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Gaming as a commodity – thinking of gaming as an entertainment service.
by Andrew MacDonald and William R Eadington.

Gaming as a commodity – thinking of gaming as an entertainment service.

by Andrew MacDonald and William R Eadington.

It is not unusual to hear casino executives speak of gaming as a unique and mysterious product. This notion also manifests itself in how casino managers think about the business of gaming. Unique, mysterious, unlike any other – these are the words often associated with the gaming business that are uttered by long-term casino managers. This is consistent with the belief that the only way to learn the business is to live the business, and see all of the unusual things that can happen on the casino floor and in the executive offices.

In reality though - gaming is just a business like most others - one that can benefit from analysis of its fundamental economic characteristics, and by drawing from, and applying, principles and experiences from other businesses.

How should one look at the business and products of gaming? Whether it be a table game, a slot machine, a sports bet or a lottery – what is it that is being sold? Referring to gaming as a leisure or entertainment product is certainly a reasonable general description and a good starting point. Casinos and other gaming operations sell “fun and entertainment” to the majority of their customers. More dramatic or superstitious customers may view casino games as an opportunity to “meet destiny,” to “test fate” or to determine if “God is smiling upon them.”

Some customers are attracted by the hope of “winning a lot for a little” or are chasing the “dream of a life changing event.” Others view gambling as an investment of time and energy into a hobby where they believe – rightly or wrongly – that their knowledge and experience at the games and understanding of the odds provides them a better chance of winning than others. And some customers consider their encounters in a casino as “buying time on the machines or the tables.”

Before venturing further into descriptions, it is useful to define the gambling activity versus the business of gambling, and gambling versus investment. Casino customers gamble whereas casino operators are in the business of gambling in the short run, and are investors in the long run. A simple definition of gambling is where the player’s long term mathematical expectation from participation is less than zero, and the activity is freely entered into. (Jumping out of a window of a burning high rise building also involves a negative expectation, but the lack of choice pushes it away from the category of a gamble.)

Operators in the business of gambling have a positive expectation on the monetary amounts they put at risk. In casino games, the operator derives a positive expectation from the games offered, and the house is selling a product at a positive price (the “house advantage”) whereas the customer is a gambler, paying the house advantage for the opportunity to gamble. Casino games are “zero-sum” games, so the positive expectation for the house is a mirror reflection of the negative expectation for the customer.

There are of course situations where the customer can alter this equation through “advantage play” techniques of various kinds – such as professional poker players, card counters, slot jackpot teams and professional sports bettors and odds takers. However, in general the casino should always view itself as the purveyor of a service rather than as a gambler. “We are in the gambling business – not in the business of gambling.” This should be a mantra for every gaming executive and one learned early on in one’s career.

Organizations in the gambling business are going to evaluate their capital outlays in terms of the expected return on invested capital, and such expectations have to be positive, and exceed some risk-adjusted minimum hurdle rate. In this context, one can invest in the gambling business. With the exception of advantage players, there are no investors among gamblers; in the long run, they all will lose.

Thus, gaming can be conceptualized as a generic entertainment and leisure product. Furthermore, gambling is an intangible product, which like many other intangibles, is one where what is being purchased cannot be touched or held. It can also be described as an “experience good” where the consumer does not know how pleasurable—or unattractive—the product will be until after the act of consumption has taken place. (Indeed, as many gamblers will attest, the experience on any given outing can be pretty ugly.)

Other easily identifiable experience goods among leisure and entertainment commodities include movies, books, sporting events, concerts, visits to art galleries, and participatory adventure sports. With these products, customers are purchasing an experience and a “memory” of an event as well as the thrill, satisfaction, uncertainty, or adrenaline associated with the activity at the time. They are also purchasing the “anticipation” of consumption, which is often an important ingredient in the decision-making process. Anticipation plays a role for a gambling adventure similar to that experienced in advance of seeing one’s favourite football or basketball team play.

For casino managers, it is important to view the gambling product in this light. If they consider themselves as purveyors running a business that provides entertainment and leisure services, they can better conceptualize the economic dimensions of the offers they are making to their customers. In general, consumers purchase commodities in various quantities, depending on prices, product attributes, consumers’ levels of discretionary income and time available, and various other important parameters.

For gaming products, the price of the service can best be defined as the house advantage associated with the specific games. The house advantage is simply the long run average amount won per unit of wager by the casino. More rigorous definitions can be found in various places , but the essence of house advantage is that it is the amount a gambler loses (“pays”) per dollar wagered to participate in a game.

For example the house advantage on a single number wager at single zero roulette is 2.70%. This is a weighted average of the proportion of times the player will win in the long run times the amount to be lost to the player by the casino, and the proportion of times the player will lose times the amount to be won from the player by the casino. The weights for winning and losing are the respective probabilities (1/37 and 36/37) and the amounts to be lost and won by the casino are -$35 and +$1, respectively. Thus, the arithmetic is: HA = 1/37*(-35) +36/37*(+1) = 2.70%.

This result is positive when viewed from the casino’s perspective and of equal magnitude but negative from the player’s view. For every $1 of single zero roulette purchased, the player can expect (mathematically) to lose 2.7 cents, and the house stands to win 2.7 cents. All gaming events have a similar price associated with them. Some other simple examples are craps (pass line bet) at 1.41%, baccarat (Player bet) at 1.36%, keno (depending on pay scale) at around 28%, slot machines at between 3% and 15% and blackjack (with a player of average skill) at about 2%.

The quantity of gambling services that customers will purchase in a given period is measured by the “handle”, the amount of money wagered. The amount of product sold, the handle, is determined by several factors. First are aggregate economic factors that might reflect the general purchasing power of the potential customer market. Such variables include aggregate personal income, changes in levels of income, prices of competing commodities (i.e. other entertainment and leisure activities), and prices and availability of complementary activities (i.e. gasoline prices, hotel accommodation prices, air fares, etc.) There are also attributes which are specific to the various games that affect hand

Date Posted: 03-Mar-2008

Andrew MacDonald is founder of urbino.net and is also Executive Vice President of Gaming and Business development with Genting Berhad in Malaysia covering that group's global activities. He can be reached at andrew@urbino.net

Bill Eadington is a professor of economics and director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno. He is an internationally recognized authority on the legalization and regulation of commercial gambling, and has written extensively on issues relating to the economic and social impacts of commercial gaming. Eadington can be reached at eading@unr.nevada.edu.

 
 
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