Electronic video games have been rising on two distinct tracks with each one having its own customer base and business models. On one path, arcade stores started with skill-based video games, and on a separate path, the casino industry introduced video slots that replaced mechanical slot machines. From the outset, video games in arcade stores and slot machines in casinos had different revenue models. Arcade store patrons showed they were willing to play on a pay-per-play model for entertainment and status and casino patrons showed they were willing to play video slots for a chance to win money.
As computer technology became cheaper and faster, arcade type games moved to players’ homes and slot machines revolutionized the casino industry, generating significant cash flows that paid for the construction of multi-billion dollar mega resorts. Land-based casinos and slot manufacturers are now discovering that millennials who have been growing up with action packed video games find their slot games unexciting to play. Facing with declining revenues, operators are actively looking for a new type of gaming that will appeal to the younger generation.
When playing a game, the outcome could be based on different factors. In the case of skill-based games, a player’s reaction speed, mental skills such as logic abilities, strategic thinking or trivia knowledge determines the outcome of the game. In the case of games of chance such as slot machines, a computerized random number generator determines the game’s outcome. A game could have both an element of chance and an element of skill or both, for example some games such as poker, bridge or backgammon have an element of chance but also require mental or math skills.
Overall, electronic games may be based on chance, skill or a combination of the two. Skill-based games have their own sub-categories that are either based on intellect or physics. Sub-categories of games with intellect include math, logic, problem solving, etc. Sub-categories of games that are based on physics include those that involve reflex, speed and coordination. Examples of casino games that are purely based on chance include most slot machines, ball or number drawn games such as lottery, keno or bingo.
The casino industry calculates key statistics such as house edge (HE) and return to player (RTP) for games of chance such as keno and slot machines based on probability theories and laws of large numbers. HE is the difference between a wager and its expected payout using probability theories. In the case of games that are purely based on chance, the actual RTP and the theoretical RTP differ but converge over a long period of play, however this is not necessarily the case for hybrid games such as video poker and blackjack, which also have an element of skill and their true RTPs vary depending on a player’s skill. Typically the industry calculates the RTP and the HE for hybrid games based on the assumption that players follow the best strategy. But the more decisions players have to make, the more mistakes they will likely make, and thus the less likely they will achieve the theoretical optimal house advantage of the game.
Traditionally, independent testing labs and regulators calculate the RTP of a slot game that involves decisions, such as video poker and blackjack, with the assumption that a player follows perfect strategy, and since a large majority of players do not, the actual hold percentages of these games often exceed their theoretical house advantage percentages. For example, a 5-card draw video poker that has a theoretical house edge of half of one percent could hold more than 5 percent, yet it has remained a popular casino game, mainly because the chance element of the game far exceeds its skill element. Also even though the RTP of a hybrid game such as video poker and blackjack varies depending on a player’s skill, the fluctuation and variance between the RTP of an advanced player and an average player are not significantly different to discourage a novice player not to play the game. With the exception of video poker and blackjack, introducing hybrid games to the casino floor has proven to be a very difficult task.
I believe it is time for the industry to embrace the concept of utility and game theory developed by economist and successfully used in other industries for many years. I would like to advocate for a methodology that involves skill-based casino style games to have dual-meters, one for chance and a separate meter for skill. I also would like to see the industry use ‘utility’, which economists define as a measure of happiness. Although in some cases utility means monetary values, in most cases utility has a much broader meaning. Applying the utility principles to the gaming industry, one can conclude that casino patrons’ utilities cannot always be measured in monetary terms. The utility value casino patrons receive is the excitement of winning plus the expected cash payout as well as other financial values they receive such as rebates and comps.
An operator’s goal is to maximize its net profit, which means total wagers less payouts and marketing expenses such as promotions and loyalty awards. On the other hand, a player’s goal is to maximize his or her “utilities” which does not always include monetary values. The utilities received by a player include factors such as entertainment, excitement, pride, social interaction, and convenience as well as monetary values such as prize winnings and comps. Having a separate meter that measures the skill of the player provides a utility payout separate from the randomly generated monetary payout of the game. Currently, slot manufactures are mixing the two elements without giving players much indications as to what exactly they are getting in return for their money.
For those interested to debate the advantages and disadvantages of having two meters, I have created a LinkedIn group page called “Dual Meter Gaming” to exchange their opinions. We should keep in mind that regulated gaming requires full disclosure and transparency, thus mixing chance and skill elements without tracking and reporting each one separately will be against these principles. Overall, the skill meter’s goal is to pay skilled players based on their skill levels, for example, rewarding those with perfect scores in full for the skill portion of their wagers and retaining a higher percentage of the wager allocated to skill, from those who show lesser skill levels. This approach will challenge the less skilled players to come back to improve their scores. Meanwhile all players, regardless of their skill levels can enjoy winning on the chance element of the game.
In summary, whether a game is based on chance, skill or a blend of the two, players are looking to maximize their utilities, which include both monetary payouts and subjective values such as being recognized for their skills. By splitting a player’s wager into to two separate meters, one for skill and one for chance and by making the skill element payout dependent on the skill of the player and by following the game theory and utility theory, operators and players effectively bargain with each other until an equilibrium is reached for all stakeholders, i.e. the operator maximizes its net profit and the more skilled players and the novice players maximize their utilities.