Last week, one of the local dailies ran a story reporting on the latest trend: baccarat and penny slots are big revenue producers for casinos, particularly on the Las Vegas Strip.
Great story, but it's about 6 months out of date--at least where baccarat's concerned. And, as a look at the numbers will show, the ascendancy of the penny slot is hardly news. There's a real story in here, but it's not the one you read in the paper--and it's not necessarily a good one for Nevada gaming.
(More after the jump)
First, let's talk about baccarat. As a percentage of total Strip casino revenues, it's been on a tear, while gaming revenue in general has been slumping. It really carried the state for much of 2010.
To put the rise in baccarat into context, I'm going to borrow from a neat little report I wrote back in December about Las Vegas Strip Table Game Mix, 1985-2010 (pdf)
Note: for 2010, I used only the first 3 quarters of revenue data (that's all I had available at the time), so the 2010 number is actually a bit overstated, given how bacc fizzled in the 4th quarter, but I'm giving away the punchline. Here's a thousand words worth of explanation:
As you can see, baccarat's recent surge isn't entirely unprecedented. In the mid-1990s baccarat was similarly booming, actually out-earning blackjack on the Strip in 1995. After 9/11, international high-end play evaporated, though baccarat was already trending downward. The revival of baccarat began in 2004, though its bigger proportional share of gaming revenues is due, as many correctly believe, to the relative shrinking of other table game play during the recession.
But here's where it gets interesting. As of last September, everything in that article about baccarat's ascendancy is spot on. This was around the time that I coined the phrase "baccarat-based recovery," which a few other analysts have picked up. For much of 2010, it seemed that strong bacc play would paper over the decline in overall gambling in Las Vegas, provided there weren't any major swings in hold percentage.
Since then, however, it's been a totally different story. Baccarat's been on the decline, ending the "baccarat-based recovery." There's a reason why Nevada's had year-to-year decreases in gaming revenue for three months in a row now: less baccarat play. Here's a chart for the Las Vegas Strip that illuminates the decline in baccarat play since September.
Baccarat win is self-explanatory--it's how much Strip casinos won at the game. The next column is the baccarat win as a percentage of total table win--something that helps us see whether baccarat's powering an otherwise-stagnant market or just limping along. Finally, I included the baccarat handle, to show that this isn't just a case of unfavorable hold; there's much less baccarat play now than there was before.
Another scary number: January's baccarat revenue was the lowest since 2004--not a sign that we're trending upward.
So even though, on the whole, baccarat in 2010 was an interesting story, the real story here is the game's sudden decline. What's the reason, and what does it mean for Nevada's gaming industry? Are Asian high rollers sticking to Macau and Singapore? Are domestic high rollers staying home, too? Outside of the baccarat salons of the Strip, it's hard to tell.
The baccarat-based recovery was a weak enough turnaround from the recession, but without it, the picture looks much worse.
Next, it's true that pennies are on a roll, but this is not exactly breaking news in 2011. As the chart shows, pennies have been on the upswing for more than seven years:
When pennies re-emerged in 2004, it was a huge story. Historically, they had long been on the decline; back in 1994, there were only 169 of them in all of Nevada's casinos. They accounted for about one-tenth of one percent of total statewide slot revenues. In 1995, the state stopped reporting them as a distinct category, lumping them in with "others."
But when pennies came charging back in the mid-2000s, they were, as anyone who's been in a casino knows, machines that took more than a penny a spin. With the introduction of the credit meter and bill validators, as well as video screens, multi-line, multi-coin machines became the norm. Allowing players to wager as much as $5 a spin, and with considerably higher holds than higher denomination games (approximately 10% for pennies vs 5% for quarters), they immediately became big revenue producers.
So what makes the penny slot so newsworthy in March 2011? The article suggests that it's a reaction to the recession, but that's not entirely, if it all, the case: as you can see for yourself, the move to penny slots predates the recession. In fact, the year-to year increases in penny slot revenue were larger in 2005 (74%) and 2006 (41%) than 2008 (26%), 2009 (18%), and 2010 (29%).
Penny slots may continue to gain traction during the recession, but it's disingenuous to argue that this is because of the recession, since proportionally speaking their growth has slowed since the Strip's economic woes began, though it did pick up again last year.
And focusing on pennies obscures the real dominant player in Strip slots: the multi-denomination machine.
As you can see in that table, multi-denom slots are the real revenue giants on the Strip, accounting for nearly half of all slot revenues--about double the size of pennies' market share. They can include penny denoms, but the machine's hold percentage--which is typically under 6%--suggests they may be seeing more action at higher denoms.
Multi-denom machines are popular with casinos because they give them 3 or 4 machines for the price of one--why bother buying separate penny, nickel, quarter, and dollar machines when you can have them all in one cabinet?
The policy question this should have raised long ago is: Does this mean that casinos will be putting fewer slots on the floor? (judging from the numbers, the answer is a clear "yes.") If so, should the fee structure of slot machines, which is based on the number of machines on the floor, be adjusted so the state can maximize its tax revenues from machines? With the budget hole the state's in, this isn't a minor issue at all.
So penny slots and baccarat might not be the most interesting gaming revenue story in March 2011, but there's certainly no shortage of stories hovering around them--and many of those stories have serious implication for Nevada and the gaming industry.