Hollywood Casino: The House Always Wins!

Payout ratios at Hollywood Casino have steadily dropped over the last 3 years
By DONALD GILLILAND, The Patriot-News The Patriot-News


At Hollywood Casino, people started gambling less on slots machines this August and have continued to wager fewer of their hard-earned dollars on slots ever since.

The total amount wagered on slots at the casino since August is down by over $93 million — or over 9 percent — from the same months last year.

Part of that is due to live table games such as poker and black jack opening at the casino in July, and the subsequent removal of electronic table games.

But given the decline in money wagered on slots, one might expect the house take — and the state’s share of the house take — from slots to be down as well.

One would be wrong.

In the same four months, the casino and the state have taken in more money from slots than they did last year.

Last week, the Pennsylvania Gaming Control Board released the numbers for November showing yet another increase in slots revenue over the same month last year.

How?

The paradox is explained by two factors: Hollywood Casino has been giving away fewer free plays, and people have been winning less.

The payout ratio for slots machines at Hollywood Casino has been dropping slowly but steadily for over three years.

The slots machines at Hollywood paid out 91.79 percent of the money fed into them in 2007-08. That dropped to 91.16 percent the following year, and again to 90.92 percent in 2009-10.

Last month, the overall slots payout ratio at Hollywood was 90.11 percent, after dipping to an all-time monthly low of 90.01 percent in October.

Because the total amount of money gambled is so high, even small changes in the payout percentage means big bucks for the casino and the state.

Since July, the payout ratio at Hollywood has decreased less than three tenths of one percent, but that has resulted in over $2.6 million more for the casino.

Under state law, every slot machine must pay out a minimum of 85 percent of the money wagered on it over the course of its life.

Casinos may set payout rates as they choose above that 85 percent legal minimum.

The overall payout rate represents the mix of various machines on the casino floor as well as how much they are played.

Small denomination machines — the penny games, for instance — usually have a lower payout rate than higher denomination machines.

But the precise ratio on each machine is determined by the casino.

It’s all about marketing, said Michael Cruz, director of gaming laboratory operations for the Pennsylvania Gaming Control Board.

“You have savvy players out there,” he said. A player who was recently in Atlantic City may notice that the same game at Hollywood pays more — or less — for a winning combination.

Casinos can set their ratios to compete with other casinos.

Cruz said that he and his team of 17 technicians spend 70 percent of their time testing to make sure the slots machines are adhering to the statistical 85-percent payout set by law.

The cost of that work is paid not by Pennsylvania taxpayers, but rather by the companies that manufacture the games, Cruz said.

So long as the overall payout ratio remains over 85 percent, the casinos have latitude to alter the mix of games - and payout ratios - on their gaming floor to match their players.

“At the end of the game, it’s all marketing — that magic number that sells a product,” said Cruz. “We don’t want to get involved with that. That’s their business. They know their patrons better than I possibly could know.”

John Newman, vice president of casino operations for Penn National Gaming, which runs Hollywood Casino, said the decreasing payout ratio reflects a gradual migration of casino goers to lower denomination machines that have a lower payout.

What’s more, he said, the casino has added more of those low denomination, low payout games that are increasingly popular.

“We look at what games are most popular, and we change out games based on popularity,” said Newman.

With more penny games on the floor and more people playing them, the overall payout ratio decreases.

But a casino may also change the payout ratio on an existing game any time it likes, so long as it follows the proper procedures set by the Gaming Control Board.

“You can’t just have an attendant go in and push a button,” explained Cruz.

Changing the payout ratio on an existing game requires extensive paperwork procedures, including notifications to field staff, casino compliance representatives and the central control computer system.

Resetting the ratio involves resetting the computer that runs the game — clearing the Random Access Memory, or RAM.

“In PC terms, you’re formatting the whole machine to start from scratch,” said Cruz. “The computer system will notice a reset to zero... And if there’s no paperwork, it will be flagged as an illegal RAM clear.”

So have the owners of Hollywood Casino been recalibrating their games to pay out less?

Newman says no.

He said the casino has not lowered payout ratios on existing games.

“We don’t go in with the goal of changing the payout ratio,” said Newman.

Rather it’s the combination of customer migration to cheaper machines, the casino stocking more of those machines and the removal of the table games slots that’s behind those numbers, he said.

That’s feasible and perhaps even likely, said Bill LaPenta, director of financial analysis at Spectrum Gaming in Linwood, New Jersey. Spectrum publishes the East Coast Slots Report, an industry newsletter on casinos in the Atlantic region.

“It’s not completely uniform, but overall payout percentages have trended down somewhat” throughout the Atlantic region,” LaPenta said. “The changes have been slight, but they are there.”

“To be honest,” he said, “Hollywood’s explanation of players trending to lower denomination machines is probably a large part of it. We don’t see any great coordinated plan or conspiracy of any kind among the operators. It’s been a slight trend overall, and not uniform.”

LaPenta said the overall average payout rate for the Atlantic region in the last three or four months has been 91.7 percent, higher than Hollywood’s and higher than Pennsylvania’s overall average of 90.5 percent.

Pennsylvania’s overall payout ratio dropped after the advent of live table games in July, said LaPenta, because of the removal of the electronic table game machines.

“Electronic table games have a much lower hold percentage for the house than traditional slot machines,” he said. When those games came out of the slot product mix, the “blended average” payout for the casino floor dropped accordingly.

But LaPenta said there has been a “resurgence in popularity” of the low denomination, low payout machines, which has been affecting the payout rate.

The trend predates table games and even the recession.

“Twenty-five years ago, nickel machines were common in Atlantic City,” said LaPenta. “Then they started to disappear, and by the mid- to late-90s there were hardly any left. Quarters were the lowest denomination... When the penny machines started to come out, they re-energized the popularity of smaller denominations.”

“Because of the trend in popularity of penny slot machines,” he said, “that product has been increased in operators’ inventories. They’re reacting to demand.”

“I think the migration to lower denomination machines started before the recession,” said LaPenta. “Whether it’s accelerated by the recession is hard to say, but it’s possible, and it certainly hasn’t pushed it in the opposite direction.”

At the Gaming Control Board, Cruz says people need to remember that the payout rate has no impact on any one person’s chances of winning.

“One of the classic myths,” said Cruz, “is if I put in $100, how come I don’t win at least $85?”

Each machine is programmed to generate results on a random basis for every play, and the payout ratio is based on the life of the machine. Actual payouts are unpredictable in the short term, but over time they will average out to the proper ratio.

That’s what Cruz and his crew constantly test for.

“We give (casinos) the pool to play in, and at the end of the day, our job is to make sure they are swimming in the right pool,” he said.

But the house always wins.

“The advantage of casinos,” said Cruz, “is they have a larger bank roll and time, so the return will always be in their favor.”