Saturday, August 2, 2008

Mohegan Sun redefines bad economy as "bad luck"

Well, I'm not as ferocious on the workings of casinos as Ryan or Gladys, but I do have an interest in the whole industry, especially as it's looking to open a branch in my town.

So I certainly noticed this recent report, here by way of the Norwich (CT) Bulletin:

Gaming revenue was down between 5 and 25 percent across the board in April, May and June for the authority — which operates Mohegan Sun in Connecticut and a combined slot machine casino and harness racetrack in northeast Pennsylvania — compared to the same period in 2007.

Although players played $611.2 million at table games during the third quarter, up 6.4 percent, the casino kept about 11.6 percent, or 4.9 percent less, from players than it did last year. That drove revenue from table games down 25.4 percent from $100.9 million in third quarter 2007 to $75.3 million this year.
Now, why would Mohegan be losing so much money? The obvious explanations are systemic: perhaps wide availability of Internet gambling means fewer people going to casinos. Maybe the slowing economy means people have less money to piss away on bets after buying heating oil. Perhaps casino profits are down because people don't want to pay for the drive. Or are put off by the addictive nature of the activity. What we do now -- and I explain in detail below -- is that casino profit margins are closely tied to volume above all, and lower profits is almost lockstep with lower volume of bets placed.

When you have problems from the gambling industry from losses in Detroit and Atlantic City to a glut in Vegas, one might wonder if Mohegan Sun's losses are part of this trend. Perhaps a problem with the industry as a whole.

Nonsense, laughs Mohegan Sun. The problem is...bad luck.

Gamblers with seven-digit bankrolls took more away from Mohegan Sun table games than usual this spring, making for “an extremely long streak of bad luck” and an 89 percent drop in net income for the Mohegan Tribal Gaming Authority, compared to the same period in 2007, Chief Executive Officer Mitchell Etess said Thursday.

“We didn’t win as much as we normally do,” Etess said, announcing the authority’s third quarter fiscal results. “The next thing you know, it adds up. “It was mathematics and that’s what happens.”

Unlike most people who go to casinos, I can do math, and I'm not intimidated by the word "mathematics". And the math says that this explanation stinks. Because the casino profit model demands such a large number of placed bets as to neutralize luck as a statistically significant concept.

Let's engage in a little example. Take the best bets in any casino: red/black in roulette, or player/banker in baccarat. You have a 47.37% chance of winning on the first case, and in baccarat your odds are a fantastic 49.47%. I'm using these two examples because they represent the worst-case scenario for casinos. In reality, more popular games such as slots have a much higher profit margin, but we'll exclude those.

This works out to a 1.58% average profit margin per bet. May not seems like much ...unless you realize that's higher than the standard profit margin of an item sale at a supermarket. And like a supermarket, casinos rely on thousands of iterations of this margin to pay for overhead (staff, facilities) and make a profit. Casinos won't make (or lose) much on any one bet...with lots of bets you can make money.

Say that 15,000 bets of $5 each are placed on these two games. If everything goes according to the odds, the casino would make a $2,370 profit. To actually lose money in this "worst case" scenario, you would need astoundingly bad luck: 475 more bets would have to go against you than the odds dictate. This has a 40% chance of happening. The odds grow longer as time goes on: there is a 1.6% chance of losing money at the tables this way in the course of a week. The chance of losing money at full tables for 3 months -- even when only the worst house odds are offered -- can only be expressed using scientific notation.

I realize that I haven't factored in overhead, but nor have I factored in poker, blackjack, and slots in this example. So frankly I'm exaggerating how bad things can get for a casino operating at high volume.

A 9-5 casino with 2 poker tables and 3 blackjack tables isn't going to make a profit: you need dozens of tables, lots of slots, and 24-hour access for all those tiny profits to accumulate enough to outweigh the overhead.
This high volume approach does two things: it gives casinos sufficient profit to cover their overhead, and it reduces the odds that a run of "bad luck" will strike to almost infinitesimal. For casinos, the more bets, the better. As you can imagine, with thousands of bets being passed, even the highest of rollers is going to get drowned out in the flow of dollars and dimes. Remember -- if you have 2000 high rollers, statistics dictate that several hundred will be losing money. This gives lie to the idea of "bad luck" -- even high rollers contribute a limited percentage of casino profits. If those high rollers have a good streak, it will barely move the needle against the retiree dollars flowing into Mohegan Sun's slots. There are just too many bets being made over three months for luck to factor in.

It can't be bad luck at the tables...there are too many tables. I don't care about the size of the bets. The problem isn't what's happening at the tables...the problem is that at too many tables, nothing is happening. Volume is the only explanation. Mohegan Sun just isn't getting the business for their model to make money.

Mohegan Sun's problem is that it has the bad luck to be part of a faltering industry. And this dishonesty isn't going to help them anytime soon.

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