The Economics of Online Gambling
The basic mathematical and business principles guiding revenues for gambling operators.
The Oxford Dictionary defines online gambling as “Gambling activities carried out via a computer network”. Such activities include sports betting, casino games (slots, blackjack) and poker. This last one should indeed be considered a casino game, but because of its popularity, we decided to detail it extensively and give it a sub-part of its own.
Sports betting
Sports betting represents “the action of gambling money on the outcome of a race, game, or other unpredictable events”.
Taking the example of a football match, a betting operator may offer several events the customer can bet upon. Some of these markets include whether team X ends up winning, losing, or drawing. Furthermore, the provider can create other derivative events from this game: the difference in goal between the two teams, who will score, the timing of a specific goal, and how the goal will be scored (such as a penalty, a corner or a header).
One may wonder how bookmakers draw substantial, predictable and not-so-volatile revenues to operate as a business. The popular culture believes that bookmakers make money when the events the punter betted on does not realise, e.g. when the punter loses their bet. However, the reality is more complex, as each market’s odds are all biased so that the bookmaker makes a profit even if the punter wins the bet. Gaming operators make such paradox possible thanks to the overround. This term refers to the amount by which a bookmakers’ odds for a set of mutually exclusive events exceeds a probability of 1. The higher the overround, the higher the bettors’ expected losses will be and the higher the operator’s revenues. (Newall, 2015).
To explain the overround, let us take the example of a fair coin flip. With an equal chance of 50%, the coin should land on either heads or tail. Thus, the unbiased odds for the event “coin shows heads” and the event “coin shows tail” should be:
1 / Probability of the event = 1 / 0.5 = 2
In this situation, the punter’s expected outcome is 1. In the long run, he will neither make a profit nor lose money, but the middleman who offered the bet will also not make a profit.
To counter this, when two outcomes are equally likely, it is common for bookmakers to use odds of 1.9091 instead of 2. With these odds for either heads or tails, a situation with 50 customers betting on heads will result as follow:
The illustration above shows that a change in odds makes a significant difference in the operator’s profit across all bets (GamblingSites.org, n.d.). The total value the platforms pay out [to customers] is going to be $954.50 against the $1,000 they have received in total wagers. The profit of $45.5 is the overround. It is commonly expressed as a percentage of the total wager and, in this case, the equation will be:
Overround = Profit / Total Wagers = 45.5 / 1000 = 4.55%
While this illustration with heads of tail simplifies the actual outcomes for sporting events, it explains well the bookmakers’ primary revenue source.
To give concrete figures, the overround given by William Hill on a British Premier’s League game of Manchester City vs Leeds was 5.1%. For Pinnacle and Unibet, the overround went as low as 2.4% and 1.9%, respectively.
Casino games
A short visit to the German Energy Casino website shows the most popular games available for their customers. Such games include roulette, craps, blackjack, baccarat and poker.
The saying “The house always wins” holds well with casino games. Papers from Harris show that as the rounds progress, the chances of winning for the gambler for all casino games ultimately decrease: the odds are in favour of the house (Harris et al., 2014). This phenomenon is called the house edge or vigorish. While gaming houses most often do not reveal their edges, studies have shown that the house edge for slot machines typically lie between 5% to 10% (Lucas, 2019). Thus, for every euro a client spends on slots, his expected return is at best 0.95€.
Poker
The Oxford Dictionary defines poker as “a card game for two or more people, in which the players bet on the values of the cards they hold”. We will not restate the rules of poker here. The reader should remember that, as for all card games played in casinos (online or not), each player decides on a certain amount of money to gamble during the gaming session. This decision can be made before each draw (for example, blackjack) or at the beginning of the game (poker). In poker, the game-winner takes all the stake that the other players betted on, minus fees.
There are several ways an online poker room make a profit. (Mace, 2020). The major one is the rake, a fee that a casino takes for each poker game to cover costs and create profit. Houses can apply this fee as either a pot rake or a time collection rake.
Operators generally value the pot rake between 2.5% and 10% of the pot — the total amount on the table during a game.
The time collection rake, generally reserved for “higher limit games, with minimum bets of $10-$20 or even above”, is usually collected “every half-an-hour during the game” as a set amount from each player.
To incentivise fidelity from their customers, some operators have removed the rake. Instead of charging a percentage, these sites [charge] a monthly membership, a deposit fee, or offer a rakeback: the online poker provider will return some of the rake (or the tournament entry fees) to the player, enticing him to continue playing (Mace, 2020).
For tournaments, fees are usually collected as an entrance fee rather than a percentage of the pot.
References
EnergyCasino.com. (2021). Energy Casino. https://energycasino.com/en/live-casino
GamblingSites.org. (n.d.). How Bookmakers Make Money. https://www.gamblingsites.org/sports-betting/beginners-guide/how-bookmakers-make-money/
Harris, Hagan, & Julian. (2014). Gaming Law: Jurisdictional Comparisons.
Lucas, A. F. (2019). Impacts of increased house advantages on reel slots. International Journal of Contemporary Hospitality Management. https://doi.org/10.1108/IJCHM-07-2018-0577
Mace, A. (2020). How Casinos Make Money on Poker Rooms, Explained. Gambling News Magazine. https://gamblingnewsmagazine.com/how-do-casinos-make-money-on-poker-rooms/
Newall, P. W. S. (2015). How bookies make your money. Judgment and Decision Making, 10(3), 225–231.
