Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts

The Iowa Poker Economy:
Little Rounding Error on the Prairie

June 26, 2011

Recently I took a look at the economics of the Prairie Meadows poker room in Des Moines, Iowa. Based on data reported to the Iowa Racing and Gaming Commission, my estimate was that rake, jackpot drop, and tips for dealers and servers likely took roughly $4 million a year out of the central Iowa poker economy. But what about all Iowa casinos?

Let's take a look at data for all gambling at all Iowa casinos for Fiscal Year 2010 (July 2009-June 2010). [FN1]. First, the one figure that leaps out of the data is that Iowans (and its visitors) love to gamble, to the tune of gambling losses of nearly $1.37 billion last year. Another striking figure is the sheer dominance of slot machine revenues, which accounts for 93% of all Iowa gaming revenue, and 91% of gaming revenue at casinos with poker. [FN2]. As someone who spends most of my casino time in the poker room, with occasional sessions of blackjack or craps, the fact that most other folks actually prefer to gamble in the rows and rows of slots really hadn't registered with me.

(Click on charts and tables for a larger view.)

Still, the table game revenues in Iowa, although dwarfed by the slots, are nonetheless nothing to sneeze at, coming in at nearly $117 million last year. Poker revenues (which are counted with the table game revenues) accounted for a mere $11.5 million last year, a sizable chunk of change that is nothing more than a minor rounding error on the casino balance sheet. And poker players wonder why they are treated as the red-headed stepkids of the gaming world.

Breaking down the table games brings some interesting insights. Hardly surprising is that blackjack is far and away the biggest earner among the table games, while poker actually holds it own, earning roughy half what is earned by the craps tables and assorted carnival games, and more than what is earned by either roulette or pai gow poker.

(Click on charts and tables for a larger view.)

Poker looks a lot less robust, however, when evaluated on a per table basis. Although blackjack also drops in the rankings on a per table basis, pai gow, roulette, and the carnival games more than double up the per table revenues of poker, while craps dominates the field with the highest per table earnings (nearly four times poker's per table earnings). Again, poker is the smallest fish in the already small table games pond.

The per table statistics are interesting to me, because a table game in the pits and a poker table should have roughly similar cost profiles. Each table requires a dealer, cards/dice, and an automatic shuffler (or wheel for roulette). Each table takes up roughly the same floor space, and can serve roughly the same number of players. One pit boss / floor person in the pits or the poker room can supervise roughly the same number of tables. The one exception is craps, which requires three dealers and a boxman per table, and a pit boss overseeing, at most, three to four tables. Still, pit games and poker should be roughly comparable on a per table cost basis. Thus, poker lagging in per table revenues certainly can't endear the game to casino management, who have to maximize casino revenues in every square foot of gaming floor space.

Table games have a few built-in advantages over poker. Most important, table games can be played on an individual basis, while poker games rarely start or continue running with fewer than five players. Also, poker can only offer the house a steady rake, while many table games offer sucker bets with a 5-10% (or better) house edge. Still, poker does bring in revenues that might otherwise escape the casino's greedy paws, and a million extra dollars of revenue can help pay the electric bill. [FN3] In many ways, poker resembles gasoline at a convenience store—a product with a low profit margin that hopefully entices players to come inside and purchase higher profit margin products like soda and groceries.

Looking at the four biggest Iowa poker rooms by revenues—the Horseshoe in Council Bluffs, Prairie Meadows in Des Moines, Riverside near Iowa City, and Diamond Jo in Worth County—these four rooms account for over 75% of Iowa's poker revenues. The Horseshoe pulls from the Omaha market, Prairie Meadows dominates Des Moines and central Iowa, Diamond Jo (Worth) draws heavily from Minnesota (where no-limit poker is prohibited), and Riverside is near Iowa City (home of the University of Iowa). Yet of these four rooms, only the Horseshoe and Prairie Meadows really show a significant revenue stream from poker on an overall basis, and on a per table basis, poker continues to be a bit player in the overall table games portfolio even for these four casinos with a large poker revenue base.

One final interesting set of data can be derived from looking at the overall and per table poker revenues for all Iowa casinos offering poker. The Big Four rooms obviously dominate on a total revenues basis. But, looking at poker revenues on a per table basis, some of the smaller rooms actually are quite competitive. Further, it is clear that Riverside lags significantly on a per table basis given its overall revenues. This is hardly surprising given that Riverside does not use automatic shufflers, forces its dealers to pool tips with other pit dealers, and generally fails to market its large poker room to the Iowa poker community.

(Click on charts and tables for a larger view.)

In an upcoming post, I'll look at the overall costs of the Iowa poker economy.


[FN1]  Data for fiscal year 2011 will be available in roughly four to five weeks, and I plan to do a year-by-year look at the progression of the Iowa poker economy once that data is released.

[FN2]  Gaming revenue excludes horse and dog racing revenues, which are not included in these reports.

[FN3]  I find it highly unlikely that poker is a "loss leader" as some people claim. Casinos aren't in the business of losing money in any facet of their operations.

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Economics of a Small Poker Room

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]:

Table 1—The "additional rake distribution" columns reflect the
percentage of raked hands which reach each additional dollar of rake 
($1 in rake taken at $20 / $30 / $40 in the pot). Figures are on
an estimated annual basis. (Click on table for larger view.)

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):

Table 2—Effect of a $5 maximum rake, related to percentage
of raked hands that reach the maximum rake ($50+ in pot). Figures
are on an estimated annual basis. (Click on table for larger view.)

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:

Table 3—Range of total amounts paid for dealer tips. Figures are
on an estimated annual basis. (Click on table for larger view.)

Using a range of 550,000 to 650,000 tipped hands per year, and assuming $1.25 to $1.50 per tip, a reasonable estimate of total dealer tips would be roughly $800,000 per year. Assuming 20-25 dealers on the regular rotation, this works out to $32,000-$40,000 per dealer per year, which seems a reasonable income (some regular dealers with more seniority, prime shifts, and better people skills likely pull down well above this amount, while the part-time dealers earn substantially less).

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:

Table 4—Range of total amounts paid for cocktail server tips. Figures
are on an estimated annual basis. (Click on table for larger view.)

Using the range of 600,000 to 650,000 raked hands, and assuming $10-$15 per table per hour (Prairie Meadows players and servers being regulars, tips run on the generous side), an estimate of $300,000 in server tips per year seems reasonable.

Taking each of these economic factors into account, the total financial costs of poker at Prairie Meadows can be calculated:

Rake:                 $2,300,000
Jackpot Drop:      $650,000
Dealer Tips:         $800,000
Server Tips:         $300,000 

Total:               $4,050,000

This figure is only an estimate, but the rake figure is definite (based on financial records), and the jackpot drop is likely not overestimated by more than $50,000 or so. Even if the dealer and server tips are overestimated by as much as 25% ($275,000 too high), the most conservative estimate for the total costs of poker at Prairie Meadows is still $3.7 million. Of course, the dealer and server tips may be underestimated as well. 

Prairie Meadows is just one of 16 casinos in Iowa that offer poker, albeit being the second-largest room in terms of both casino and poker revenues (after the Horseshoe). Prairie Meadows is a typical small-to-mid-sized (11 table) poker room with a mostly local / regional player base. Non-local players find their way to the poker room because Des Moines is the state capital and state's largest city, which helps attract a certain number of business and convention travelers. Also, Drake University is located in Des Moines while Iowa State University is in Ames, an easy 30 minute drive north of the casino. Des Moines is located in the center of the state, at the intersection of I-80 and I-35, generating additional players from long-distance travelers, primarily truck drivers (it certainly doesn't hurt that the casino is located right off an I-80 exit near the east I-80/I-35 mixmaster, an exit shared with the Adventureland amusement park). Certainly, the room certainly has a different player base and business model than similarly sized rooms in Las Vegas.

In any event, it is indisputable that poker players pay roughly $4 million per year in actual costs for the privilege and convenience of playing poker at Prairie Meadows, money which is completely removed from the poker community. Obviously a certain percentage of the Prairie Meadows players are winners. So, the Prairie Meadows poker community as a whole has to generate non-poker income sufficient to cover the $4 million in overhead costs, as well as pay the winning players their profits. This money can only come from one source—players' outside income, whether from wages, business or investment revenue, savings, government assistance, or other sources. With Iowa having a population of only 3.04 million, median household income of $48,000, and median individual income of $31,400 (women) to $42,600 (men), generating $4 million to cover the poker overhead at Prairie Meadows is no mean feat. It certainly gives one pause to reflect on the long-term sustainability of poker, at least in the live casino setting on the current scale.

Stay tuned! Later this week crAAKKer takes a broader look at the economics of the live poker scene in the state of Iowa as a whole.


[FN1]  In the rare instance that the straight flush payouts exceed the daily jackpot drop, the amount needed to cover the excess straight flush payouts is deducted from the reserve BBJ fund. The poker room manager indicated this situation has occurred "at most three or four times".

[FN2]  This annual estimate might be a little on the high side given that the Prairie Meadows poker room generally sees somewhat higher action during winter months (monthly poker room rake ranges from $165,000 to $220,000 according to Iowa Racing and Gaming Commission reports). Also, the BBJ mania likely generated somewhat higher than normal numbers of players, though much of this extra business probably generated lower than normal rake rates as many of the extra players sat in $3/$6 LHE games and folded hands with little or no BBJ potential, while checking down or light-betting hands with BBJ potential.

[FN3]  The spreadsheet from which all the tables were derived can be viewed on Google Docs.

[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.

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Avoiding a Titanic Poker Leak

January 04, 2011

But it’s a totally different story in a big game. If I raise it $3,000 or $4,000 and the other guy and I have a lot of chips on the table, he’ll be a little more hesitant about raising me now because he knows there’s a very good chance I’ll play back. The guys I play with know that when I put my children out there, I don’t like to let them drown.

—Doyle Brunson, Super/System2, p. 394

A few days ago, I played a cash game session at the Meadows ATM. During the game, I saw an example of what is probably among the top five poker leaks, at least among recreational players—calling with a hand you are fairly sure is behind solely because of the amount of money already invested in the pot.

The hand went roughly like this. There was a straddle, and just about everyone in the room limped into the pot. Straddler raised to $24, and there were four callers. The flop came out highly coordinated—something like 9h8h8d. Straddler led out for $75, and got two callers. The turn was the Jh. Straddler led out for $125, with both players immediately going all-in for ~$800 more and ~$100 more. Now the big stack had never once shown down less than the second nuts when putting big money in the pot, while the other player was an uber-tight older nit. Straddler thought a minute, then said, "Well, I've already put most of my money in the pot, I have to call," and called for his last $150. Sure enough, the big stack had 98 for the flopped boat, while the old nit had the nut flush. The boat held up for another monsterpotten to the big stack. Straddler claimed to have held AhAd, and left after busting on the hand.

Now the big leak in this hand is the Straddler's thought process. He was fixated on the size of the pot and the fact he had committed a lot of his chips to the pot. The problem is that this fixation on the pot size and prior action blinded him to the reality that he was likely either drawing thin or dead. In economics terms, the money already committed to the pot is regarded as a sunk cost. A sunk cost is essentially a prior expenditure that cannot be recovered. For example, a developer decides to build a casino on the Las Vegas Strip. Building commences, and the project is 50% completed, but then the economy tanks. The projections for income from gambling, conventions, shopping, and other resort activities are no longer valid and must be revised. The new figures show that the projected income stream from the completed casino will not meet the additional expenses needed for completing and opening the casino; in other words, the project cannot be finished at a profit. A rational developer would abandon the project, despite having already invested tens or hundreds of millions into the project. The money invested prior to the decision point is irrelevant to the decision regarding whether to complete or abandon the project. If the additional investment needed to complete the project will not result in a profitable venture, then there is no point in making the additional investment.

Turning back to poker, the amount you personally have invested in a pot is never a valid consideration governing your future play in the hand. Either you have correct odds to call vs. your opponents' range(s), or you don't. The amount you have "invested" or put in the pot up to the decision point is irrelevant; it is a sunk cost. The past is past, and that money is now part of the pot; it is no longer "your" money or "your" investment. Reasoning that you "have to call because you already put in $X" or "it's an easy fold because you've only invested $Y" is a major leak. A smart poker player will look only at the total pot versus the wager he is facing (and future implied wagers, where relevant) when making his decision. 

The problem is that many recreational poker players, because they are loss-averse, will improperly factor the sunk cost of their prior wagers into their decision making process. These players often improperly invoke the concept of being "pot-committed" to justify their ultimate decision to make a bad call. Let's look at an example. You flop a monster draw with QJs, but get to the river and have Queen-high after missing your draws (let's ignore your ineptitude in failing to get all-in on the flop). The river paired the board, so you decide to take a stab at the $500 pot, betting $300. Your opponent, a rock, goes all-in for $400. It's $100 to call into a pot of $1,200. You're getting 12:1 on the last call, but is your hand ever good here, let alone one out of every thirteen hands? Are you truly pot-committed here? Calling in these situations is a terrible leak, yet many recreational players make that last call because they're fixated on all the money they've already put into the pot.

There are circumstances where loose calls with marginal hands are warranted, but those loose calls must be justified by relevant considerations: your opponent's likely range based on his betting line and your reads, coupled with your knowledge of your opponent's playing style (particularly whether he is prone to bluffing or making value bets with marginal hands). Basing your decision to make a loose call on the fact that you've already put a lot of money into the pot is throwing good money after bad. Once you've paid enough money to know you're beat, why voluntarily pay even more for the privilege of losing the pot? Making a habit of making these bad loose calls will eventually sink your bankroll.

"Don’t make loose calls and hopeless bets to avoid giving up on the pot. It’s okay to leave your kids out there sometimes. Maybe they have soccer practice today."

—Schmidt & Hoppe, "Don't Listen to Phil Hellmuth", p. 112

If you're sunk, it's silly to go down with the ship.

(Image source).

Take the red pill! ... There's more to see ...

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