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I have a friend I’m really fond of who believes in all kinds of conspiracy theories. He’s a nice guy, but he thinks the earth is flat.

He’s also convinced that the casino makes all its money from cheating. In fact, he told me once that the only fair game in the casino is craps, because you can’t fake the roll of the dice.

I’m not sure why he thinks dice are immune to being “fixed” while roulette wheels and playing cards aren’t. I understand how any of those devices could be fixed.

But casinos don’t need to fix any of these devices to make a profit.

They have a really simple means of making a profit and keeping their games completely random.

They examine the odds of winning for a game, then when they set their payout odds, they set them lower than the odds of winning.

What Are Odds and How Do They Work?

One of the ways of looking at the probability of something happening is by looking at the odds that it will or won’t happen.

Probability is just a ratio that compares the number of ways a specific event can happen with the number of ways it can’t happen.

You flip a coin. What’s the probability that you’ll get heads as a result?

It’s 1/2, 50%, or 1 to 1.

That’s the probability expressed as a fraction, as a percentage, and as odds.

1 to 1 means there’s one way to lose and one way to win.

When you roll a 6-sided die, what’s the probability of rolling a 6?

There’s one way to roll a 6, and there are 5 ways to roll something that’s not a 6.

So the odds are 5 to 1.

But there’s more to odds than that.

Odds also is a way of describing how much your bet pays off.

If you received 1 to 1 odds on guessing a coin toss, that would be called even money. You could bet $100, and if you won, you’d win $100. If you lose, you’d lose $100.

If you received 5 to 1 odds on guessing the outcome of a die roll, you’d break even over the long run. You’d win $500 every time you won, but you’d lose $100 on the 5 out of 6 times that you lost.

The way the casino makes its profit is by paying you winnings that are lower than the odds that would make a game break-even.

For example, if the casino made you risk $110 to win $100 on a coin toss, in the long run, the casino would make a profit.

50% of the time, they’d lose $100. The other 50% of the time, they’d win $110. It’s easy to see how they could make a profit doing that, right?

Or, if the casino paid off at 4 to 1 on guessing the correct outcome on a roll of a single die, they’d be making a clear profit, too, right?

5 out of 6 times, you’d lose $100. Only once out of 6 times would you win $400, which means the casino would come out ahead in the long run.

The Effect of Short Term Variance

If this is how the bets are set up, and if most people know it, why do people still gamble on casino games?

There are 2 reasons:

The first is that people are woefully uneducated about basic math in this country. Fewer casino customers than you think understand how the math behind these games works.

The second is that when you’re dealing with random events, in the short run, anything can happen, no matter how unlikely.

If you guess that a 6 will come up on the next roll of a 6-sided die, you’re PROBABLY going to lose.

But sometimes you’ll win.

In math, there’s something called the Law of Large Numbers.

This is the premise that if you repeat something random often enough, eventually, your actual results will resemble the statistically predicted results.

If you roll a 6-sided die 6 times, you might get the same number 3 or 4 times.

But if you roll a 6-sided die 6000 times, you’ll usually see a pretty even distribution for which number comes up.

This short term variation is what gamblers call luck.

That’s how some gamblers walk away from the casino winners even though the odds are against them.

How the Casino Makes Its Profit from Blackjack

Blackjack seems like a game where the casino couldn’t have an edge. In fact, it seems like a game where a smart player might get an edge over the house just by knowing how to play his cards.

After all, the odds of getting various cards are the same for both the player and the dealer.

AND the player gets a 3 to 2 payout anytime he gets a 2-card total of 21.

It’s simpler than you think, actually. The house edge in blackjack comes from the fact that the player has to play his hand before the dealer plays hers.

If your hand busts, you lose your chips immediately, before the dealer plays her hand. Even if the dealer busts, too, you’ve lost your money.

That, by itself, is enough of an advantage for the casino to make a profit.

Even if you play with perfect basic strategy, you’ll probably bust your hand around 30% of the time.

Even if the casino busts, too, you’ve already lost your bet.

The other advantage the casino has is if the dealer gets a natural, you don’t even get to play your hand. Your only hope is if you also have a natural, which is treated as a push. You don’t win any money, nor do you lose any money in that situation.

How the Casino Makes Its Profit from Craps

Craps is known for being exciting and for having a wide variety of bets you can make.

But every bet at the craps table (save one) pays off at less than the odds of winning. The only bet where that isn’t true is called (appropriately enough) the odds bet, and it pays off at true odds.

But to place that bet, you must have first placed a bet on the pass line or the don’t pass line. (Or the come or don’t come.)

Those are the best bets at the craps table, by the way, but they still give the house an edge of 1.41% or 1.36%. The other bets at the craps table are all far worse, and they all result in a profit for the casino because they don’t pay off at the same odds they have of winning.

Here’s an example of a craps bet, its odds of winning, and the payout odds for that bet:

The “any 7” bet is a single-roll bet that the results of the next roll of the dice will total 7.

The odds of winning that bet are 5 to 1.

The payout is 4 to 1.

I used the same example in the introduction when I talked about the probability of rolling a single die.

How the Casino Makes Its Profits from Roulette

Roulette is my favorite example of how probability works, especially as it relates to casino games and the house edge. It’s a simple game, too.

You have a spinning wheel with 38 possible outcomes. The pockets in this wheel are numbered 0, 00, and 1-36. The 0 and the 00 are both green. Half the numbers 1 through 36 are black, and the other half are red.

You have a variety of roulette bets available to you, but all of them share the same house edge. (Well, except for one bet, which I’ll explain here, too.)

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The easiest bets, and the ones which win the most often, are the even money bets. These are the bets where if you bet $100 on them, you win $100.

An example of an even-money bet is a bet on red. Since almost half the numbers are red, you have an almost 50% chance of winning this bet.

But the 0 and the 00 make it so that the bet doesn’t pay off at the same odds as the odds of winning.

You have 38 possible results, and 18 of them are red. That’s 18/38, or 47.37%.

If you had a statistically perfect set of 38 spins, you’d win that bet 18 times, but you’d lose 20 times. You’d win $1800 on your winning spins, but you’d lose $2000 on your losing spins. Your net loss would be $200.

If you averaged that by the number of spins you made, you’d have an average loss per spin of $5.26.

All the bets on an American roulette wheel pay off at odds that would be a break-even proposition IF the 0 and the 00 weren’t on the wheel.

The bet that wins the least often in a roulette game is a single-number bet. This is a bet on a specific number, like 18, for example.

You have a 37 to 1 shot of winning this one, but when you do win it, you only get paid off at 35 to 1. The same averages apply—this bet also has a 5.26% edge.

One bet at an American roulette table has a higher house edge than that, though. It’s the 5-number bet, which is a bet that the ball will land on 0, 00, 1, 2, or 3.

That bet has an even higher house edge—7.89%.

The only correct strategy in an American roulette game is to place any bet you want as long as it’s not the 5-number bet. No strategy can overcome the inherent mathematical edge built into the game.of people come up with roulette systems based on changing the size of your bet based on what happened on previous spins of the roulette wheel. None of those systems improve your probability of winning in the long run.

The best explanation I ever read of how the various roulette betting systems work is that it’s like trying to add up negative numbers to get a positive result. No matter how you size those negative numbers, they’re still negative, and you’ll still wind up with a long-term loss.

How the Casino Makes Its Profit from Slot Machines and Video Poker

Slot machines and video poker do the same thing. They just have more possible prize amounts on their pay tables.

But each of those potential payouts has a probability.

The payout for that possibility is always lower than the probability that you’ll hit it.

You have a slot machine with 10 symbols, and each of those symbols has an equal probability of coming up. Let’s suppose that the top prize on the machine is for lining up 3 cherry symbols. The payout for that is 900 for 1.

What’s the probability of having that outcome?

It’s 1/10 X 1/10 X 1/10, or 1/1000.

If you make 1000 statistically perfect spins, you’ll lose $1000 (betting a dollar per spin). You’ll win $900. That’s a net loss of $100 over 1000 spins, which means that this slot machine has a 90% payback percentage and a 10% house edge.

Video poker games work the same way, although the probabilities are driven by the probabilities inherent in poker hands and decks of cards. The probability of getting a flush playing Jacks or Better video poker is the same as it would be if you were dealing out of a deck of 52 cards.

I should point out one big difference between gambling machines (like slots and video poker) and table games.

The payouts for table games are made on an X to Y basis. For example, a payout on a single-number roulette bet is 35 to 1.

This means that if you lose, you lose $1.

If you win, you keep your bet, and you win $35 on top of it.

But with a gambling machine, the payouts are made on an X for Y basis.

This means that if you lose, you lose the amount you bet.

But if you win, you get the winnings, but you don’t get your original bet back on top of it. You traded your wager FOR the winnings.

This implication is important, because you’ll find many games that offer an even-money payout on a specific hand or combination of reel symbols.

On a gambling machine, this is just a push. You haven’t really won anything. You just got the size of your bet back. If you were playing blackjack, this would be considered a push.

Conclusion

Why do casinos profit from random casino games?

It’s simple.

They offer payout odds that are lower than the odds of winning.

In the short run, you can still win in a situation like that, but in the long run, the casino will always win. You can think of this disparity between the payout odds and the odds of winning as the house edge.

And you can think of the house edge as being like a tax on each bet you place. Another way to think of it is as a negative interest rate on an investment.

Playing casino games can be fun, but in the long run, playing casino games is a costly endeavor for a casino gambler.

It’s also a profitable endeavor for the casino.

How do Vegas Casinos Make Money?

The answer seems obvious right? Gambling. Hell, I just lost $200 at the craps table last week. Vegas casinos are ornate palaces. And those palaces are funded by people that get a kick out of feeding machines and chasing royal flushes.

What about all the “fringe” activities though? The dining, night clubs,hotel, shows, retail ,etc. Are they simply a draw to get us in the door as a loss leader or do they contribute to the casino’s bottom line as well. To answer the question, I dug into MGM Resorts 2016 financial report.

See Also:77 free things to do in Vegas. A complete list!

For those unfamiliar, MGM owns a number of properties in Las Vegas to include MGM Grand, Luxor, Bellagio, Excalibur, Circus Circus, Monte Carlo, New York New York, Mirage and Mandalay Bay. The accounting that I am looking at does include some non-Vegas properties as well, however, still provides a solid revenue and profitability snapshot.

Below is a high-level overview of MGM’s revenue per category or, simply put, what customers spent per activity before MGM deducted out expenses.

Casino revenue is defined as what the casino “won” over the year after paying out players. “Other Income” would be defined as income made outside of MGM’s core business (Example: Rented out excess warehouse space not being used to another, unrelated, organization).

Revenue per Category:

As you look at Revenue generated by MGM, it’s no secret that the Casino is king accounting for 48% of money coming in. Hotel rooms and Food/Beverage come in as the second two largest generators accounting for 20% and 16% of the company’s revenue in 2016 respectively.

When you take the revenue per category and subtract out the expenses incurred, you can get a nice, simplistic, high level picture of what the casino profits off of each category.

Although other categories carry some weight for MGM, the Casino still nets almost as much money as the rest of the categories combined at $2.2 billion dollars in net profit vs. $2.5 billion dollars net by room sales, entertainment, food/beverage and “other” combined.

There are additional expenses that eat away at MGM’s bottom line that aren’t directly attributable to one of the revenue categories above such as corporate expenses ($313 million dollars in 2016), administrative expenses ($1.4 billion in 2016), etc, however, the info above should give you a good idea of where Las Vegas casino revenue and profits are coming from. What’s clear is that although money generated from gaming is important, it’s not the only show in town.

As MGM Resort’s hotels provide the second-largest profitability and revenue punch I thought it would be cool to take a look at which of their Vegas properties command the highest rates and sport the highest occupancy.

There are 3 main terms you will want to know:

• Occupancy Rate – What percentage of rooms were occupied.
• ADR – Average Daily Rate – What did people pay on average per night.
• REVPAR – Revenue per Available Room – What the average nightly revenue was per room available (whether occupied or not). Basically, your nightly hotel revenue divided by total # of rooms.

Not surprisingly, Bellagio topped MGM’s charts for Average Daily Rate in 2016 at $278. Bellagio was also 91% occupied and had a Revenue per available room of $246 per night.

Circus Circus came in with the lowest Average Daily Rate at $83 and was 81.6% occupied. CC Las Vegas had a Revenue per available room of $68.

New York-New York notched the highest occupancy of MGM’s casino/hotel portfolio at 95.1% occupancy with an ADR of $141.

According to the UNLV Center for Gaming Research, it’s important to keep Gamblers captive overnight as in 2016 guests drove the following average revenue per room daily (all Vegas casinos – not just MGM):

Pit Revenue: $96.48

Slot Revenue: $105.83

Food Sales: $98.11

Beverage Sales: $43.73

In summation, it’s clear that Casino revenues in Las Vegas are king but there are other key drivers of resort profitability to include entertainment options, dining along with the property’s hotel. These fringe services are becoming a more important piece of the profitability picture as Millenials shy away from gambling and seek “experiences”. More properties are getting creative with revenue drivers and rightfully so. For instance, you can now hunt zombies in Virtual Reality at the MGM Grand or play Twilight Zone Mini Golf at Bally’s. You also can’t walk 15 feet in Vegas without tripping over a damn zipline attraction.

Gambling will remain the core but there is certainly a shift in Vegas toward new and innovative dining and entertainment options.

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On a final and unrelated note, as of the end of 2016, MGM logged an “Outstanding Chip Liability” of over $227 million. Which one of you guys is hoarding all the chips? Cash those bastards in!

Check out our other piece – Could Circus Circus be the next Las Vegas implosion?

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