More on why slots pay back less

I recently read your reply to a question regarding reduced payouts at slot machines. I believe your reasoning was that due to reduced size of wagers, that you agreed that in general, that slot payouts appeared to be less than in years past.

I go to Atlantic City once a month for an overnight gambling trip. Everyone is aware of their reduced gaming revenue. It appears that 'gaming experts' are reluctant to credit the reduced payouts as a result of the casinos manipulating the machines to pay out less. With Atlantic City taking in $2b in less revenue than 2007, and many of their expenses are fixed, it just makes sense that the casino owners would need to reduce their payouts, in order to survive financially.

Jim

Dear Jim,

Let me clarify my reasoning that you referred to in your first paragraph with a few examples.

The average long-term payback on the slot floor has been falling in the past 10 or so years because casinos are installing more penny and nickel machines with low long-term paybacks and removing higher-denomination machines with higher long-term paybacks. For example, say a casino had 100 nickel machines at 90 percent long-term payback and 100 dollar machines at 96 percent long-term payback 10 years ago. The average long-term payback on its slot floor was 93 percent. Today the casino has 150 nickel machines at 90 percent and only 50 dollar machines at 96 percent. The average long-term payback on the slot floor is now 91.5 percent. The change in the mix of machines caused the average long-term payback on the floor to fall.

Each denomination does not necessarily get the same amount of action. Many dollar and up players have migrated to the penny and nickel slots because they like all the bells and whistles on the video slots. The overall actual payback percentage on the slot floor has decreased in recent years because players are playing more on penny and nickel machines than on higher-denomination machines, which have higher long-term paybacks. Let's say our rinky-dink casino had $1,000,000 in action on the dollar slots and $100,000 in action on the nickels 10 years ago. The theoretical long-term payback is 95.45 percent. Today, the dollar slots get $600,000 in action and the nickels $500,000. The theoretical long-term payback is now 93.3 percent. The change in the mix of play caused the theoretical long-term payback to fall.

To sum up, compared with the slot floor of the past, today's slot floor has more lower-paying machines that get more play and that one-two punch leads to lower long-term paybacks for players overall.

Moving on to your second point, a business can increase revenue by either raising prices or increasing sales. There's only so much a casino with close neighbors can do to increase its prices (that is, lower the long-term paybacks on its machines). A casino doesn't want to get a reputation for being the tight casino on the block -- unless it has some other feature to compensate. Competition usually forces casinos to have similar paybacks.

Also, casinos can't "manipulate" the machines so they pay out less. Unless a machine is one of the few machines that support downloadable games, the only way a casino can change the long-term payback on it is to change the virtual reel layout stored in some read-only memory device on the machine. That's not a trivial operation and it involves paperwork with the state. These are the reasons why many writers don't say that the decrease in long-term payback is "a result of the casinos manipulating the machines to pay out less."

Best of luck in and out of the casinos,
John

Send your slot and video poker questions to John Robison, Slot Expert, at slotexpert@comcast.net. Because of the volume of mail I receive, I regret that I can't reply to every question.