June 12, 2011
This spring, Iowa poker players have been abuzz about the larger than usual bad beat jackpots at the Prairie Meadows Racetrack, Casino, and Den of Iniquity. In mid-May, the main jackpot went off at a little north of $215,000. The reserve jackpot of roughly $95,000 was then rolled out, and has since grown to nearly $110,000. With shares of 50% to the losing hand, 25% to the winning hand, and the remaining 25% divided equally among the other players at the table, the bad beat jackpot is certainly a nice pay day for catching the wrong end of a cosmically rare lucky cooler hand.
After a little reflection on the bad beat jackpot (BBJ), it occurred to me that the nature of the BBJ structure and the timing of the recent jackpot win permit some intriguing insights into the economics in play at the Prairie Meadows poker room. In particular, the BBJ information provides a method for making a meaningful estimate of the number of raked cash game hands dealt, total cash game rake taken by the house, average rake per hand, and even dealer and cocktail server tips.
Looking first at the structure of the BBJ, the sizes of the the main and reserve BBJs in May suggested that the jackpot drop was distributed to the two BBJ funds in a 2:1 or 3:2 ratio. A poker room manager confirmed to me that the jackpot drop was distributed with 60% going to the primary BBJ and 40% to the backup BBJ. Even more important is that the room's other uses of jackpot promotion funds—$200 flat payments to straight flushes—are not funded with a dedicated reserve, but instead bonuses for straight flushes are deducted first from each day's jackpot drop, with the remaining funds then credited to the two BBJs. [FN1] Thus, unlike many poker rooms which use their jackpot drop to fund a variety of promotions, it is fairly easy to determine the actual total jackpot drop taken at Prairie Meadows.
To calculate the jackpot drop taken at Prairie Meadows, we first take the amount of the reserve BBJ, which we know was wholly funded since the last BBJ was won. Dividing the reserve BBJ ($95,000) by 40% gives the amount contributed to the main BBJ ($142,500 of the $215,000), for total BBJ funding of $237,500 since the last BBJ was won. Next, we need to add an estimated payout for straight flush bonuses from the jackpot drop. Talking with the poker room manager, roughly two to four straight flush bonuses are paid out each day. Assuming an average of 20 straight flush bonuses per week adds roughly $208,000 per year to the jackpot drop taken (20 x $200 x 52 weeks).
Next we need a way to convert the BBJ funds to an annual basis. This is where the timing of the recent BBJ win comes into play. The recent jackpot was won roughly six months after the last win in late December. So, to get an estimated annual jackpot drop, we can simply double the jackpot drop since the last BBJ win ($237,500 x 2 = $475,000) and add the annual straight flush payments ($208,000) for a total annual jackpot drop of $683,000. [FN2]
Now the interesting point to keep in mind is that the amount dropped for the jackpot fund is correlated to the amount dropped by the house in rake. The dollar dropped each hand for the jackpot fund is taken at the same time as the first dollar of rake (at $10 in the pot). So, if a hand is not raked, no jackpot dollar is dropped. Thus, the amount dropped for the jackpot fund is the minimum amount taken by the house for rake (the "base rake"). To estimate the total amount taken in rake, one must simply estimate the percentage of raked hands that also reach the second, third, and fourth dollars of rake (taken at the $20, $30, and $40 marks). This depends to a great degree on the game mixture in each room. A room spreading $2/$4 LHE will take less rake than a room with $3/$6 or $4/$8 as the smallest LHE game. Similarly, a room with $1/$2 NLHE will hit those rake marks less frequently than a room with $1/$3 or $2/$5 NLHE as its smallest game (though some rooms offer more graduated rake structures for their bigger games). Rooms that allow or require kills, half-kills, and/or straddles will also take more in rake.
Turning back to Prairie Meadows, the estimated annual jackpot drop of $683,000 translates into a base rake for the house of $683,00. Taking into account that the jackpot drop calculation might be subject to some variation based on season, economic conditions, the effect of promotions, and the live horse-racing season, the jackpot drop and base rake might vary up to 20%, giving us a range of jackpot drop and base rake of roughly $550,000 to $825,000, though the actual number is most likely much closer to the original estimate, probably around $650,000. Converting the base rake to an estimated total rake merely requires estimating the frequency of each raked hand also being raked at the second, third, and fourth dollar levels. A room with mostly small stakes limit games and "social" style no-limit games will generate a less aggressive rake profile than a room with predominately action-oriented no-limit games. The following table for a room with base rake similar to Prairie Meadows illustrates the range of total rake that might be taken depending on the nature of the room's game mix and action level [FN3]:
The left hand column for total rake is probably a closer fit for a poker room with mostly $2/$4 LHE and some $1/$2 NLHE, while the right column for total rake is a better fit for a room with mostly action-oriented $1/$2 or $2/$5 NLHE and some $3/$6 or higher LHE. Prairie Meadows generally spreads mostly $1/$2 NLHE and $3/$6 LHE (with a full kill), along with fairly regular $2/$5 NLHE and a weekly $6/$12 Omaha8 game. Using a base rake of ~$650,000 per year, and the more aggressive rake assumptions, the estimated total annual rake for Prairie Meadows is roughly $2.25 million.
Looking at the Iowa Racing and Gaming Commission official financial reports, Prairie Meadows reported total poker rake of $2.3 million in 2010. Assuming $75,000-$100,000 of the reported rake is from poker tournament entry fees [FN4], the estimate of $2.25 million in cash game rake, as well as the underlying assumptions regarding the size of the annual jackpot drop and the aggressive rake structure are validated as being reasonably accurate.
As an interesting side note, the Caesars Entertainment family of casinos has imposed a $5 maximum rake at most of their poker rooms (and a $5.50 maximum rake at their Horseshoe Casino in Council Bluffs, Iowa). The amount generated by this extra rake can be estimated by adding the amounts in the following table to the rake calculated previously for a $4 maximum rake (the table below shows the percentage of hands that reach the maximum rake threshold of $50):
Based on the table above, if Prairie Meadows increased its maximum rake to $5, it could generate an additional $250,000 to $300,000 in annual revenue. Although there would be some resistance from players to any rake increase, Prairie Meadows really has little direct competition due to geographical constraints. The closest competitive poker rooms in terms of size and action are in Council Bluffs (across the river from Omaha) and Kansas City, each two or more hours drive from the Des Moines area (not to mention these rooms already have at least a $5 maximum rake). Some players might go to rooms at Meskwaki or Riverside (near Iowa City), but these rooms generally have less action and less satisfactory room set-ups in addition to being an extra one to two hour drive for most players. In any event, it's easy to see why Caesars increased its maximum rake.
Now, why bother deriving the jackpot and rake drops indirectly if the rake drop can be determined simply by looking at financial reports? First, as noted previously, we can verify the general validity of our assumptions about the rake structure, which will help derive financial data for all Iowa casinos (the subject of an upcoming post). Second, knowing the jackpot drop can help us draw some other interesting conclusions about the economics of the poker room, specifically the amounts spent by poker players on tips to dealers and cocktail servers.
Our analysis of dealer tips begins with the observation that the jackpot drop is essentially a proxy for the number of hands that are raked. Each dollar in the jackpot drop represents one hand that was large enough to generate rake (i.e, had at least $10 in the pot). Generally speaking, if a pot is large enough to be raked, a dealer is usually tipped at least $1. Some players will tip on smaller pots, while some players are stingier with tips. In a room like Prairie Meadows with a high number of regular players and mostly long-term dealers, tips tend to run above the $1 per hand benchmark, with a fair number of players tipping more than $1 on larger pots. A matrix of raked hands dealt ("tipped hands") and average tip size gives us a reasonable range of total dealer tips per year:
Turning to cocktail server tips, the connection between raked pots and server tips is not as closely correlated as was the case with dealer tips. However, servers generally come by each table two to three times each hour, and typically bring three to five drinks each trip. Most players tip $1 per drink, so a server should earn $6-$15 per table per hour. So, if we assume that the typical table gets in approximately 25 raked hands (30 total hands) per hour, then we can estimate the reasonable range of cocktail server tips:
[FN4] Prairie Meadows has three weekly tournaments with buy-ins of $60 or less, each of which has 30-100 entries. Assuming 150-200 entries per week at $10 each, the poker room will earn a total of ~$75,000-$100,000 per year from poker tournaments. Although many poker rooms offer more tournaments with higher entry fees, clearly poker rooms rely on cash games to generate the bulk of their revenues.