One of the hot-button issues in the gaming industry – as well as many other industries – is the problem of marketing to millennials. The term "millennial" broadly refers to anyone born between 1980 and 2000; and with a population of 87 million, millennials are a group which outnumber Baby Boomers (76 million) and will account for one-third of all retail spending within the next five years. Millennials also have casino operators and industry observers alike scratching their heads, as they don't seem to gamble as much – particularly on slot machines – as the industry would like.

Much has been written speculating why this is so. Such discussions often start with a particular factoid – that gaming now accounts for less than 37% of revenue on the Las Vegas Strip, even though Strip visitation is increasingly being driven by millennials – followed by any of a laundry list of explanations:

- Millennials find the current slot product uninteresting

- Millennial gamblers want to be engaged and empowered, and to exert some control over outcomes

- Millennials prefer night clubs to casino gambling

- Millennials are more interested in online gaming, poker and daily fantasy sports (DFS)

- Millennials want skill-based games

- Millennials want experiences

- Millennials want to be social

- Millennials demand fairness

All of the above may be true, but except for the last point are almost certainly the right answers to the wrong questions. For starters, casino operators and the Las Vegas Strip in particular have had little difficulty attracting millennials and getting them to show up – the cause of consternation seems to be with the amounts that millennials (don't) gamble. And it's not even that millennials don't gamble – with gaming expansion, the poker boom, and various forms of online and mobile gaming, millennials have more experience gambling than any generation to come before it – but rather that millennials aren't gambling on the things the gaming industry wants them to gamble on (slots).

What's more, that factoid regarding Strip gaming revenues represents one of the grossest misinterpretations of data going around (more on that point a little later).

The problem is, virtually all of the discussion regarding millennials has centered on abstract explanations seeking abstract solutions, when the biggest problem is likely far more fundamental than that. Few if anybody discussing the millennial problem have discussed it in the context of the declining economics of gambling itself.

The simple fact is that people in general are gambling less, while the economics of gambling have worsened considerably over the past two decades. In one very important respect, there has never been a worse time to be a casual (non-advantage) gambler in the history of legalized gambling in the United States.

Slot economics: The rise of the hold percentage and the decline in slot volumes

Let's start with two equations. The first is the law of demand, which will be familiar to anyone who has studied entry-level microeconomics:

The Law of Demand

The second equation is a general equation for gaming revenue: 

For example, the house advantage on the Pass Line bet in craps is 1.41%; if a player bets $10 on the Pass Line, the player will spend $0.14 ($10 x 1.41% = $0.14), which represents gaming revenue for the casino. The $10 wager is the volume, while the 1.41% house advantage represents the price of wagering $10 on the Pass Line in craps.

For a slot machine, the house advantage is generally called the hold percentage or slot win percentage. If you bet $1 on a slot machine with a 7% hold percentage, you will spend $0.07 on average; that 7% hold percentage is the price of wagering $1.

Prices have been on the rise for the past two decades, as casino operators have continually pulled on the house advantage lever.

The graph below is from a report entitled "Slot Market Assessment: Analysis of Industry Data." The report was issued by research group Applied Analysis, and commissioned by the Association of Gaming Equipment Manufacturers (AGEM), a trade association representing suppliers such as International Game Technology PLC, Scientific Games, and the very recently renamed Everi Holdings (formerly known as Global Cash Access). The graph shows the change in slot hold percentages covering 16 states (effectively representing the commercial gaming industry plus two Indian casinos in Connecticut) going back to 1990.

Source: Association of Gaming Equipment Manufacturers

In the 16 jurisdictions included in the Applied Analysis study, the aggregate slot hold percentage was 6.43% in 1990 (essentially Nevada and New Jersey, prior to widespread gaming expansion in the U.S.), dropping to a low of 5.96% in 1996. The aggregate slot hold percentage has risen steadily since, passing 7% in 2006, and reaching its current height of 7.70% in 2014.

Indeed, slot play is more expensive to the gambler than ever before. Meanwhile, higher hold percentages have been further exacerbated by technology: According to a white paper issued by slot manufacturer WMS -- now a unit of Scientific Games – game speed has increased dramatically, rising from around eight spins per minute in 2004 to 14-17 spins per minute in 2014.

In short, the slot player is losing more money faster than ever before. And there is ample evidence in recent years to suggest that this is now coming at the expense of volume.

In its report, Applied Analysis also observed that slot machine handle (the total amount wagered – or volume – on slot machines) in the United States has dropped markedly since the Great Recession, even while personal income has increased. In its study (again covering 16 states), slot handle dropped from $355 billion in 2007 to $291 billion in 2014; meanwhile, personal income grew from $12.0 trillion in 2007 to $14.7 trillion in 2014.

Slot win in these 16 states dropped from $26 billion in 2007 to $22 billion in 2014.

In other words, it's clear that Americans are spending less and less of their income on slot machines.

So that's slot machines, where changes in house advantage are generally felt rather than seen (aside from video poker, you generally can't determine what a given slot machine's payback rate is simply by looking at it). What about table games, where table games players are generally more sophisticated than slot players, and where the house advantage is far more visible?

Table Games: Rising House Advantages on the Las Vegas Strip

Let's do some value shopping. Let's say you're visiting the Las Vegas Strip and are looking to play table games. Which of the following options look the most appealing to you?

*Average bet per hand either directly sourced from or derived from Wizard of Odds

**House advantage per unit wagered, often referred to as "element of risk"

Blackjack has traditionally been the game that smart people play, largely because blackjack games have traditionally been beatable by card counting (as first popularized by Ed Thorpe in his 1962 classic Beat the Dealer), but also because the game has traditionally been the lowest edge game in the casino under basic strategy. As such, blackjack looks like a reasonably fair bet at 0.50% on the base unit, if you can learn basic strategy. Baccarat also looks reasonable at 1.06% for the Banker bet and 1.24% on the Player bet, given that the game requires no skill; the average blackjack player plays worse than that. Alternatively, if you're a bigger bettor and are willing to bet 3.77 units per come out roll ($18.85 on a $5 base unit, or $37.70 on a $10 base unit) and will bet the full 3x-4x-5x odds, craps looks like a good gamble at an adjusted house advantage of 0.37% per unit wagered.

Unfortunately, if you're like probably 95 percent of America and want to bet less than $25 per hand, those might not be your options.

As I wrote earlier this year, blackjack games in general are disappearing. In 2013, there were 2,704 blackjack tables in the state of Nevada, down from 3,682 units in 2000. On the Las Vegas Strip specifically, there were 1,347 blackjack tables in 2013, accounting for just 51% of table games units and 24.6% of table games revenue on the Strip.

Las Vegas Strip: Blackjack table count and revenue

Source: UNLV Center for Gaming Research

However, these games aren't just disappearing: Some of the remaining games have been slapped with continuous shuffling machines (CSMs) to combat card counting, but most have been replaced outright by higher-edge blackjack games paying 6:5 for blackjack (which adds 1.39% to the base house advantage) and newer proprietary games with higher edges, such as Three Card Poker (3.37% house advantage, or 2.01% per unit wagered) and Ultimate Texas Hold'em (2.19% house advantage, or a more reasonable 0.53% per unit wagered).

Las Vegas Strip: Non-traditional games

Source: UNLV Center for Gaming Research

Moreover, the blackjack games paying 6:5 are no longer just the single-deck variety, as was the case when they were first introduced over a decade ago; nowadays, even six-deck and eight-deck games can be prominently found with 6:5 payoffs, with house advantages as high as 2.30%.

At present, to find even a handful of blackjack games paying 3:2 for under $25 on the Strip, you're pretty much limited to Treasure Island and a handful of Caesars Entertainment properties (Bally's, Caesars Palace, Linq, Paris, and Planet Hollywood, and to a lesser extent Harrah's and Cromwell), all of which also feature a healthy dose of 6:5 games as well (see the Blackjack Survey at the Wizard of Vegas).

You are also going to have a tough time finding baccarat games with minimums under $25 (and none under $10), as there are only a handful of those sprinkled along the Strip in some of the lower-end casinos, namely Luxor (MGM), Flamingo (CZR), Harrah's (CZR), Circus Circus (MGM), and SLS.

Even craps may not be safe. Wynn Resorts recently caused a stir when it reduced its craps odds at the Wynn and Encore to 2x, from the mostly Strip standard 3x-4x-5x. Now, instead of being able to wager 3.77 units per come out roll at 0.37% per unit, craps players at the Wynn/Encore can only wager 2.33 units per come out roll at 0.61% per unit wagered. As was the case with 6:5 blackjack, there's a non-zero chance that this could become the norm rather than the exception on the Strip.

Consequently, if you are a smaller-stakes bettor visiting the Las Vegas Strip, your options are looking more and more like this:

*Average bet per hand either directly sourced from or derived from Wizard of Odds

**House advantage per unit wagered, often referred to as "element of risk"

And even where 3:2 is still an option at under $25, the trend is clear: There are fewer and fewer games for smart people to play, and house advantages in aggregate are on the rise, at least at stakes that the vast majority of America would want to play at.

Consequently, people who are knowledgeable about gambling are being systematically – if unintentionally – excluded from the market.

A gross misinterpretation: That 36.8% Strip gaming revenue figure

The most commonly cited figure in these types of discussions regarding millennials is the fact that gaming revenues as a percentage of total Las Vegas Strip revenues have been on a sharp decline. As the argument typically goes, the average Strip visitor is getting younger and younger; millennials are increasingly driving visitation, but are spending more money partying in nightclubs and less money gambling; therefore, millennials are less interested in casino gambling, which will become a problem going forward.

The fact itself is black-and-white: According to the UNLV Center for Gaming Research, gaming accounted for 36.8% of all revenues on the Las Vegas Strip in Nevada's FY 2014, down from 45.9% in FY 2000 and 58.6% in FY 1984.

Las Vegas Strip Revenue Breakdown: Percent of Total

Source: UNLV Center for Gaming Research

But the interpretation is wrong. What's happened in the past three decades is not that there is inherently less interest in gambling on the Strip, but rather that the market for Las Vegas has broadened beyond people who only come here to gamble.

In the mid-1980s, there were only two states in America with legal full-scale casinos: Nevada and New Jersey. Casino gambling was a destination product, something that visitors from elsewhere in America could not do at home. And the market for Las Vegas as primarily a gambling destination in 1984 was 12.8 million visitors.

But with widespread Indian and riverboat gaming expansion throughout the 1990s, Americans increasingly no longer had to travel to experience casino gambling. Meanwhile, Las Vegas reinvented itself with increasingly high-end hotel casinos with accompanying dining and other entertainment options, starting with Steve Wynn's Mirage (1989), followed by Kirk Kerkorian's MGM Grand (1993), and then Bellagio (1998), Mandalay Bay (1999), and The Venetian (1999). This version of Las Vegas also came with an increased focus on convention business, and in all drew 35.8 million visitors in 2000.

By this point, gaming was already less than half of total Strip revenues. And it wasn't because gambling was less popular – in fact, gaming revenues more than tripled between FY 1984 and FY 2000 – but rather that Las Vegas was attracting a broader range of visitors than merely people who came primarily to gamble. This trend was furthered in the 2000s with the rise of the nightclubs and dayclubs, heightening Las Vegas' reputation as a top global party destination with a top 10 DJ present every weekend.

The market for Las Vegas as a pure gambling destination is X people. The market for Las Vegas for people who come to gamble, stay in a nice hotel, and enjoy a broad range of dining and entertainment options is X + Y people. The market for Las Vegas for all of the above plus people who come to party – largely millennials – is X + Y + Z people.

The growth in both convention business and the people who come to party shows up in rooms, food and beverage (F&B), and other revenue.

Las Vegas Strip Revenue Breakdown

Source: UNLV Center for Gaming Research

Las Vegas Visitor Statistics (Clark County)

Source: Las Vegas Convention and Visitors Authority

 

When somebody points to that 36.8% figure and says that millennials are spending more on night clubs and restaurants and less on gambling, the underlying assumption is that if millennials weren't spending their money partying in Las Vegas, they would be spending it gambling in Las Vegas (either that, or millennials apparently should be gambling more to match what they're spending on bottle service).

This is 100% wrong – the reality is that if millennials weren't spending their money partying in Las Vegas, they wouldn't be coming to Las Vegas at all.

The fact is that – aside from the World Series of Poker – people don't come to Las Vegas to gamble; people come to Las Vegas to come to Las Vegas. As we've already established, Las Vegas is a crappy place for the average Joe to come to gamble, as most of America can find better value gambles at smaller stakes in the local casinos in their own backyards.

Why people gamble: The weakening factors of demand

In my mind, people generally gamble for at least one of four basic reasons:

1. Novelty/experience. You've never gambled before, or perhaps just not in a certain casino or locale (say, Las Vegas); or there is some aspect of gambling (perhaps different games or types of games) you've never experienced before.

2. Profit. You gamble to make money, whether you are playing at an advantage or merely think you are playing at an advantage but really aren't.

3. To hang out. You are gambling to hang out, perhaps with friends. You might be the type to bet the minimum on any given game, unless you also fit into the next category.

4. Action. You came to gamble. You don't have an advantage; you understand you are playing at a disadvantage, but are willing to do so for a chance to catch a good run of cards/rolls/spins. You might be the type to bet the full odds on craps in order to bet the most at the lowest disadvantage.

Here's the problem: Of the four basic reasons why people gamble listed above, the top two – novelty and profit – have been decimated. The reality is that due to widespread gaming expansion in the U.S., casino gambling is no longer novel for much of America.

The second category – people who gamble for profit – is more complicated. On the one hand, there are likely more people gambling for profit than at any point in the history of mankind. However, such advantage gamblers typically play either poker or daily fantasy sports (DFS) and are of marginal or no value to the casino operator; or otherwise have negative value to the casino (card counters, and other advantage players).

But of greater interest to the casino is the subcategory of gamblers who believe they can beat the casino but can't. As gaming has expanded and gaming markets have matured, fewer and fewer people are likely to incorrectly believe that they can beat casino games that are designed to be unbeatable.

Moreover, millennials – who have come of age during and after the poker boom of the 2000s, have the benefit of the Internet and all of the gambling knowledge that wasn't available to previous generations – are more knowledgeable and generally less stupid about gambling than any generation to come before us. We are far less likely to believe, for example, that the Martingale system is valid.

The point is: (1) Casino gambling in general has matured, and (2) millennials (and the rest of America) are doing what you would expect people to do when they become more knowledgeable about gambling -- gamble less in larger amounts for profit, and more in smaller amounts to hang out.

Skill-based games: The solution?

If you ask anybody who's ever legitimately gambled for a profit – that is, someone who has played poker, blackjack, bet on sports or daily fantasy sports (and yes, DFS is very much gambling), or video poker with a positive expectation – the defining feature that makes a gambling skill game a skill game is that such a game is beatable. That is, the player can gain a mathematical advantage either over the casino or the opposition.

In what some are desperately hoping is the solution to engage millennials, both New Jersey and Nevada have in the past year enacted legislation allowing for new types of games – slots or otherwise – with skill-based elements. At present, nobody really knows what this means or what these games or machines will ultimately look like.

But could this be the solution?

The answer is both "yes" and "it depends." The first problem is that what a skilled gambler qualifies as a "skill game" and what's being enabled by such legislation are likely two very different things. For starters, it's very not likely that new "skill-based" slots will be beatable with skill; rather, it is more likely that a slot player skilled at a certain element will simply lose less than a lesser skilled player. And though the New Jersey law enabled a free-throw shooting contest at Borgata earlier this year, such contests are not particularly repeatable or scalable.

On the other hand, we already know that skill-based slots can work, because we already have them: It's called video poker.

However, the primary reason video poker machines have become as popular as they have is not merely because video poker has a super addictive quality or that it requires skill to lose less; the primary reason is because video poker games generally feature higher achievable payback rates (lower house edges). Moreover, video poker can sometimes be beaten factoring slot club rewards, or some cases may be mathematically beatable straight up (on machines with greater than 100% payback).

The simplest demonstration that house edge is the primary factor is the fact that video poker machines are far more prominent in locals casinos than they are in destination casinos such as those on the Las Vegas Strip. This is probably not because tourists don't like video poker, but rather because video poker machines in locals casinos generally feature higher payback paytables; locals who play longer and more frequently demand better value on their gamble.

Another prominent example of skill-based machines are the ubiquitous (and loud) pachinko machines in Japan.

So the answer is generally "yes" – skill-based machines can be the answer, but "it depends" greatly on the implementation. If you're going to require skill, the player needs to be compensated for having skill.

Which brings us to the skill-free rate and skill-based pricing.

The skill-free rate and skill-based pricing

In our discussion on blackjack and table games earlier this year, we introduced a concept I call the skill-free rate, which essentially is the lowest house advantage of a comparable game requiring no skill. The implication is two-fold:

1. That a game requiring skill should have a lower house advantage under optimal play than a comparable game requiring no skill.

2. The more skill a game requires, the lower the house advantage needs to be to both compensate the player for acquiring the necessary skills, while avoiding over-penalizing lesser-skilled players.

The fundamental problem with 6:5 blackjack is that if you are a casino offering $10 minimum bets on craps, the player can bet $10 on the Pass Line at 1.41%. If your entry-level blackjack game is $10-minimum 6:5 blackjack at 1.42% or higher (and with the emergence of multi-deck 6:5 blackjack games on the Las Vegas Strip, it is more frequently becoming higher), the skilled basic strategy player is not being properly compensated for skill, while new players have no incentive to develop the skill required to play the game.

Hence, if 6:5 blackjack continues to increasingly become the preferred solution of casino operators, blackjack will continue to die a slow death.

What this also means is that for a skill-based slot machine, if a $1-minimum reel slot machine requiring no skill has a payback rate of 97% and thus a 3% house advantage, then a skill-based slot with a $1 minimum average bet should have a higher payback rate (i.e. >97%) and thus a theoretically achievable house advantage less than 3%. Otherwise, there will be no incentive for the player to develop the skills required to play the game.

This also means that a player betting $1 per play on penny slots should also be playing closer to the neighborhood of the 97% payback rate of the $1 reel slots, rather than as if the player is playing for pennies at $0.09-$0.15 per play. This is generally not the case, and is likely one of the reasons that hold percentages have been on the rise, as penny-denomination slots have come to dominate slot floors and the average bet on penny-denomination slots continue to rise (see Frank Legato's excellent article entitled "Slot Floor Exodus" for Global Gaming Business).

There needs to be an adjustment somewhere.

The Millennial Problem: Delivering Gambling Value

Thus far, the millennial problem has been widely billed as a problem of a difference in preferences. And while I generally agree with most of the observations regarding millennials, none of that will matter if the bigger picture issue isn't resolved, which is that gambling value increasingly stinks.

The legendary poker player Doyle Brunson said it perfectly: In order to get action, you've got to give action. Benny Binion understood this when he opened Binion's Horseshoe in 1951; so did his son Jack Binion when he opened the Horseshoe Tunica in Tunica, Miss. in 1995. The latter casino was (at least prior to the sale of Horseshoe Gaming to Harrah's Entertainment in 2003), in my mind, quite easily the best value gamble in America for small and big bettors alike, offering single-deck blackjack games at a range of stakes, high odds craps, easy comps, and a great 24-hr. buffet (according to the most recent copy of Current Blackjack News I have, most of those single-deck games have since been converted to double-deck games).

The problem is that the gaming industry as a whole is giving less and less action, while millennials in general are more perceptive to the nickel-and-diming.

As I've written before, the simple fact is that millennials are smarter, more experienced, and more knowledgeable about both gambling and gambling strategy than any generation to come before us (I have a 1981 birthdate, and loosely fit in this population). There are reasons why – almost category for category – so many of the dominant poker texts of the past decade have been written by guys who are now in our 30s, and largely written when we were in our 20s: We already had a wealth of knowledge available to us, as well as access to more computing power than ever before. We also had unprecedented access to legalized land-based gaming, as well as online gaming.

Right now, everybody's approaching the millennial problem by trying to figure out what makes an idiot an idiot. What we should be doing is trying to figure out what makes a smart person tick, and seek to deliver value accordingly.

I can think of at least a few solutions, in addition to simply dropping the hold percentages on slot machines:

1. Electronic table games. Electronic table games have the crucial ability to deliver lower stakes games, which fundamentally broaden the market for casino gambling. Moreover, the one thing that everybody can agree on is that a generation that grew up on video games is far more accepting of electronic table games than perhaps earlier generations may have been.

2. Higher-action, lower edge table games. Clearly nobody wants to offer games with base-unit house advantages under 1% -- otherwise we wouldn't be seeing the abominations that are 6:5 blackjack. However, it is possible to deliver value to the type of higher-action gambler that bets the full odds in craps, where a player betting the full 3x-4x-5x odds can play at 0.37% per unit wagered, as long as the player is willing to bet an average of 3.77 units per come out roll. It is possible to appeal to the action-oriented gambler by delivering higher action games, while compensating for skilled play with lower achievable house edges on a per-unit basis.

3. Skill-based pricing. The next generation of skill-based games will fail unless they are priced correctly. The player must be compensated for skill.