Tuesday, February 20, 2007

Can I have 15% of your money

I didn't realize that the British term for a slot machine was fruit machine when I wrote this old post. Duh. You learn something new every day I suppose.

but I learned a few things about gambling last week talking to some lawyers who know about the business. What I learned was that the minimum slots payout for Pennsylvania is set at 85% by law. What is the payout percentage? It is simply the ratio at which you win your money back every time you play. If it were 100% you could theoretically play slots forever, though you would never come out ahead in the long run, you would also never lose. Anything below 100% and you are slowly losing your money to the house. The further below 100%, the worse the bet, the faster you lose your money and better the deal for the casino. The every time is the important point. At an 85% payout, on average you will lose 15% of your wager with every pull of the lever. Play just 6 times and you will be down to (0.85^5=) 37% of your wager. How long does it take to play the slots 6 times?

More on how that compares to other venues and tax implications in a minute. But what was fascinating was how that 85% will be audited in Pennsylvania. It was not 85% per hour, day, week or month. Given pure randomness, it would be hard to enforce a set percentage for a small period of time, but aparently, in Pennsylvania the 85% is a requirement to be met over a 3 year period! 3 years can be a long time.

What I do not know is whether Pennsylvania allows for adjustable payout rates. Old mechanical slots machines had their payout percentages set when manufactured, but with today's networked slots machines, I have to imagine there is some central computer that can adjust the casino-wide payout rates collectively for all machines, but that is speculation as to how it will work in practice. The implications are big. You could easily come up with all sorts of reasons to change the payout rate over time. Maybe you would have a higher payout rate when the casino's open as a way to entice people to come to Pennsylvania slots venues, but over time bring it back down once a market is established. It also means that if there is a period of high payout now, yet only a 85% requirement over the long haul, that there could be a period well below 85% in the future.... the law of averages and all.

Then there are these tax implications. One of the most common complaints among casino operators in PA from the get-go is that Pennsylvania is taxing casino gross revenues more than anywhere else. Currentlly 52% of the gross take goes to the state in taxes. a very high rate. True enough. but that is 52% of the house margin which over the long haul could be as high as 15%. Compare that to other states where the taxes are lower but the house margin is much smaller as well. From what I read, the slot payouts in Nevada range between 92-99%. Thus the house margin on slots is 1-8% which pretty much means that even without taxation, Pennsylvania slots are more 'profitable' per dollar injested by the slots machines. (potential house margin of 15%, net of taxes is 7.2% of total $ bet). Hmmm.

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