When Competition Hurt the Game

Could one single blackjack table really hurt a casino's image?

Earlier this year, we discussed how many of the big casino operators -- namely Harrah's Entertainment (NYSE:HET), Caesars Entertainment (NYSE:CZR), MGM Mirage (NYSE:MGG), and Station Casinos (NYSE:STN) -- were introducing a spectacularly deceptive single-deck blackjack game at casinos, first across Nevada, and then out to Mississippi and finally Missouri (see "Casinos Get Greedy").

The casinos market the game with the proclamation that "single-deck blackjack is back by popular demand" -- except that in this game, blackjack pays only 6:5, meaning that if you make a $10 bet and hit blackjack, you win only $12 (whereas blackjack traditionally pays 3:2, for a $15 win on a $10 bet). That rule change gives the house a long-run edge about 10 times greater (1.45% house edge) over the perfect "basic strategy" player than the average classic 3:2 single-deck counterpart found in downtown Las Vegas (0.15% house edge) -- the game that any knowledgeable player would actually want (the odds are only about twice as bad against the average player).

As you can imagine, I was a little annoyed when the local Harrah's casino here in St. Louis put a new 6:5 single-deck blackjack game into play back in April. And given that I had already spoken out against the 6:5 game in general, I was absolutely torqued to find out that my own casino -- Ameristar Casino (NASDAQ:ASCA) St. Charles (I've been a faithful shareholder for about two years now) -- had introduced the same game just last week.

And the rules make it one of the worst blackjack games I have ever seen.

For the blackjack curious, the average 6:5 single-deck blackjack game in Las Vegas has the dealer hitting on soft 17 but allows doubling down after splitting -- yielding the aforementioned 1.45% house edge over the basic strategy player.

But at Harrah's and Ameristar in St. Louis, the game is even more restrictive: Not only does blackjack pay only 6:5, but odd bets under $5 pay only even money on blackjack (e.g., on a $17 bet, you get paid 6:5 for a blackjack on the first $15, but only get paid "even money" -- no premium -- on the other $2). In addition, you can double down only on 10 or 11, there is no double down allowed after a split, and you can split Aces only once.

Add that up, and you've got the second-worst blackjack game I am aware of (the worst being the single-deck game at Harrah's Rio Las Vegas, where blackjack pays even money and the house edge over the basic strategy player is 2.77%).*

The question: Why?
The odd thing is that Ameristar clearly doesn't have a policy against 3:2 single-deck blackjack. The Ameristar casino in Vicksburg, Miss., has a single-deck game that pays 3:2 on blackjack where the dealer stands on soft 17 (an Ace plus a six), but the player can only double down on 10 or 11; these compromises yield a house edge of 0.25%, making it very much a beatable game under the right conditions. In addition, the two original Ameristar-owned properties in Jackpot, Nevada, consist of 20 tables of single-deck-only blackjack with a 0.32% house edge. Even the rules at the two-deck blackjack game at Ameristar St. Charles are relatively friendly to the basic strategy player.

Ameristar's strategy thus far has been to deliver games consistent with the most competitive games in each of its markets. So what would motivate Ameristar to introduce one of the worst blackjack games on the planet?

The motivation: Competition and demand
The knock against the classic 3:2 single-deck games is that the house edge is too low, the game is too easy to beat by card counters, and the dealer must shuffle too often to be profitable (if the dealer is shuffling, he is not dealing cards, and the casino is not making money). But so long as you can get people to play the game, one easy solution is to create a game with a bigger house edge.

Here's the thing: Even though the 6:5 single-deck game at Harrah's is about three times worse than the six-deck game (0.56% house edge) and blackjack games on continuous shuffling machines (CSMs), the lone single-deck table has gotten more action than the average blackjack game thus far. According to the Missouri Gaming Commission website, Harrah's 6:5 single-deck game has had an average drop (how much a player buys in for, and a good indicator of demand) of $158,507 per month through the first six months, while the average six-deck and CSM blackjack game only dropped $119,386 per month on average. That's despite the fact that in April, the 6:5 single-deck game wasn't even in play for half the month.

And if you get more action in a game where you have a bigger edge, you stand to make more money in the long run.

The table below lists the Adjusted Gross Receipts (AGRs), or the portion of your buy-in that the casino keeps when you leave the table and records as gaming revenue. By this measure, the big, bad, dirty single-deck game has blown away the average six-deck and CSM blackjack table.

Harrah's St. Louis Blackjack Average AGR by Game

It should be noted that the two two-deck tables in the casino are $25 minimum bet, the single-deck is $10 minimum, and the other games vary from $5 to $25 minimum.

If you're Ameristar St. Charles, you're looking at two things. The first is that there is at least a single table's worth of demand for 6:5 single-deck blackjack. The second is that the game appears to have more economic value than a single six-deck table. So if your goal is to have the best property with the most advanced slot floor and the newest games in every market -- as is the case with Ameristar -- how can you not offer a game in demand, especially if it is more profitable to boot?

State regulations and the game
Aside from the existence of closer competition, one of the main reasons the 3:2 single-deck game exists in Mississippi and not in Missouri is the law. In Missouri, casinos cannot bar card counters for counting cards, making a legitimate single-deck game virtually impossible to protect. In fact, game protection is why both Ameristar and Harrah's only deal out one deck out of their two-deck games (the more cards a card counter sees, the bigger his advantage).

So if a known card counter appears at a 3:2 single-deck game in Missouri, the casino's only recourse would be to shuffle after every hand, which circles back to the original problem of shuffling too often combined with a low house edge, which hurts profitability.

Branding opportunity
We've gotten to the point where Las Vegas is about the party, and the casino is about entertainment value. Yet here we are with a new brand of blackjack designed strictly for the pure sucker. Worse, we have an otherwise classy casino that believes it needs to offer the same game just to be competitive.

I think the reality is that 6:5 single-deck blackjack, in general, is here to stay. But the casino is about perception: Low rollers play craps because craps is "the game that high rollers play," and people play blackjack because they "know" that it can be beat, whether or not they can actually beat it. And if people want to play a game that they at least think they have a chance to beat, why not capitalize on this reality, rather than fight it or play your guests for complete suckers?

That said, I think this may present an opportunity for brand differentiation.

If I were running Ameristar, I'd consider doing the following: Replace the atrocious 6:5 game with a couple of brand-building 3:2 single-deck games. Market that you have the real thing. It doesn't have to have the best rules: Hit on soft 17, allow doubling only on 10 and 11, and take a 0.35% or so edge. If you keep the tables full, forcing a shuffle after every round, you won't have to worry about anybody beating it. And once in a while, when the game is shorthanded and beatable, don't worry about it: You're investing a couple of dollars at a couple of tables to have the best game in town.

For more Fool coverage on Ameristar Casinos, check out:

• Ameristar Is a Hold
• Sizing Up Ameristar
• Ameristar: Time to Buy?
• Ameristar's Land Grab
• Those Pennies Add Up

Fool contributor Jeff Hwang owns shares of Ameristar Casinos.

*Source: Current Blackjack News