JONES NEWSWIRES: TEN THINGS THE GAMING INDUSTRY WON'T TELL YOU
July 18, 2000
Dow Jones Newswires
SmartMoney: Ten Things The Gaming Industry Won't Tell You
This story appears in the August issue of SmartMoney magazine.
By Brian O'Keefe
1. "You can't win . . ."
Everyone knows the house has an advantage. But most casino patrons
don't realize just how heavily the odds are stacked against them. Take
keno, in which you pick a string of numbers, hoping to match them to
what the casino randomly generates. The house advantage is at least 25
percent, increasing with the more numbers you pick, says John Alcamo,
author of Casino Gambling Behind the Tables. The odds of hitting, say,
the 10 spot -- a string of 10 numbers -- are 9 million to 1. (Getting
killed by fireworks is nine times more likely.) Despite those odds, a $2
bet usually pays off at only $50,000 to $200,000.
Slot machines are
popular because they offer a shot at a big jackpot for little
investment. For example, $3 gets you a chance at the Megabucks jackpot,
which links slot machines in Nevada and builds like a state lottery from
a base of $5 million. The odds of winning? Nearly 17 million to 1. You
have a better chance of being killed by an asteroid striking Earth.
Okay, so maybe you won't win the jackpot in slots. But surely you have a
decent shot of walking out ahead of the game, right? Don't count on it.
"Slot machines are the biggest moneymakers in the casino,"
Alcamo says. "That should tell the players something." Experts
like him never play games that give the house more than a 2 percent
advantage, and quarter slots put the advantage at about 8 percent.
Your best bet?
Blackjack. If you play perfect strategy, the house advantage is less
than 1 percent. And in craps, the pass and come line bets give the house
an advantage of less than 1.5 percent.
2. ". . . and
if you do, we might not pay you."
While on vacation in Lake Tahoe in September 1996, Cengiz Sengel stopped
to show his wife the lights of Reno, Nev. They walked into the Silver
Legacy casino, got a $20 bag of quarters and headed straight to one of
the slot machines. A few pulls later, three jackpot symbols popped up in
the windows. The Sengels jumped up and down, hugging each other as
fellow slot players rushed over to congratulate them. They had just won
nearly $1.8 million. Or so they thought. A supervisor, claiming the
machine had malfunctioned,
denied the Sengels the payout. The couple appealed all the way to the
state Supreme Court, which this June ruled against them.
Effie Freeman can
sympathize. In 1995, she put $3 into a slot machine at thenow-defunct
Splash Casino in Tunica, Miss., and was stunned to see red,white and
blue ducks line up, signaling a $1.7 million jackpot. But thestate
gaming commission ruled that it didn't count because the machine hadgone
into "tilt" mode.
Todd Westergard, a
Nevada regulator, says that such decisions, no matter howcruel they
sound, are only fair. It's the computers inside the machines, not what
pops up in the window, that determine winners, he says, and in the
Sengels' case the computer connection was disrupted.
But gamblers don't care
about the technical explanations. "The main thing isthat we got
those three symbols," says Cengiz Sengel. "They found a way
not to pay us."
3. "We promise
more than we deliver."
Twenty-seven years ago only seven states had lotteries, and only Nevada
allowed casinos. Now 37 states have lotteries, and 28 have casinos
(including Indian gaming). Why have policy makers and the public allowed
gambling to flourish? One reason is the notion that it creates jobs and
But research suggests the downside far outweighs the benefits. "The
economy as a whole would be much better off had we not allowed [casino
gaming] to expand," says Earl Grinols, a University of Illinois
economics professor. Figuring in a broad range of factors -- crime, lost
productivity, bankruptcy, social services and regulatory costs --
Grinols determined that each pathological and problem gambler costs the
public $13,600 per year; the total works out to $180 per citizen. That
more than negates the industry's economic benefit, which Grinols
estimates at $50 to $70 per citizen.
Much of the income
generated by casinos simply gets diverted from other local businesses,
critics say. Atlantic City is a good example. Within four years of the
casinos' arrival, a third of the city's retail businesses had closed.
Meanwhile, crime soared. What about lotteries? That money surely is a
windfall for causes like public education, right? Not always. A study by
St. Mary's College professors Patrick Pierce and Donald Miller found
that while lotteries provide an initial boost to education budgets, the
increases quickly taper off. In fact, the professors say, states with
lotteries eventually provide less
support for public education per capita than do states without them.
4. "We know
everything about you."
Casinos have developed sophisticated techniques for targeting and
profiling repeat gamblers. Harrah's Entertainment has led the way,
hiring marketing experts and a Harvard professor. In 1997, the company
began gathering details on players when it rolled out its Total Gold
frequent-gambler cards (now called Total Rewards) and has built a
database of 19 million customers. Players insert the cards into slot
machines or hand them to casino supervisors when they play table games.
The cards are marketed as a prestige item that helps players accumulate
comps such as free rooms, meals and show
tickets. But the real purpose is to track the habits of each customer
and tailor a marketing plan that will keep players coming.
If you're a big bettor,
you'll find that casinos know all kinds of creepy information -- just
enough to push your buttons. "You put your slot card in the machine
and bing, it's ticking off in the office," says syndicated
columnist Mark Pilarski, who spent 18 years working at casinos. "If
you're a good customer, they send down a hostess, she pats you on your
back and offers you dinner. She gets information on you. Next time you
come in they ask about your wife or dog by name. They know your
anniversary. They'll definitely send you a card for your birthday."
5. "We're a lousy investment."
If you don't want to bet on their games, maybe wagering on casino stocks
is a good option. Think again. Though gaming stocks are up 16 percent
this year, most haven't provided a great return over the long haul. The
sector is up only 22 percent over the past five years, compared with the
S&P 500's 171 percent increase.
Some stocks have been outright busts. Harrah's is trading 47 percent
below where it was five years ago. Mandalay Resort Group is down 35
percent. And let's hope you didn't let your money ride on The Donald.
Stock in Trump's gaming company is down 78 percent over the past five
years. One big winner has been MGM Grand, up 36 percent this year.
Still, analysts at Salomon Smith Barney and Lehman Brothers just
downgraded their ratings on the stock from buy to neutral. The reason?
With a recent expansion of casinos and hotel rooms, Vegas may be getting
Add in competition from Indian gaming in California and the prospect of
a slowing economy, and revenue could take a hit.
Gaming stocks are not for the faint of heart. Saddled with debt, many of
these companies experience the kind of wild price swings that only a day
trader could love. "It's a very trade-oriented sector," says
Lehman Brothers analyst Stuart Linde. "It goes in a boom or bust
keep us in business."
Does the gaming industry target addicts? "It's like asking, Does
the vodka industry target alcoholics?" says Henry Lesieur, head of
the Institute for Problem Gambling. "Well, they target heavy
drinkers, and a certain percentage are alcoholics."
Duke professors Charles Clotfelter and Phillip Cook did a study that
found that 10 percent of lottery players account for 68 percent of
lottery purchases. Similarly, Illinois professor Grinols estimates that
one-third to one- half of casino revenue comes from problem or
"After a while [some casinos] don't want compulsive gamblers
because they overrun their credit," Lesieur says. "But by then
they've already made a lot of money off of them."
Perhaps more disturbing are cases where casinos allow known addicts to
continue betting. After losing a million dollars, Houston businessman
Joe McNeely sent a letter to several Louisiana casinos asking that they
not allow him to gamble. But that didn't prevent him from losing another
$2 million. McNeely then sued five casinos, claiming they continued to
market to him aggressively even after they were aware of his addiction.
Representatives of one casino, he says, even showed up at his mother's
funeral and invited him to stop by. Though the casinos pointed out that
McNeely hadn't registered with the state police, which has a
system in place for addicts, they settled the suit last fall for an
7. "We target
your children . . ."
More kids today gamble than are involved with drugs, smoking or
drinking, according to Jeff Derevensky, a psychology professor at McGill
University in Montreal. One reason: They are growing up with a message
that wagering is acceptable. "Today's 10-year-old will spend their
entire life in a world in which gambling is sanctioned and owned by the
government," he says. To make matters worse, Derevensky has found
that the addiction rate among youths is two to four times that of the
population at large.
Though it's illegal to play the lottery if you're under 18, studies show
that a high share of adolescents buy tickets -- 32 percent in Louisiana,
34 percent in Texas and 35 percent in Connecticut. How? In some states,
ticket sales aren't always monitored. Twenty-nine states use automated
machines in public places such as airports and stores as one way of
dispensing instant-game tickets.
"You'll see that
[the industry is] trying to appeal to younger people," says Laura
Letson, executive director of the New York
Council on Problem Gambling. Last year, for example, the council flagged
the New York lottery for its marketing tie-in with Warner Bros.' Wild
Wild West -- a movie rated PG-13.
It's not just lotteries that are accused of catering to kids. Pete
Earley, author of Super Casino, points to the new family-friendly
atmosphere promoted in Las Vegas. (MGM Grand now has the second-largest
theme park in the country.) "It's calculated," he says.
"You're encouraging future generations to come there, and
reinforcing that gambling is okay."
8. ". . . and
Five years ago an elderly woman was brought by her adult children to
a geriatric clinic in Omaha. Caring for their mother after she had a
stroke, the children discovered that she had rung up $35,000 on credit
cards at casinos in nearby Council Bluffs, Iowa. It was the first of
many similar cases for Dennis McNeilly, a psychologist at that clinic.
He began studying the effects of gambling on seniors and found that
casinos tailor their marketing to attract an older crowd. The Station
Casino in St. Charles, Mo., for instance, has a Golden Opportunities
Club for people 55-plus, in which they can earn credits toward meals and
gambling chips. The casino also offers free valet parking and $1 lunches
to seniors, and some of
its slot machines are based on detective stories from the '40s.
Some casinos run shuttle buses from retirement homes. McNeilly found one
casino that featured former stars of Lawrence Welk's TV show. The
industry even has a term, "third-of-the-month club," to
describe gamblers whose casino trips coincide with the arrival of Social
"The senior population is getting destroyed by gambling," says
Ed Looney, executive director of the Council on Compulsive Gambling of
New Jersey. He cites the fact that in 1997, gamblers 60 and older
accounted for 65 percent of the $3.7 billion Atlantic City took in.
"You have a right to market your product, but there's a line you
need to draw," Looney says. He points out research that shows
seniors get to the crisis stage of gambling faster, and don't have the
time to rebuild their finances when they get in trouble.
"There's no way they can recover," he says.
9. "We have
your legislators in our pocket."
At an investors' conference in June, MGM Grand CFO James Murren was
asked about the status of the company's new temporary casino in Detroit.
He acknowledged that MGM couldn't complete a permanent facility in four
years, as it had promised the city. Still, he added, "there's no
way in the world they're going to
shut us down. We pay our gaming taxes daily."
His comments reflect just how reliant policy makers have become on
casino money. And it's not just in the form of taxes. In 1998
congressional and presidential candidates received $5.7 million from the
gaming industry, up from $1.1 million in 1992.
Soft-money contributions jumped from $400,000 to $3.8 million.
From 1997 through 1999, the gaming industry spent $22.5 million lobbying
federal lawmakers, more than such powerful contingents as alcohol and
gun groups, according to political watchdog Common Cause.
With that kind of spending, it would be tough to pass antigaming
legislation, says William Thompson, a professor of public administration
at the University of Nevada at Las Vegas. "They've got the bucks,
and the opposition doesn't. The casinos make contributions to every
viable candidate." Adds Robert Goodman,
head of the U.S. Gambling Research Institute: "Government is moving
toward relationships that are problematic."
regulation is full of loopholes."
Gaming industry officials like to say that their business is tightly
regulated. But the truth is, regulators often have their hands tied.
Take Indian casinos. Though they have to cooperate with the states to
some extent, often tribes are left to regulate themselves. A new compact
in California, for instance, leaves it unclear whether the state has the
power to audit the tribes' books or inspect their slot machines.
Keeping tabs on Internet gambling is even tougher. Congress is
discussing possible measures, but for now regulators can do little about
the 850 foreign sites that cater to U.S. gamblers. In some countries,
all that's necessary to get a license is to register. "They don't
have anything like regulation," says Sue Schneider, chair of the
Interactive Gaming Council.
Then there are the "cruises to no where," boats that depart
from coastal U.S. cities and head into international water, where they
offer gambling in an unregulated environment. "In a lot of cases,
we aren't even sure who the entities are operating these games,"
says Kent Perez, Florida assistant attorney general.