There’s an interesting piece in Wired about how “free is the future of business.” It got me thinking about how the gaming industry, at least in Las Vegas, has flopped its revenue model: once free rooms and food lured visitors to the casino, but now lodging and dining rivals the casino as a profit center. The author, Chris Anderson, starts by talking about King Gillette’s successful free packaging of his new disposable razor, then heads off into cyberspace:
Thanks to Gillette, the idea that you can make money by giving something away is no longer radical. But until recently, practically everything “free” was really just the result of what economists would call a cross-subsidy: You’d get one thing free if you bought another, or you’d get a product free only if you paid for a service.
Over the past decade, however, a different sort of free has emerged. The new model is based not on cross-subsidies — the shifting of costs from one product to another — but on the fact that the cost of products themselves is falling fast. It’s as if the price of steel had dropped so close to zero that King Gillette could give away both razor and blade, and make his money on something else entirely. (Shaving cream?)
You know this freaky land of free as the Web. A decade and a half into the great online experiment, the last debates over free versus pay online are ending. In 2007 The New York Times went free; this year, so will much of The Wall Street Journal. (The remaining fee-based parts, new owner Rupert Murdoch announced, will be “really special … and, sorry to tell you, probably more expensive.” This calls to mind one version of Stewart Brand’s original aphorism from 1984: “Information wants to be free. Information also wants to be expensive … That tension will not go away.”)
Free! Why $0.00 Is the Future of Business
Read the rest of the article if this interests you–I used it as the jumping-off point for a little thought experiment.
Traditionally (1950s to 1990s), most casino resorts were run the same way: every department but the casino was a loss leader. Give people cheap food, entertainment, and rooms, and they’ll come gamble. In fact, you should give your best gamblers everything for free, including hotel suites, gourmet meals, and use of the casino’s private jet. With interest-free markers, casinos even gave their credit players free loans, sometimes even discounting losses in the name of promoting future play.
But in the late 1990s, that changed. On the Las Vegas Strip, the rooms, restaurants, and theaters emerged as profit centers in their own right. With the rising importance of business travelers, who have access to expense accounts but don’t care to gamble much, non-gaming parts of the resort began to hold their own.
Currently, in the big Strip resorts gaming win accounts for around 40% of total revenues. Room rates have consistently gone up, and prices for tickets and meals are not going down.
Additionally, nightclubs blow the old model completely out of the water. Instead of being comped drinks, patrons pay up to $500 per bottle for the same kind of vodka that you could get at Lee’s Discount Liquor for $28. It used to be that casinos offered free alcohol to get people in the door; now, they fantastically overcharge for alcohol because people want to be where the action is. That, my friends, is what social scientists call a paradigm shift.
How far will the paradigm shift? If we extrapolate the present trend, gaming will become less and less important on the Strip. In ten years, it may account for 15% of total revenue, which is about where dining is today.
At this point, what are Strip resorts selling as their main draw? Not gambling. I’d guess that rooms will become the chief revenue earner, accounting for about 40% of the total–right where gaming is now. Strip resorts will be selling an overall experience that’s predicated around paying top dollar for a magnificent hotel room or suite.
So why not offer free gambling as an incentive? $100 in slot play for every room-night purchased might offer incentive to a potential customer on the fence, and a free entry in a poker tournament could induce visitors to pay for a weekend’s stay.
The per-unit costs of gambling don’t directly correlate to their usage. Like web servers (which Anderson cites in his article). Of course, the busier a casino is, the more dealers it needs to staff, but with increasing mechanization labor is becoming a less important part of the picture. If you’ve got a slot machine that cost you $10,000 a year ago, does it really make much difference whether someone comes in off the street and plays $200 cash or you sell someone a room at $400/night and let them play for free for an hour? In the former case, the casino’s win theoretically should be about $13.60. Isn’t it smarter to give up that $13.60 for the profits from a higher room rate?
Offering some gambling for free might help the horse racing industry. With visitation down but simulcast revenues up, giving away free bets at the track might convince neophytes to make a night of playing the ponies. With the average age of racing fans inching up, this might be the sport’s best shot at attracting younger fans.
Free gambling might also be a way to work around UIGEA. Congress has banned pay-for-play online gambling, but what if your subscription to a magazine bundles in non-refundable credits for cash games? Before you protest that there’s no way to make money off free gambling, ask yourself whether you could have imagined a way to make money off of free web searching, video sharing, or online classifieds? The people behind Google, YouTube, and Craig’s List did.
When you put it in that light, free gambling doesn’t seem so outrageous, does it?