How electronic gambling machines work: Structural characteristics

AGRC Discussion Paper No. 8 – July 2017

The price of EGMs

Like other forms of gambling, EGMs have a price, a kind of negative return on investment known as the "return to player" ratio.

Return to player ratio

A return to player (RTP) ratio is the proportion of each wager an EGM game is designed to return on average to users. RTP represents an average deduction from the user's wager for each bet, calculated over the game cycle.

Australian jurisdictions prescribe a range of minimum RTP. In clubs and pubs in NSW, Victoria, Tasmania, Queensland and the Northern Territory, minimum RTP is set at 85%. In the ACT, minimum RTP is 87%, and in South Australia it is 87.5%. EGMs in casinos generally have a higher minimum RTP (reflecting their greater turnover and higher bet limits).

If minimum RTP is set at 85%, this means that, over the long term (often described as the "game cycle"), the game must return to the user at least 85% of the amount they wager.

The prescribed method of calculation for this to be achieved varies between jurisdictions. In Victoria, the actual RTP is calculated by assessing the aggregated wagers and total returns paid to users over the course of a year for all EGMs operating within a specific venue (Gambling Regulation Act 2003 (Vic), p. 335). In other jurisdictions, an individual machine must return at least the minimum RTP over its game cycle. The game cycle, however, may be many years, because of the large number of possible outcomes, as discussed below.

A machine's theoretical return to player ratio (TRTP) is determined by its "game maths": the interaction of the configuration of the game's "reel maps", the number and order of symbols on each virtual reel, and the "pay table", the prizes awarded for each combination of symbols appearing on a line.

A game's TRTP can be readily determined mathematically, but it is important to note that TRTP is very unlikely to be achieved on an EGM game in the scale of an individual user's interaction with the game. Most EGM games have a very large number of potential outcomes - frequently 50,000,000 or more.

Dolphin Treasure, a relatively old-style EGM game still provided in many Australian venues, has 35,640,000 possible outcomes. This can be derived from the number of symbols on each of the five reels utilised by the game (30x30x30x30x44). Thus, the time to traverse the full repertoire of possible outcomes of such a game would require a minimum of 5.6 years of continuous use (at game intervals of 5 seconds per spin, for 24 hours per day, every day).

However, the probability that even such a time commitment would produce all possible results in an EGM game is very close to zero.

The reality of player returns

The price of EGM games can be defined as 1-RTP, so that an RTP of 85% (or 0.85) produces an average price per wager of 0.15 or 15%. That is, the "house edge" for Australian EGMs is as high as 15%. It is, however, rare for such an outcome to be achieved in the short term.

As prize outcomes over short periods are subject to significant variation, it is difficult for players, via their gambling experiences, to determine player returns with any accuracy (Woolley, Livingstone, Harrigan, & Rintoul, 2013).

However, in an experiment where the price of a game was varied substantially (and rather more than occurs in practice - between 2% and 15%), users were reportedly able to detect this (Dixon, Fugelsang, MacLaren, & Harrigan, 2013).

In some Australian jurisdictions, RTP must be displayed on a user information screen, while others prescribe that such information must be available at a venue upon request. But even when disclosed, the question remains whether EGM users understand the meaning of RTP or its relevance to their outcomes.

The bottom line is that unlike other addictive consumptions such as alcohol (Babor, 2010) and tobacco (Chaloupka, Yurekli, & Fong, 2012), price as a concept is difficult to apply to the case of EGMs (Woolley, Livingstone, Harrigan, & Rintoul, 2013).

Common misconceptions

Many EGM users believe that if the game is operated in a fair manner, they should leave gambling venues with an amount consistent with the return to player ratio advertised - that is, 85% or 87% of their stake (depending on jurisdiction).

In fact, the "price" calculation is best conceived as the deduction of the price factor (1-RTP) on average for each bet wagered (i.e., for each spin).

A user operating an EGM with a price of 15% will, on average, lose 15% of their wager at each spin. The effect is cumulative. So, if a user inserts $10 and wagers $1 each spin, even if the game performs exactly as predicted (and this is extremely unlikely), the user would exhaust their funds in a little more than five minutes (at the rate of one wager every five seconds). With $5 bets, this process would occupy a little over one minute.

In a simulation of the popular game Black Rhino, the Productivity Commission (1999b) undertook an exercise to calculate the mean and median "time on device" with a given stake. Their calculation, based on a $30 stake, $1.50 wagers and 5-second spins, was that average time on the game before funds were expended was 13 minutes and 4 seconds, with a median time of less than 4 minutes.

The maths behind major prizes are just as stark. The Productivity Commission (1999a) developed a calculation to assess the number of spins that would be required to provide a 50% probability of winning the major prize on an EGM. Applying their calculation to the Dolphin Treasure game, it would require 24,703,765 spins to achieve a 50% probability (a 1 in 2 chance) of winning the major prize. Wagering a single line at 40¢ per spin at intervals of 5 seconds, this would cost nearly $1.2 million and occupy 1,429.6 days (or 3.9 years) of continuous use.

The effect of betting strategies

The betting "strategy" of users will influence time on device. (For a discussion of typical EGM wagering strategies, see "Wagering strategies", below).

If a user bets only one credit on one "line", they may experience extended time on the game compared to the above examples. However, most experienced EGM users employ a "mini-max" or similar strategy (Harrigan, Dixon, & Brown, 2015; Livingstone & Woolley, 2008), whereby they will select multiple lines (often as many as possible) and bet the minimum on each line. This means that no "winning" line will be missed. It also makes "losses disguised as wins" (see below) possible.

Price elasticity of demand

If gamblers' demand for EGM gambling were highly responsive to price - that is, if users changed their behaviour as prices rose - then the conclusion would be that EGMs had significant price elasticity. Raise the price and lower the demand.

The Productivity Commission (1999a) has noted a lack of evidence of price elasticity for gambling in general, and in particular for EGMs. But on the basis of available evidence, the Productivity Commission concluded that demand for EGMs was most likely price inelastic, because of the lack of price information and the lack of substitutability.

Although in casinos alternative gambling forms, such as somewhat lower priced table games, are readily available, EGM users continue to utiliseEGMs - which may cost as much as 10 times the price of a table game (Productivity Commission, 1999a).