Thursday, March 03, 2005

Posted by Johnnymac 7:48 AM
Thanks for the responses to yesterday's post. I am particularly fond of the rudimentary business education that one anonymous poster wanted to give - when I was getting my MBA they never taught us what loss leaders were - too bad those professors didn't have Wikipedia! I could have just skipped the MBA and read Wikipedia, apparently, and saved 50 grand. I want a refund!

In all seriousness, my point is this - I recognize that there has to be some element of branding and a low-margin introductory strategy here - I even mentioned that in my original post. I get that. These casinos aren't spreading $2/4 and $4/8 holdem because they're making buckets of money off of the rake - they're expanding their poker presence because they're banking that the poker players will stick around and play blackjack or throw dice (I don't consider hotel rooms and restaurants and spas and any other ancillary service here - as far as the casinos are concerned, those products are also loss leaders). And when you consider the other costs in the poker rooms (salaries, cocktails, etc) it would seem that incremental margins on these poker rooms can't be that high in comparison to other gaming options.

I won't say that the new poker rooms aren't profitable - they make money. I'm just saying that incrementally, they don't make as much money per square foot or per player as a slot machine or a blackjack table.

So this gets me back to the loss leader question - I don't quite see how this is the best strategy for these casinos to be pursuing. Vegas is booming right now and Vegas was booming before anyone other than his ex-wife had ever heard of Chris Moneymaker and before all of this nonsense had even started. Hotels were already full and the town was already packed on weekends. And thus, what I am asking, is why do the casinos even need the poker players? And specifically, I'm interested in seeing some numbers or some data that back up the proposition that these poker rooms are increasing the bottom line somewhere - anywhere - in the process.

If the hotel is already booked solid and the blackjack tables are already full of players, I can't see how getting more low-limit holdem players will somehow increase the bottom line of the property. The casinos are licensed for only so many square feet devoted to gaming (there are no slot machines in your hotel room, after all) - and if they expand the poker rooms they must give something up - table games and slot machines. Thus, if the gaming area is already full and earning a set amount per square foot, and then you take a little bit of space away to add more poker tables that earn less per square foot, then the only way to increase (or even maintain) the bottom line in the rest of the casino is to increase the margin per square foot in the remaining areas not devoted to poker. In other words, you raise the limits. Instead of $5 blackjack you now have $10 blackjack and instead of nickel slots you have quarter slots.

In my opinion, this is where the loss leader strategy breaks down. Guys playing $2/4 holdem (which is the most widespread game in Vegas these days) are not going to play blackjack for $25 or even $10 a hand when they finish playing cards at the MGM - they are going to eventually go broke and then go home and if they do play blackjack they are go over to the Boardwalk and O'Briens and play for $5/hand, even if the rules are worse. And the ones who don't go broke, the ones who are winning, are more than likely winning because they have the good sense not to play silly gambling games in the first place.

Finally, I also don't think that the "wives" argument makes sense, either - the whole reason that the casinos have shops and swimming pools and rollercoasters and spas and Cirque du Soleil is to give the wife something to do while her husband is gambling. The wives aren't what the casinos are hunting for - they're hunting for the husbands. And if Daddy's playing poker he's not doing his part to subsidize momma's massage, so I don't buy into that argument either.

Thus, my question still remains. I'm not necessarily doubting the business strategy - I just want to see some data that explains it a little better then "poker is booming and our customers are demanding it". I've checked both the MGM's and Mandalay's 10K and neither mentions poker other than "the games we offer in our gaming business are x, y, and z." I am sure there might be some analyst or industry report out there that explains the strategy better, because after all, Wall Street follows the money.

11 Comment(s):

Posted by Anonymous Tenacious, at 9:41 AM, March 03, 2005  

I really think is boils down to a headcount of people inside a casino. Poker, ammenities, attractions(those waitresses in the blue bikinis at the Hard Rock), etc. are all strategically created to get people through the door. Having a bigger better poker facility is a competitive advantage of one casino over the other. I can't quantitatively make an argument because I don't have access to what I assume is confidential information, but I can make a good guess at how they approach it.

Casinos have to track certain statistical trends in order to understand their customers (markets/demographics/habits), right? Well, I would guess they have a formula for tracking the number of people that enter the casino on a given day. I bet that number corelates directly with revenue numbers, and in a positive direction, i.e. the more people, the higher the revenues. Now, granted this is a small sample size, I can say that the past three times I went to Vegas with big groups of guys, every single person that played poker ALSO played either BJ or craps. So collectively this is probably thirty people. Of course you have the retired gray hairs who sip coffee all day grinding, that would sooner drink battery acid than touch a roulette table; the casino looks at them as part of the loss leader arena. BUT the 20 guys that come in town for a bachelor party to play poker will definitely play other games as well. Thus, making it worth the casino's dime to create a competitive advantage so as not to lose this business to another casino. Thoughts?


Posted by Anonymous Anonymous, at 10:27 AM, March 03, 2005  

This comment has been removed by a blog administrator.


Posted by Blogger Johnnymac, at 10:30 AM, March 03, 2005  

Because I started this thing and if I'm going to put my name on what I write, you can too.


Posted by Blogger Johnnymac, at 10:32 AM, March 03, 2005  

But I do agree that I am a "jackass"... fair point


Posted by Blogger Junelli, at 10:40 AM, March 03, 2005  

These days casinos are ubiquitous commodities. Not unlike VCRs or personal computers. You can play blackjack, roulette, or craps anywhere, and other than the color of the felt on the table, the games are identical. Therefore, casinos must do everything they can to stand out, get noticed and attract attention. Some have expolding volcanos. Others have water shows. These are all designed to get people in the door. Poker is no exception.

A response to some of your points: The average rake in the $2/$4 is hardly different than the NL game. It's still capped at $5, just like NL. The smaller bets are more than made up for in the fact that nearly every hand is shown down.

I disagree that hotel rooms, spas, etc. are loss leaders. Casinos make a significant chunk of revenue off these items, and they certainly stand on their own. The fact that they often comp these items, doesn't mean that they don't care about the revenue, it means that they don't care about the revenue for "that particular player." His play is so valuable to the casino that they are willing to eat the cost of the room in exchange for the action he brings to the casino.

You're exactly right that poker rooms don't make as much money per square foot as slots, but that's not the point. The point is that they want as many people as possible in their doors.

I disagree that a guy playing $2-$4 poker is unwilling to play $10 or $20 blackjack. He'll play whatever blackjack is conveniently offered to him. Very few people will travel to another destination merely to take advantage of smaller limit tables. If he's at the Bellagio, and he wants to play Blackjack, he's going to play blackjack at the Bellagio. Also don't assume that people playing $2-$4 hold em are cheap. Maybe they're just learning and aren't yet comfortable with the game. Maybe they feel much better about a game they've played all their lives: blackjack/craps, etc.

Every day $180 million is wagered in online poker rooms. That is $150 million more than two years ago. The numbers are growing, and the casinos want as much of that action as they can get their hands on.


Posted by Blogger Junelli, at 10:43 AM, March 03, 2005  

Why do you keep deleting posts? That's a sure way to kill particpication in this blog.


Posted by Blogger Johnnymac, at 11:29 AM, March 03, 2005  

check your email, Junior


Posted by Anonymous Rob "John's a Jerk" Jackson, at 2:02 PM, March 03, 2005  

I can't belive you deleted another anti-john post. Look I've signed in now, does that make the comments more palatable? I would say the deletion is right in line with my earlier post but I guess no one else gets the opportunity to see that one


Posted by Blogger Johnnymac, at 2:55 PM, March 03, 2005  

works for me, Rob


Posted by Anonymous Anonymous, at 8:21 PM, March 03, 2005  

I have been looking at the picture of that Dr. Fro. He looks yummy.


Posted by Anonymous Maggie, at 2:07 PM, March 08, 2005  

Economic Comparison

At 60 hands per hour, $3 average rake.. Thats 180 dollars per hour per a table revenue to the casino.. Assuming dealer wages at $20 per hour and $20 per hour per table for runners, manager...).. gross revenue is $140 per hour. That leaves 140 per hour for profit, captial (tables, chairs, donuts).

By comparision Nickel slots at 15 pulls per minutes (triple bet) is $135 per hour revenue, but 97% payout... thats $4 per hour to the casino... Now, granted you can fit 10 machines per a poker table layout. SO thats $40 per hour per a poker table layout. Still less than poker.

Based on this logic, it would require $2 slots to be equal to the revenue from a poker table..

With this logic, bring on the poker player. I just bought Wynn Hotels and MGM grand stock to take advantage of the poker money.. Now the rake you pay, pays me my dividends...


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