Over the past few years, management in

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1 Effects of Downloadable Credit Free Play on Revenue by Stephen M. Simon Over the past few years, management in many casinos have observed a decrease in the Hold percent on their casino floors. They have also observed an overall increase in reinvestment with a general reduction in Cash Revenue. This is particularly evident in local market casinos, in which Downloadable Credit Free Play comprises a higher percent of revenue than seen in resort casinos. The effect of Downloadable Credit Free Play is the primary cause of the decrease in Hold percent and increased reinvestment in players. Inaccuracies in par percents recorded in Slot Masters also contribute. The solutions offered in this paper will help mitigate these problems until such time as the slot accounting systems, players club management systems, and business intelligence systems address these matters completely in their software and reports. Over the years, there has been a transition through hoppers, credits available meters, weigh scale hoppers, bill acceptors, and ticket printers, to name a few. Each of these developments has created a greater gap between what is called revenue accounting and machine or production accounting results. They have also created greater difficulty in reconciling theoretical revenue and hold percent to actual results. Revenue accounting takes a fairly simplistic approach to the calculation of net win, leaving many small reconciling items for monthly or annual adjustments and, along the way, ignoring some out-of-the-equation variables completely, classifying them as immaterial. In addition, one of the primary measures of performance, actual hold percent, is becoming more and more difficult to reconcile to theoretical hold percent. Some of this is because the calculation of actual hold percent uses what have become completely unrelated variables in the formula, and also certain events that are external to the slot machine are introducing anomalies in the metering. We are now at the point where several events are added which are paid through or by the slot machine but are not part of the slot game pay-table. Once you do this, you lose the ability to reconcile events using contemporary methods with accounting meters. Some of the external events are bonuses and downloadable credit free play. To understand how all of this works, Table 1 starts with the accounting definition of Win and adds all reconciling items to the equation. Table 1 also shows the performance method of calculating Win. When placed side by side, you can see the differences and the similarities. Table 1 Revenue Accounting Formulas Accounting & Performance Methods Accounting Method (Cash) A Drop B C D E F G H W Credits Available Hand Paid Jackpots Hand Paid Progressive Jackpots Accumulated Credit Payouts Hopper Fills Hopper Float Tickets Vended Win Performance Method In the Accounting Method: Drop equals - Coin in the drop cabinet - Bills in the bill acceptor canister - TITO (ticket-in/ticket-out) tickets in the bill acceptor canister - Cash-Back given by the casino as an incentive (This includes promotional tickets that are placed in the drop) Note: Auto Bonus credits, aka Downloadable Credit Free Play, downloaded from the slot system never reach the drop meter and cannot be counted as drop. Credits Available are the credits showing on the meter on the face of the slot machine that may be wagered or cashed out. In some cases they are the unplayed remainder from a paper bill, TITO ticket, or coin inserted into the slot machine. In other instances they include the remainder of unplayed credits from the original bill or TITO ticket, plus winnings that are escrowed on the meter awaiting payout or further play. And finally, Credits Available may only be the amounts escrowed for payout after the original credits from inserting a paper bill or TITO ticket have been played off. For example, when you insert a $20.00 bill into the currency acceptor of a denomination slot machine, the Credits Available meter will show 20 credits available. Play off 3 credits without a win and the Credits Available meter will show 17 credits available. Win back 10 credits on the next handle pull, after wagering 3 more credits, and the Credits Available meter will show 24 credits. So in reality, the Credits Available are unplayed credits held in escrow that are a reduction in drop or an addition to payouts. In either case, Credits Available is a reconciling item that reduces Win. Z Y C D Coin In (Credits Wagered) Coin Out (Credits Won) Hand Paid Jackpots Hand Paid Progressive Jackpots W Win 34 Indian Gaming April 2011

2 Hand Paid Jackpots are payouts made when a specific winning combination shows up on the reels and the slot machine locks up, requiring a hand pay. These Jackpots are recorded on Jackpot meters in the slot machine, recording number of occurrences and cumulative amount. Jackpots of any kind are not recorded on the Coin Out (Credits Won) meter. Jackpots are reconciled externally from the slot machine when gaming reports are prepared. Hand Paid Progressive Jackpots are payouts made when a specific winning combination shows up on the reels of a slot machine, that has a progressive meter, and the slot machine locks up requiring a hand pay. These Jackpots are also recorded on meters in the slot machine recording both number of occurrences and cumulative amount. Progressive jackpots are recorded on different meters than regular jackpots. Accumulated Credit Payouts are hand pays resulting from large amounts of Credits Available (unplayed credits held in escrow) accumulated from small wins on a slot machine. These are found more often in slot machines that use hoppers, but are still seen on TITO slot machines. A slot machine can be set to require these payouts at just about any time a cash-out is required, based on casino needs or jurisdictional policy. Hopper Fills are predetermined amounts of coin used to refill slot machine hoppers after they have dispensed their coin to make payouts that result from patrons cashing out their Accumulated Credits. This is not applicable if coins are not used for play. Hopper Float is the change in the amount of money found in the hopper from day to day. This is a reconciling item in the accounting method that is only determined monthly in most casinos. It can be determined daily, monthly, yearly, or life-to-date from the following formula: Plus Plus Beginning Amount In Hopper Hopper Fills True Coin In True Coin Out Coin to Drop Ending Amount in Hopper Beginning Amount in Hopper Hopper Float (Change in Hopper Amount) When Hopper Float is determined monthly, a sampling and estimating technique is used where the casino performs a physical count of a percentage of hoppers in each denomination and extrapolates the count to all hoppers, making an adjustment to the current asset cash on hand and miscellaneous revenue. This method does not help detect hopper problems, as using the calculation and comparing it to physical counts would accomplish this. Tickets Vended is the total of TITO tickets vended from the ticket printer on the slot machine. It is a paidout that is done automatically like the Hopper Pay Out. This cashes out any unplayed credits still available and shown on the Credits Available meter. In the Performance Method: Coin In which really should be called Credits Wagered has absolutely nothing to do with coins, paper bills, or TITO tickets inserted into the slot machine is the measure of bets made in the slot machine. Credits Wagered is recorded on a meter and the meter will only increment when a game is started by pressing the spin button or pulling the handle on the slot machine. Coin Out which really should be called Credits Won has absolutely nothing to do with coins or tickets dispensed from the slot machine is the measure of wins on the slot machine. Credits Won is recorded on a meter and the meter will only increment when a winning event, other than a jackpot, occurs on the slot machine. Hand Paid Jackpots are the same as in the Accounting Method. Hand Paid Progressive Jackpots are the same as in the Accounting Method. Since we currently do not account for Hopper Float and Credits Available in the Accounting Method, there will always be some variance, between the two methods. However, the more accurate method remains the Performance Method, but only when adjusted for promotional credits. Every event to account for Hopper Float is either a calculation or is recorded on a soft meter in the slot data system, or is represented by a document recording a transaction. In addition, each event in both the Accounting Method for calculating revenue and the Performance Method for calculating revenue is recorded on meters, represented by a document recording a transaction, or both. Therefore, if all meters are recorded at the same time the drop is removed from the slot machine, the only reconciling item would be Accumulated Credits on the face of some slot machines. A complete and accurate reconciliation to the machine level is not only possible, using these methods, but advisable. Two of the most important measures of slot machine performance are Hold Percent and Win. Actual Hold Percent is continually compared to Theoretical Hold Percent to determine if the slot machine is performing within its statistical expectation. Concurrently, Theoretical Win and Actual Win are compared. Currently, actual Hold is the quotient of Win calculated using the Accounting Method of calculating Win divided by Coin In (Credits Wagered) used in the Performance Method of calculating Win stated as a percent. Although this measure is commonly used and works reasonably well, you are actually comparing apples from the Accounting Method to oranges 36 Indian Gaming April 2011

3 in the Performance Method and probably should be abandoned in our current operating environments if true, accurate results are desired. As a formula, Actual Hold looks like this: Win Coin In The following algebraic solution shows that Win from the accounting method is really not related to Coin In. It is a close estimation, but as you will see, it is subject to major distortion. Here is the algebraic solution (refer to Table 1 for letter designations): Theoretical Hold Percent is the Par of the slot as shown on the par sheet plus any external events that will affect that par such as progressive jackpots and external bonuses. For example, if a slot machine has a hold of 13% on the par sheet and a progressive of 1% and a bonus of 4%, the theoretical hold of the slot machine is 8% ( = 8). Theoretical Hold Percent is a statistical measure. Take another look at Downloadable Credit Free Play. First, look at how a player plays a slot machine. Do players typically cycle their money through a slot machine one time and then cash out, or do they keep cycling their money over and over through a slot machine until it is gone? You will often see that the latter is true and that behavior will be used for this analysis. When a player puts a $10.00 bill into the currency acceptor of a slot machine, they do not just bet the amount one time, then cash out and go home. Most often the player continues to bet, playing one machine or another, until their money is gone. That is why the change in Coin In on any given day is so much greater than Drop. Table 2 shows what will happen statistically when a player wagers each handle pull on a slot machine that has a 10% par until he loses of his original $ As you can see, statistically the player will make $10.00 in wagers and lose. Therefore, to lose the entire $10.00, x 100 = Actual Hold % Accounting Method Performance Method Set the Two Equations Equal to One Another Cancelling Like Items Leaves (C, D) Solve for Z (Coin In) Drop $10.00 $9.90 $9.80 $9.70 $9.60 $9.50 $9.40 $9.30 $9.20 $ Indian Gaming April 2011 A B C D E F G H = W Z Y C D = W Z Y C D = A B C D E F G H Z Y = A B E F G H Y + A B E F G H = Z Table 2 Gamed Played to Lose Wager Loss Total $10.00 Remainder $9.90 $9.80 $9.70 $9.60 $9.50 $9.40 $9.30 $9.20 $9.10 $9.00 the player will have to make $ in wagers on a hypothetical 10% par slot machine. An easy way to calculate how much Coin In a particular amount of money will create, statistically, is to take the amount of money dropped in the slot machine and divide it by the Par of the slot machine. Examples: $100 Drop 10% Par = $1,000 Coin In $100 Drop 6% Par = $1,668 Coin In $100 Drop 15% Par = $667 Coin In Statistical performance is important because you must look at all of these events over time, including thousands and thousands of events. Yes, a player may insert money and lose it in just a few handle pulls. Conversely, the player may insert money and leave with millions of dollars. But over thousands and thousands of events, these are the outcomes you can expect. They are statistically valid. Based on playing patterns observed in thousands upon thousands of players over years of visits to casinos, players appear to play their Free Play in exactly the same way as they play cash. Like cash, the Free Play is usually recycled through the slot machine until it is gone. Players do not appear to play their Downloadable Credit Free Play one time, convert any remaining Credits Available to cash, and leave the casino. There does not appear to be much of a walk factor with Downloadable Credit Free Play, as there used to be when players were given coin or cash incentives to play. The effect of this phenomenon on Actual Hold is significant. The following examples show how this works. Assumptions: Slot Machine Par is 10% Cash Played is $10.00 Downloadable Credit Free Play Played is $10.00 Both Cash and Free Play are played until there are zero Credits Available Based upon what is discussed above, if the $10.00 in cash is played on the hypothetical slot machine until it is gone, there will be Drop and therefore Win of $10.00 and the change in Coin In will be $ The Actual Hold will be $10/$100 = 10% Now, assume play of $10.00 in Downloadable Credit Free Play. There has been no money placed into the slot machine, so the Drop and therefore the Win are $0.00 (zero). However, as the Free Play converts to Credits Available, and those credits available are played over and over in the hypothetical 10% Par slot machine until they are gone, $ of Coin In will be created. The Actual Hold will be $ 0.00/$100 = 0% Continued on Page 98

4 Continued from Page 38 Combining the two events, the Actual Hold will be ($10 + $0.00)/($100 + $100) = 5% This helps account for the variances between Theoretical Win or Hold and Actual Win or Hold that casinos have been experiencing since the advent of Downloadable Credit Free Play. Understanding this example, try to use some amounts that represent a typical mid-sized local casino. Assumptions: Weighted Average Par for all slot machines on the casino floor is 9.5% Win from the Accounting Method is $5,000,000 per month Downloadable Credit Free Play is $700,000 per month Expected Coin In, that resulted in the Win, is approximately $52,600,000 ($5,000,000 / 9.5%) Expected Coin In, that resulted from playing Downloadable Credit Free Play, is $7,400,000 ($700,000 / 9.5%) Total Coin In is approximately $60,000,000 ($52,600,000 + $7,400,000) Actual Hold will be $5,000,000 / $60,000,000 = 8.3% There is a variance between Theoretical and Actual Hold of 1.2% or nearly 12.6%. The variance can reasonably be resolved by adding the Free Play to the Win and recalculating the Actual Hold. Actual Hold will now be $5,700,000/60,000,000 = 9.5% When you are performing an analysis of variances between Theoretical and Actual Hold, or Theoretical and Actual Win, you will need to either reduce Coin In for the effect of free play wagered or increase Drop for the amount of free play wagered. Another generally unrecognized variance caused by Downloadable Credit Free Play is its effect on reinvestment. For the most part casinos are experiencing such great popularity with their players clubs that between 60% and 70% of all play on slot machines is what is called Carded Play. In other words, the players use their players club card to collect rewards. Most casinos offer Cash Back as a reward and occasionally some form of complimentary reward that can be used as discounts on food, beverage, and other amenities. In most casinos these rewards are based on Coin In. If Coin In is artificially inflated by Downloadable Credit Free Play, Cash Back, and Complimentary rewards will also be inflated. Since the rewards are reconciled as a general marketing cost and never charged to the individual machine, the slot machine shows the cost as a variance in hold percent. The reduction in hold percent will always be partially representative of the amount of rewards given to players. Using the data from the hypothetical casino above, add a few more assumptions and see what the effect is of Downloadable Credit Free Play on Cash Back and Complimentary items: Carded play comprised 60% of all play For every dollar of Coin In, a player receives one point toward Cash Back For every dollar of Coin In, a player receives one point toward Complimentary Awards For every 500 points a player receives, he may redeem them for Cash Back and of Complimentary Award Coin In from Carded Play is 60% of $53,000,000 = $31,800,000 From this amount of Coin In, you can create a liability of: $31,800,000 / 500 = $63,600 in Cash Back and a like amount in Complimentary items The Coin In from Downloadable Credit Free Play is $7,400,000 (all of it applies since it was all played with a Players Club Card inserted in the slot machine). From this amount of Coin In, you create a liability of: $7,400,000 / 500 = $14,800 in Cash Back and a like amount in Complimentary items Cash Back and Complimentary items from Downloadable Credit increase the reinvestment by approximately $14,800, from $63,600 to $78,400, an increase of 23%. Another effect of Downloadable Credit Free Play that is generally ignored is it also increases future reinvestment with no increase in money played by the casino guest. Player reinvestment is generally based upon a player s Theoretical Win. Theoretical Win is calculated as the product of Coin In times Weighted Average Par. It has already been shown that there is an effect of Downloadable Credit Free Play on Coin In and an inflationary effect on Cash Back and Complimentary Items. Using the same numbers, the effect on reinvestment will be shown in a very simple way. Assumptions: Reinvestment of 10% of all Win resulting from Carded Play back to the player in the form of Downloadable Credit Free Play Theoretical Win from Carded Play is the product of Coin In from Carded Play times Weighted Average Par for all slot machines on the casino floor Example: $31,800,000 X 9.5% = $3,020,000 10% of Theoretical Win from Carded Play will be given to the player in Downloadable Credit Free Play 98 Indian Gaming April 2011

5 Example: $3,020,000 X 10% = $302,000 Now, add the Coin In effect of the Downloadable Credit Free Play previously played, which is $7,400,000 Example: $7,400,000 X 9.5% = $703,000 The 10% reinvestment on this amount is $70,000 and the combined reinvestment of the two amounts in Downloadable Credit Free Play is $372,000, nearly 19% more free play dollars than desired. If this exercise is continued for a few more iterations, you will soon see that you are giving your players more and more play time with Downloadable Credit Free Play. This gives the player who has a time budget, as most local players do, less and less opportunity to reach into his or her pocket for money. This effect can be resolved by reducing each player s Theoretical Win by the amount of Theoretical Win caused by the playing of Downloadable Credit Free Play. All of the calculations used in this entire process are based on the Par (aka Theoretical Hold) of the slot machines that make up most casino floors. The revenue reports and the player management reports all look for these Par amounts in something generally referred to as the Slot Master. The Slot Master is the base file in the slot machine database that describes all of the critical items associated with each slot machine. The most critical of these is the machine Par. If the Par of a slot machine in the Slot Master is overstated (Hold shown too high), the Weighted Average Par is overstated and vice versa. So accurately entering the Par for each slot machine is vital for successful revenue analysis and accurate player reinvestment. However, there is one very important item to focus on. The Par sheet (aka Theoretical Hold Worksheet) will generally only show the mathematics associated with the game. Anything that results in the slot machine making payouts to a guest that is not part of the basic game, such as individual and link progressives and certain bonus systems, does not appear on the par sheet. In addition, any player patterns that appear while playing the game may also effect selection of a reasonable and accurate Par. Some examples include video poker where there is both a Par and an expected outcome, multi-game slot machines (including poker) where the Pars for each game vary widely, and multi-denomination slot machines where the pars of each game within the denominations and across denominations vary widely. So how are they recorded in the slot master? Frankly, no slot accounting system provides an adequate method to record this information. Some slot accounting systems provide a par field and a progressive field in the Slot Master to record the hold percent of the slot machine and the rate of progression of the progressive meter, but none provide a field to record the rate of progression of the bonuses that automatically download as payouts to the slot machine. There is generally no guidance on how to address the video poker, multi-game, and multidenomination challenges. Some Solutions Until technology in the slot accounting systems catches up to the needs of the casino, there are solutions. When dealing with external bonuses that are paid through the slot machine accumulate all of these par amounts and record them in the par field of the slot This, of course, will lead to a MICS violation since the par recorded in the slot master does not agree with the par on the par sheet. There is also a solution for this: include a letter in the slot machine file of the machines affected, which describes the cause of the variance and reconciliation. In this way you will be able to reconcile Theoretical and Actual Hold on this group of slot machines. Table 3 should provide some guidance. Video poker par sheets show Theoretical Hold, which is the statistical outcome based on perfect play. They also show an expected outcome based upon years of study of play and play patterns on the various poker games. The correct assumption here is that not many players will play the game perfectly. Therefore, the Actual Hold percent of the game will be consistently greater than the Theoretical Hold and will almost always fall within the expected outcome. A workable solution in this case is to select the midpoint between the lower and upper values of the expected outcome as the par to be entered into the slot This is a statistically reasonable approach and, when combined with the fact that poker players are generally awarded about half of the reinvestment awarded to other slot players, it is also conservative. Example: The Par of the Video Poker Game is 2.5% The range of the expected outcome is 3% to 5% A reasonable choice of the par to enter into the slot master would be 4% Before this approach is attempted, it is very important to obtain consensus from regulators in either state or tribal gaming agencies. After you apply this method, it is very important to periodically audit actual results to see that they are consistent with the theoretical results you are predicting and make adjustments if necessary. A reasonable solution for applying a par that accurately represents play on multi-denomination slot machines, multigame slot machines, and the combination of both is far more difficult. The selection will be dependent upon the range of denominations used in the slot machine and the range of pars used on the game themes installed in the slot machine. If there are two or three similar denominations, such as one cent and two cent, the par range will be around 1% or 2% between denominations. If the two denomination pars are 15% and 13% respectively, the midpoint (14%) would be a reasonable choice making the one cent denomination approximately 7% more April 2011 Indian Gaming 99

6 Table 3 Various Slot Master Configurations for Slot Accounting Systems Sample Cases Slot accounting system provides only par field in the slot master Slot accounting system provides par field and progressive field in the slot master Slot accounting system provides par field, progressive field, and bonus field in the slot master (not available at this time) The par of the slot machine agrees to the par on the par sheet. in individual progressive meter attached to it and the progression rate is included in the par on the par sheet. in individual progressive meter attached to it and the progression amount is not included on the par sheet. progress the meter in the par field on the slot master and the amount you will progress the meter in the progressive meter field on the slot in the par field on the slot master and the amount you will progress the meter in the progressive meter field on the slot external bonus where all bonus amounts automatically download to the slot machine when won. progress the bonus meters in progress the bonus meters in plus the amount you will progress the bonus meters in the bonus field on the slot external bonus where all but the top amount on the meters automatically download to the slot machine when won and the top amount on the meter requires a hand pay. progress the bonus meters including the top award in the par field on the slot Enter the par on the par sheet plus the amount you will progress the meters that automatically download in the par field on the slot master and the amount you will progress the top award in the progressive field on the slot in Enter the amount that you will progress the meters that will automatically download in the bonus field in the slot Enter the amount you will progress the top award in the progressive field on the slot liberal than intended and the two cent denomination about 8% less liberal than intended. The overall effect of this will likely be to drive most of the play to the penny denomination on the slot machine. Ultimately the correct Par for the Slot Master in this very complicated example is the actual outcome of play. Start with your best estimate and move on from there by continually testing the actual results until you get the correct end result. Finally, one could also look at slot play on a purely cash basis and not evaluate players and determine reinvestment based on Coin In (Credits Wagered). What is the true worth of a player to the casino? Of course, it is the actual money he plays into a slot machine. True value of any slot play session is determined by the cash left in the machine at the end of any session of play, not the Coin In played or the length of time played. The simple equation for this is Cash In minus Cash Out equals Casino Win (Cash In Cash Out = Win). This will give true Win, regardless of the performance efficiency of the slot machine and it will remove reconciling items not presently recorded. It will determine the true worth of the player, which is his cash value to the casino. For example, a player inserts $100 into a $100 slot machine and plays for a period of time. During this time, the player wins 2,500 credits and bets 2,500 credits. At this point, with 100 credits still remaining on the Credits Available meter, the player decides to cash out and receives a $100 voucher from the slot machine. What is the result? Cash In ($100) Cash Out ($100) = Win ($0). Yet, in the present method used in casinos today, the player still gets credit for 2,500 credits bet along with all of the rewards it will bring. The cause of variances in theoretical and actual hold can be reconciled by adjusting Drop for the face value of Downloadable Credit Free Play or Coin In for a good estimate of the coin in (credits wagered) created by downloadable credit free play. There is a great need to adjust for the effects of downloadable credit free play in player reward systems, to avoid excessive reinvestment in players. It is also quite possible that, regardless of what you do, using Coin In as the primary driver of player reinvestment may be incorrect and require using a simpler method that measures the player s actual cash losses. Regardless where you wind up in this process, it is becoming more and more evident that all slot accounting and player management systems must address these matters directly. Steve Simon is a consultant with over 32 years of experience in the gaming industry. He can be reached by calling (505) or stephenmsimon@msn.com. 100 Indian Gaming April 2011