Winner Takes All

by Christina Binkley

  Welsh, who kept her maiden name, had never set foot in an American casino when her husband took the job with Harrah’s. Like many wives who are offered the opportunity to move to Las Vegas—a place where professional poker player Annie Duke once complained that people don’t own books—Kathy Welsh declined. So Harrah’s new chief operating officer commuted from Boston to Las Vegas.

  His rumpled shirttail flying out of his pants and his overgrown hair poofing over his ears, the thirty-eight-year-old Loveman dived into Harrah’s with all the joy of a child at Christmas. He had the cherubic face and unruly clothes of filmmaker Michael Moore, and he also shared Moore’s critical curiosity.

  Because he didn’t accept many of gambling’s well-worn maxims, Harrah’s general managers shuddered when Loveman arrived. Their phones would ring at midnight with reports of him nosing around back-of-the-house asking questions and suggesting changes.

  Loveman devoured books related to his new job. Sitting on his desk one day in 1999 were: Why We Buy: The Science of Shopping, by Paco Underhill; Casino: Love and Honor in Las Vegas, by Nicholas Pileggi; and Discovering the Soul of Service: The Nine Drivers of Sustainable Business Success, by Leonard L. Berry.

  The professor’s arrival stirred the pot at Harrah’s among people like Colin Reed, Harrah’s cagey, acerbic chief financial officer, who was heir apparent to Phil Satre.

  Loveman disdained the casino industry’s predisposition toward hiring its own. He began recruiting talent from far afield—people like Richard Mirman, a thirty-three-year-old former University of Chicago math whiz, and David Norton, who came to Harrah’s from American Express. Neck chains and pinky rings to them were a bad joke. These special forces of Loveman’s were highly educated, middle-class talents. They were as surprised as anyone to find themselves in Las Vegas. “I never thought about the casino business,” said Mirman early in his tenure. His father and brother are college professors. “My parents are still crying.”

  Like the early Clinton White House, these wonks felt they had a higher purpose. Mirman often dashed home for dinner with his wife and two sons before heading back to the office to huddle with Loveman. “We decided we would rebuild the company around marketing and we’d study best practices of other industries to do it,” Mirman says. “Within the first six months, we knew what we were going to do.”

  They didn’t bother to familiarize themselves with the casino business’s close-knit social structure. Rather than look to MGM Grand or Mirage Resorts, they studied Rite Aid and Victoria’s Secret. A year after coming to Las Vegas, Mirman still didn’t know who Terry Lanni was—the chairman and chief executive of one of the industry’s leading companies. Instead, Mirman’s idol was Richard Fairbank, the chairman and chief executive of an innovative credit-card company, Capital One Financial Corp. (“What’s in your wallet?”)

  Having operated for so many years as industry outsiders, this crew at Harrah’s watched Wynn’s melodrama from afar, the way one might view a fire at a house down the street—feeling curious and hoping the firemen won’t trample the begonias.

  When they did stumble into evidence of it, they were shocked at the insular nature of their new industry and the long, intertwining relationships between rivals. “It’s like a Kentucky wedding—the Smiths and the Joneses,” said Loveman, who also had no love for beautiful casinos. The billions of dollars lavished on malls and marble bathrooms had cut investment returns in half over the previous decade. “The casino industry loves hardware,” Loveman said. His voice turned mocking: “‘We used to have a chair over here, and after considerable deliberation, we moved it over there. Isn’t that better?’ I was like, I haven’t the slightest freaking idea. What I want to know is what drives consumer preferences.”

  Loveman slashed and burned, insulting casino industry stalwarts and his own bosses. “The casino industry is an embarrassment in marketing,” the wunderkind told Wall Street analysts and the company’s biggest investors during a meeting in New Orleans. “We give better care to chips than customers. We let customers sit idly on the floor all the time. We’d never leave a chip on the floor.”

  Loveman disagreed with the habit of catering to high rollers while small-time gamblers were left to fend for themselves. “As an industry, we have taken very good care of our VIPs. Better than banking and any other industry,” Mirman said, parroting Loveman. “But below that level, there’s no intimacy.”

  Loveman noted that Harrah’s gamblers spent only thirty-six cents of every wagering dollar at Harrah’s. Loveman viewed gamblers as “promiscuous.” If he could get them to spend just one more penny of every wagered dollar at Harrah’s, Harrah’s annual earnings would jump by more than $1 a share.

  “I’m in the business of fostering customer monogamy,” Loveman said, evangelical. “I’m like the Ladies’ Temperance Movement.”

  In the late twentieth century, the casino industry was still run by the early “gods” and the people who had trained under them, said Colin Reed. Many casino managers were superstitious. They might send a blackjack dealer home for the night, believing she was experiencing an “unlucky” streak. The homegrown talent at Harrah’s sometimes clashed with the new fancy-pants management and their fresh ideas. In the year or two after Loveman joined Harrah’s, a stream of longtime Harrah’s managers marched for the door, including the head of Nevada operations who had worked for the company for twenty-three years.

  Those who welcomed Loveman’s newfangled insights found their careers rising. Tom Jenkin, a gravel-voiced casino veteran, rose from running Harrah’s Las Vegas casino to overseeing the entire Western region in just a few years. Jenkin leaped at the new technologies for tracking how much individual customers were gambling. In a sea of gamblers it’s easy to identify the high rollers, he said, but without the aid of technology, it was impossible to identify those steady grazers in the middle. “Everybody’s great at [catering to] the high-level customer. But not against the four-hundred-dollars-a-day customer,” Jenkin said. “They didn’t have stamps on their foreheads, so we couldn’t identify them.”

  The wry Jenkin called Loveman’s new brain trust “propeller heads,” in reference to the proverbial nerd with a beanie cap, saying they were smart and naïve at the same time.

  “I get to worrying when these propeller heads spend too much time talking to each other,” Jenkin said with a chuckle. “They need a dose of reality.” He took Rich Mirman to a country music concert, then teased him for wearing Tommy Hilfiger jeans with his cowboy hat.

  It is impossible to win over the long haul at gambling. This is why professional poker players regard gamblers—those who play slot machines or roulette or baccarat—with disdain. Poker is a game of skill, which is why casinos don’t bank poker games; they charge a fee for the use of their tables.

  Casinos do not gamble—the odds are always fixed on their side. Whether it’s the programming inside a slot machine or the payout table for blackjack, a casino sets the percentages that result in its profits. The more you gamble in a casino, the more you lose.

  This is why casinos try to keep customers around longer, especially if they’ve been winning. Because they know. Over time, a gambler has to lose.

  A casino calls whatever it keeps of a player’s wagers the “hold.” In Las Vegas the hold for slot machines generally runs from 2 percent to 4 percent. Over time, they will hold on to anywhere from 2 percent to 4 percent of the money that is wagered on them—though one person might win big and another might lose big on any given day. (At tribal casinos, where there is less competition, the hold can run as high as 20 percent, according to some estimates.)

  Las Vegas casino operators generally believe that their customers will notice if they raise the percentage of the hold, which is exactly the same thing as raising the price of gambling. Which invites a question. Is it just a superstition that gamblers notice? “I believe there’s a lot of money to be made for the person who has the answer to that question,” Loveman says.

  The real question w
as: Could casinos raise prices without anyone noticing? This is a titillating question for an economist. It is Economics 101, a problem of demand elasticity. The less elastic the demand, the more a producer can raise the price without losing customers. Gary Loveman is an economist.

  “I have met virtually no CEOs who would rather talk about numbers and algorithms,” says Tom DeLong, a Harvard organizational psychologist who consults for Harrah’s and found that Loveman was one of those CEOs.

  Gambling is betting on the probability of various outcomes, so it lends itself to mathematical models like the ones economists use. Loveman’s mathematical model predicts how profitable gamblers might be to Harrah’s. In the early days, Mirman liked to call it Harrah’s “secret recipe”—as powerful as the famous unrevealed formula of Kentucky Fried Chicken.

  The gambling business was a trove of treasure to these fellows. What other industry could provide such detail about the buying habits of its consumers? By signing up for the Total Rewards, and dutifully sticking that card in the machine, Harrah’s customers were volunteering to be guinea pigs. Loveman and his propeller heads began conducting thousands of clinical-style trials to determine what gets people to gamble.

  The sixteen million gamblers in Harrah’s database were grouped according to characteristics such as zip code, how long they’d been a Harrah’s customer, how much money they were likely to lose, how frequently they gambled, and the types of games they played. Harrah’s tested hypotheses against control groups in a series of “conjoint analyses.” That’s just an academic term for measuring which bundles of goodies people prefer.

  In one case, Harrah’s chose two groups of slot players from Jackson, Mississippi. The control group was offered a typical casino marketing package known as RF&B, or “room, food, and beverage,” worth $125. They were offered a free room, two steak meals, and $30 of free chips at the Tunica casino, for a grand-total value of $155.

  The test group was offered just $60 in chips for gambling.

  Tradition has it that gamblers prefer the fancier RF&B offer—it has been around for decades. But in the tests, the more modest chips-only offer generated far more gambling.

  Once again, the casino industry’s traditional wisdom had failed. The propeller heads concluded that certain avid gamblers aren’t motivated by hotel rooms and meals. They just wanna gamble. So Harrah’s had been wasting money giving away free rooms and meals to people who didn’t care much about the goodies. After revamping the promotion, profits from it nearly doubled from $33 to $60 per person per trip.

  Harrah’s sent all sorts of offers in the mail each month, personalizing them and adding expiration dates, which encouraged people to come to the casino before they expired. Response rates rose from 3 percent to 8 percent.

  The propeller heads found they could discover a lot from how fast people hit the buttons on slot machines. They called this the “velocity” of gambling. It turned out to be a powerful indicator of people who could be easily convinced to gamble more.

  Harrah’s focused on a group of once-monthly gamblers who hit the buttons fast and lived near the casino. To entice them to make two visits that month, Harrah’s sent cash and food offers that expired in consecutive two-week periods. The gamblers responded like maze-running rats: The group’s average number of trips per month rose from 1.1 to 1.4.

  Harrah’s new direct-mail programs were so successful that, in its Las Vegas casino alone, the rate at which people responded to mail offers more than doubled. In Tunica, Mississippi, Harrah’s revenue rose at twice the rate of nearby casinos.

  The propeller heads’ technique was Pavlovian. Unbeknownst to the gamblers, Harrah’s statistical model set calendars and budgets that predicted when they would gamble and how much. It calculated how much each gambler was likely to lose to Harrah’s over his or her lifetime: their “predicted lifetime value” to Harrah’s.

  Harrah’s computers spit out “behavior modification reports” so personalized that they could suggest that one gambler would respond best to a cash offer while another would be more motivated by a free hotel room.

  A lady who showed up every two weeks would be labeled “past due” if she didn’t show up for a month, but a guy who showed up twice a year wouldn’t be past due for fourteen months.

  A gambler who was overdue for a visit to the casino would receive an “invitation” by mail or e-mail. If they didn’t respond, they got a phone call from a Harrah’s telemarketer. “We get him motivated, back in an observed frequency pattern,” Loveman said.

  This is the kind of thing that casino hosts have traditionally done for high rollers. Harrah’s database and a staff of telemarketers made it possible to do the same for the low-rolling masses.

  Working off their computer-generated call lists, Harrah’s telemarketers were trained to listen for a set of trigger words, such as “hotel.” If they called a past-due customer and the person mentioned that they loved the hotel, the telemarketer was trained to respond by offering a free or discounted stay in a hotel.

  Later, Harrah’s used this for its VIPs, too, assigning lists of five hundred customers to a “host” who was required to call each gambler once a month. Harrah’s monitored the hosts’ outbound e-mails, how many phone calls they made, and how many letters they mailed to the people on their list. Their phone calls were scripted to ensure they hit just the right note.

  Many hosts left Harrah’s when faced with their new telemarketing-type jobs. The old hosts “were spending all their time on the loyal customers,” says David Norton, describing the traditional job of a host. “We wanted them to stimulate sales.”

  Loveman was enthusiastic about applying technology in every way possible. In a 2005 pilot program, Harrah’s put radio-frequency tracking tags on cocktail waitresses at the Rio to study how long it took them to serve their customers.

  Taking a cue from banks and airlines, Harrah’s launched tiered frequent-gambler cards with gold, platinum, diamond and, eventually, Seven Stars thresholds. Like carrots on sticks, the rewards escalated as customers gambled more with Harrah’s. Diamond echelon players were expected to lose at least $5,000 a year. Seven Stars players were expected to lose about $50,000.

  Loveman’s new systems were effective. Sales growth at its existing casinos went from 9.1 percent in the fourth quarter of 1998 to 11.4 percent the following quarter and to 14.6 percent the quarter after that. Customers were also becoming more loyal, traveling from one Harrah’s casino to another: Cross-market revenue rose 36 percent in the first quarter of 1999 compared to the year before.

  The accolades were pouring in by 2000. Forbes named Harrah’s to its “Platinum List” of four hundred best performing companies—the only casino company on the list, in such company as Time Warner, Marriott International, and The New York Times. InformationWeek magazine named Harrah’s to its list of the five hundred most innovative companies.

  By the time Wynn was selling Mirage Resorts to Kerkorian—two years after Loveman’s arrival in Vegas—Harrah’s was garnering more respect on Wall Street. Its earnings more than doubled that year. Rivals were beginning to talk about data management.

  Loveman was also discovering an unhappy truth about the casino business: Casino customers are often miserable.

  “You ask someone how they’re doing,” Loveman said, “and in a casino, they say, ‘Shitty.’ I didn’t know how to have that conversation—I didn’t know how to respond.” Loveman was astonished at the magnitude of losers’ distress. “I was surprised at how big it was,” he said.

  There was a fundamental disconnect between Loveman and his customers. The professor believed that people were gambling for recreation, so he didn’t expect them to feel so upset about losing their money. He believed gambling was games.

  Loveman isn’t a gambler and has never been a gambler. Unlike Kerkorian and Wynn, he is not an entrepreneur. He can analyze customers’ behavior, but he doesn’t get them deep in his belly.

  One fall afternoon in Las Vegas, Loveman wa
lked through the Rio, looking professorial in a black turtleneck and tan corduroy jacket. He passed one of the Rio’s “bevertainers”—waitresses who set down their trays, climb on platforms, and dance to energetic songs. The bevertainer shimmied in her black bikini, running her hands up and down her body and smiling brightly.

  “Now, here’s an example of something that I thought was just not going to work,” Loveman said. “The local management here had the idea. I thought it was going to be just awkward. But it’s been a hit. The customers love it.”

  Wynn and Kerkorian were selling products they loved to consume themselves. Loveman was selling something foreign to him, based solely on his wits.

  When Loveman realized that losers are miserable, he figured he could keep them gambling longer if he could reduce their perception of losing. “We have to be more diligent about identifying people who are losing disproportionately and doing something about it,” he said.

  Harrah’s began tracking gamblers’ losing streaks in real time—while they were still sitting at the slot machine. As soon as a gambler stuck their Total Rewards frequent gambler card in the machine, the computer started comparing their actual losses and winnings against the predicted odds. Big losers were flagged in the system. A “luck ambassador” was then dispatched to perk them up with friendliness and a token gift.

  Casino employees were put through a three-day training program on how to deflect gamblers’ misery with empathy. Using scripts and role-playing, trainers instructed them to ask if the customer had had fun—to keep the focus on the game rather than the loss. Comp them a free meal or a small cash voucher. Sustain the conversation. A little sympathy, it turned out with mathematical precision, kept people gambling longer.

  The propeller heads were closing in on that other big question: whether gamblers recognize lower odds on slot machines. They studied how speed and amounts of payouts on slots create a perception of winning, gleaning valuable information on how to set a slot machine’s price.