SLOT HOLD AS A PRICING LEVER

The Isle of Capri conference call was the first time a casino company discussed lowering “pricing” on slot play. As we noted in our 07/18/08 note, “I’LL HAVE A SLOT MACHINE, HOLD THE WINNINGS”, hold percentage has been steadily increasing for years. Slot “tightening” and game mix shift toward video and penny slots were the main culprits. Effectively, consumers have received fewer and fewer payouts for their dollars wagered. Maybe that’s the price for higher entertainment value.

The charts below show the slot hold percentage trends over time for the Las Vegas Strip, Atlantic City, and Missouri. Missouri is used as a proxy for the regional markets due to readily available data in that state. Slot hold percentage in Las Vegas and AC experienced similar increases. Pricing power in Missouri was much greater, no doubt due to the limited license nature of that market which limits competition. With the exception of Mississippi (unlimited licenses), the other regional markets generated similar increases in hold percentage to Missouri.

I’m not sure whether ISLE’s decision to lower the slot hold percentage in certain markets represents an industry wide cut. However, it is a signal that “pricing” has gone up for too long and has probably peaked and the economy may keep the payout ratio in check.

This is a trend that investors should follow closely. Depending on the tax rate in the jurisdiction, flow through rates on a change in hold percentage can run from 50-90%. To show you the materiality of this issue, take a look at the Strip over the past 15 years. The hold percentage increased from 5.4% to 7.0% over that time. The 160 basis point improvement on 2008 slot volume represents about $650-700 million in profits to the Strip.