GAMBLING DEFINITIONS AND GAMING OPERATIONS Lecture #4 Bill Eadington Doyle Andrews September 6, 2012

LEGAL DEFINITION: GAMBLING A gamble must include: Prize, consideration, and chance –Prize: Something of value to be won –Consideration: Something of value put at risk –Chance: Outcome is determined by an unpredictable event A gamble must be associated with an incidental or discretionary activity Negative expected value (?) The risk inherent in a gamble is the prerogative of the gambler

DISTINGUISHING BETWEEN GAMBLES, INVESTMENT, AND SPECULATION Investment: Positive expected return on invested capital; motivation is to earn a positive return. Risk is controllable. Speculation: Positive expected return on invested capital; motivation is to earn a positive return. Risk is substantial. Gambling: Negative expected return on invested capital; motivation might be to earn a positive return or for the enjoyment/ thrill.

CLASSIFYING GAMES Characteristics of games: –Alea (chance) –Agon (skill, adversarial competition) –Mimicry (play-acting) –Vertigo (dizziness) Structure of games: –Paeda (unstructured, creative) –Ludens (highly structured, driven by rules)

ATTRIBUTE STRUCTURE ALEA (chance) AGON (skill, prowess) VERTIGO (dizziness, adrenaline) MIMICRY (role- playing) Paeda (creative) Ludens (rules, structure) How would you categorize the following games or situations? Football; Jeopardy; Improv Theater; Bridge; Slot machines; Charades; Poker; Golf; Sky Diving; taking drugs

DISTINGUISHING BETWEEN GAMES AND GAMBLING

DEFINITIONS OF GAMES An activity providing entertainment or amusement; a pastime => A game of cards A competitive activity or sport in which players contend with each other according to a set of rules => golf An organized athletic program or contest => football Mathematics. A model of a competitive situation that identifies interested parties and stipulates rules governing all aspects of the competition, used in game theory to determine the optimal course of action for an interested party. => Zero-sum sequential games

DEFINITION OF GAMBLING To bet on an uncertain outcome, as of a contest. To play a game of chance for stakes. To take a risk in the hope of gaining an advantage or a benefit. To engage in reckless or hazardous behavior: You are gambling with your health by continuing to smoke. To put up as a stake in gambling; wager. To expose to hazard; risk: gambled their lives in a dangerous rescue mission. An act or undertaking of uncertain outcome; a risk: I took a gamble that stock prices would rise.

RISK TAKING THAT HAS SIMILARITIES WITH GAMBLING Speeding on the highway Challenging a driver that cut you off on the highway => Will there be road rage? Driving when drunk; Riding with a drunk driver Drug use (for the first time) i.e. MJ, coke, H Extreme skiing, rock climbing, paragliding Unsafe sex (pregnancy, AIDS, STDs) Cheating on a spouse, girlfriend/boyfriend, or significant other Cheating on an exam Smoking

MOTIVATIONS FOR GAMBLING AND RISK TAKING Adrenaline rush –Pleasure-pain anticipation –Recapture the euphoria of prior experiences Controlling the moment –“Asking the Oracle” Financial, prestige, one-upmanship –Importance of the prize Beating the system –Finding the Edge, the Overlay, positive expectation Entertainment value –Utility of the positive reinforcement of winning versus the costs of participation

Peter Drucker wrote: “Because the purpose of business is to create value, the business enterprise has two– and only two—basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

CASINO DEPARTMENTS: 7 LARGE RENO CASINOS Casino: Total Revenue: $474.2 million –Pit Revenue: 20.7% –Slot Revenue: 76.1% –Poker, Race, Sports: 3.2% Departmental Income: 37.8% Rooms: Total Revenue: $181.2 million –Room Sales: 72.3% –Complementary rooms: 27.7% Departmental Income: 56.1%

CASINO DEPARTMENTS: 7 LARGE RENO CASINOS Food: Total Revenue: $474.2 million –Food Sales: 71.2% –Complementary Food: 28.8% Departmental Income: 5.2% Beverage: Total Revenue: $73.9 million –Room Sales: 41.6% –Complementary rooms: 58.4% Departmental Income: 46.0%

MANAGEMENT CHALLENGES FROM DEPARTMENT TO DEPARTMENT Complementaries: To whom do they get charged? Selling products from one department to another: How to set prices? Resource allocation: Who gets the new positions and the bigger budgets?

Casino Resort Inter-Departmental Issues Net operating income is their report card for revenue generating department; increasing revenues while decreasing expenses is always the mantra. This can lead to cross departmental billing practices that can be harmful to the overall profitability of the company.

The two main casino revenue generating departments are slots and table games. They are supported by other revenue departments and non-revenue departments.

HOTEL The Hotel Department provides rooms and suites for the gaming customers. The casino marketing department is given a block of assorted rooms for complimentary customers. The prices of these rooms are billed back to the appropriate casino department as a line item expense and the hotel books the revenue though no cash has changed hands. During peak hotel occupancy these room are billed at rack rate (full retail). During slow periods the rooms are usually discounted.

Several dilemmas occur: What is the full value of gaming customer versus a non-gaming retail hotel customer? What is a fair price for the rooms? If the hotel is not full should the room charge be more than the cost of cleaning the room? If the hotel is full is there a displacement cost to the properties bottom line if the complimentary gaming customer generates less revenue than a retail hotel customer? How does one account for this displacement cost?

FOOD & BEVERAGE The Food and Beverage Department provides the restaurants and room service for the gaming customer and it provides the catering for casino marketing’s special events. While the majority of gaming customers only qualify for complimentaries in the low end restaurants like buffets and coffee shops while some qualify for comps in the steak house or gourmet restaurants. Some maître and sommeliers have been known to push the most expensive wines and cordials or just to pad the bill.

ROOM SERVICE Room service complimentaries charges can be so inflated that casino marketing executives have resorted to stocking suite bars with booze purchased at local stores with petty cash vouchers.

CATERING The catering department that provides the banquets for casino marketing department’s special events has been known to inflate their bills. One catering department charged a year’s supply of rice. This is one way of reducing the cost of food to sales.

Non-revenue departments that provide support are: Accounting; reports and compliance IT; maintenance to software and hardware Surveillance; asset protection Security; Fills and credits Entertainment; enticements