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February 10, 2012

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South Point’s Michael Gaughan gambles on looser slots

By Liz Benston

Tuesday, July 6, 2010 | 2:01 a.m.

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Michael Gaughan

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Map of South Point Hotel-Casino-Spa

South Point Hotel-Casino-Spa

9777 S. Las Vegas Boulevard , Las Vegas

As the sole proprietor of the South Point, Michael Gaughan doesn’t have to consult a board of directors, worry about Wall Street, appease shareholders or hold countless management meetings to accomplish his goals. Gaughan says he’s not concerned about how his competitors operate their businesses or what they think about his methods.

That helps explain why he directed technicians to open up a few hundred so-called penny slot machines and replace their computer chips — the devices that control how much slot machines pay back over the long haul — with chips programmed to pay back 1 to 2 percent more of gamblers’ wagers over time.

Gaughan didn’t advertise the change. He figured most players are superstitious and suspicious of any changes to their game of choice, so they wouldn’t believe the casino’s claims anyway.

Still, he thinks the change will translate into higher revenue as a result of players losing less money in the long run.

“I think, over time, that people can tell” whether a machine is “loose” or “tight,” he says. “They’re not always right, but they can sense when there’s something different, when they used to come in and play for four hours and now they’re playing for two hours with the same amount of money. Then you look around and wonder where your customers went.”

Terms like loose or tight can have dramatic public relations consequences, yet are tricky to grasp in the practical sense.

Machines that pay back 97 percent of wagers may be better for gamblers than 99 percent machines if they have a lower standard deviation — a statistical term meaning that game outcomes are less volatile and trend toward the preprogrammed payback percentage more than those with higher standard deviations.

That’s according to Tony Lucas, a casino management professor at UNLV who says a slot machine’s theoretical payback percentage has little to do with how long the player’s bankroll will last, the factor that most concerns casino managers and their customers.

Lucas has conducted multiple studies to determine whether such a correlation exists, including one in which his team lowered the theoretical payback on a bank of slot machines by more than 10 percent over time, while at the same time lowering the volatility of the games.

Bankrolls diminished more rapidly when playing higher-payback slots that were also more volatile, an indication of an inverse relationship, if any at all, he says.

Many casinos don’t bother with such mind-numbing analyses, instead relying on the simpler benchmark of payback percentage as an indicator of how much gambling time players get for their dollars, Lucas says.

It’s a poor gauge of player satisfaction, however, as players frequently complain about “tight” machines that in fact have more favorable outcomes over time — at least on paper, Lucas says.

That’s a constant problem for casinos that want to keep players happy — even those whose complaints are unfounded, he says.

Although penny-pinching gamblers can be hard to please given that slots yield wildly different outcomes for individual players, payback percentages — as a result of the cumulative effect of thousands of machines generating millions of spins — significantly affect the bottom line.

Gaughan wouldn’t give the payback percentages of the machines he was changing. But while raising the payback of a slot machine from, for example, 98 to 99 percent might not sound like much, it represents a 50 percent reduction in potential revenue, as the casino’s “hold” is cut in half. That’s why Gaughan’s slot manager initially opposed the move — and why Gaughan says some casinos are going in the other direction, acquiring higher-holding games that can boost revenue in a way that isn’t always noticeable to players.

By all accounts, Nevada casinos are squeezing more profit out of their slot machines these days. Slots, in aggregate, are keeping a higher percentage of player wagers than they were a few years ago.

For the 12 months that ended April 30, penny slots in Nevada kept 10 percent of wagers compared with 9 percent in 2005, according to the Gaming Control Board. The difference is similar for casinos in the same region as the South Point, although Gaughan claims his penny slots were higher than the geographic average even before the recent change.

The lower payback is partly the result of casinos replacing older, higher-denomination games with penny-denomination games that have lower payback percentages. Casinos and slot makers say players prefer the new games because they tend to “hit” more often.

Gaughan wasn’t so sure. Believing that the machines’ hold percentage had been set too high, he spent a few hundred dollars on each machine to insert new chips programmed with lower hold percentages. There were no regulatory hurdles, as casinos buy slots that are compatible with a range of predetermined payback percentages tested and approved by regulators beforehand.

Although Lucas doubts the effectiveness of Gaughan’s slots exercise, he says it’s understandable in a time of experimentation and uncertainty.

For Gaughan the move appears to be part hunch, part “old school” management philosophy.

“The time to tighten up your machines is when you’re doing well and the time to loosen them is when business is slow,” the 67-year-old son of longtime downtown Las Vegas casino owner Jackie Gaughan says.

Major corporations, including those that own the big casinos that compete with the South Point, are inclined to have the opposite reaction because they are driven by short-term gains in revenue that have become crucial to survival in the recession, Gaughan says.

“Slot managers are under an immense amount of pressure to make money, especially in the local market,” he says.

That strategy can backfire, though, as customers won’t come back if they burn through their cash too quickly, he says.

This much is certain, Gaughan says: “People just don’t have the money to spend.”

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