The Death of Blackjack and What Games Are Replacing It

By Markets Fool.com

With the rapid expansion of land-based casino gaming across the U.S. over the past quarter-century, along with the global poker boom and online gaming explosion of the 2000s, more people have been exposed to gambling games than ever before. And with the great advancements in gambling knowledge and game strategy over this time period, more gamblers millennials in particular are more sophisticated and more knowledgeable about gambling than at any point in the history of mankind.

Continue Reading Below

The casino is losing its mystique, and the product of gambling is maturing. As a consequence, the tastes of the modern gambler are changing, such that there is an increasing demand for gaming activity that is more social in nature, and an increasing demand for gaming activity at least partially based on skill.

But what does that really mean for the next wave of casino games?

Basing payouts on Pong
The first and most prominent interpretation of this trend thus far has been to develop video slot games designed to appeal to a video game generation. About a decade ago at the 2004 Global Gaming Expo (G2E), Bally Technologies (acquired by Scientific Games Corporation last year) introduced a slot game based on Pong, the landmark Atari game released in 1972. Bally's slot adaptation approved by Nevada gaming regulators in 2007 included a bonus feature in which the player would play a 45-second round of Pong, and the player's performance affected the payout; the difference in expectation between the best player and the worst player in this bonus feature was 7 percent. Other companies have followed suit, with games such as IGT's Centipede and GTECH's Zuma offering skill-based bonus features.

More recently, in October 2014, the New Jersey Division of Gaming Enforcement announced that it was "currently authorized to approve" and "eager to receive" skill-based game submissions for review under its New Jersey First program. New Jersey First was designed to encourage the development of casino games in New Jersey combining both the social and skill-based elements found in games like Candy Crush and Words with Friends by allowing games with such features to be fast-tracked to the casino floor within 14 days of approval, provided that the game is "submitted to New Jersey prior to or simultaneously with any other jurisdiction or testing lab."

The first concept to emerge from NJ First was not a video game, but rather a basketball free throw shooting contest to be held at Boyd Gaming and MGM Resorts International's Borgata in Atlantic City on March 21.

Continue Reading Below

Oddly, completely absent from the discussion about the demand for social and skill-based games is the area of the casino floor that historically has been both the most social and most demanding of skill. That area is the table games pit.

Let's start by first talking about the state of blackjack, the most popular casino skill game of them all.

The rise and slow death of blackjack
Ever since Ed Thorp introduced the first card counting system in 1962 in his book Beat the Dealer, blackjack has led the way as the game of choice for intelligent gamblers in the table games pit. For reference, in 1985, blackjack accounted for 81% of table games units and over half of table games revenue in the state of Nevada.

Part of the reason for blackjack's popularity was the fact that some gamblers like to make decisions and have some level of control over the outcome. But the chief reason for blackjack's exceptional popularity was the idea that the game was beatable, and the idea that blackjack represented a fair game.

The fact is that most people who play blackjack don't even play perfect basic strategy; moreover, relatively few people know how to count cards, and even fewer among them can do it proficiently enough to beat the game. But the idea that a gambler can walk into a casino and beat a game that's not intended to be beatable and in a place in which the player is not supposed to win is a romantic one, and has been strong enough to power the brand of blackjack for the past five decades.

And even setting card counting aside, blackjack has indeed represented the fairest gamble in the house, with house advantages under perfect basic strategy generally in the 0.50% range. The result is that in the history of legalized and regulated gambling in the United States, blackjack has been the game that smart people play.

But all of that is changing. Over the past decade, casinos have taken the most extreme steps to eliminate risk from card counters in particular, as there is no fundamental reason why the casino is obligated to offer a mathematically beatable game. The first big trend was the increasingly widespread use of continuous shuffling machines (CSMs), which speeds up the game but also eliminates card counting. Another more recent trend is that some casino operators have moved to make a more drastic step of paying 6:5 on blackjack not only on single-deck alternatives, but also on two-deck and multideck shoe games; paying 6:5 rather than 3:2 adds 1.39% to the house advantage.

What's happened in the process is that the casinos are gradually (and probably unintentionally) eliminating any incentive to learn a complex basic strategy for a game that not only is no longer beatable, but in an increasing number of cases does not even offer a more favorable house advantage than can be found in games requiring no skill whatsoever. By way of comparison, the Banker bet in baccarat offers a 1.06% house advantage, while the Pass Line bet in craps has a 1.41% house advantage; neither wager requires any decision-making.

And for the most part, the modern gambler has begun to move on from blackjack. At its peak in 2000, there were 3,682 blackjack units in the state of Nevada, representing 64.4% of tables in the state, and generating $1.17 billion in revenue. By 2013, the blackjack count in Nevada was down to 2,704 units, representing 55% of tables, and generating $1.09 billion in revenue.

Note that the decline as a percent of all table games revenue in the table below is largely a function of the spectacular rise in predominantly high stakes baccarat play on the Las Vegas Strip over this time period.

Nevada: Blackjack table count and revenue

Year

Units

% of Units

Revenue

% of Revenue

1985

3,049

80.7%

$720.6M

56.3%

2000

3,682

64.4%

$1.17B

38.6%

2013

2,704

55%

$1.09B

27.5%

Source: UNLV Center for Gaming Research

Proprietary alternatives: Game strategy and the skill-free rate
As blackjack continues to lose real estate on the casino floor, this real estate has in part become occupied by non-traditional, usually proprietary alternatives such as Three Card Poker and Caribbean Stud. These games are typically protected by patents and trademarks (Pai Gow is a notable exception, though several modified variations of Pai Gow are patented), and are generally leased to casinos. This is an area that has long been dominated by SHFL Entertainment (now part of Scientific Games as a result of SHFL's merger with Bally Technologies in 2013, and Bally's subsequent acquisition by Scientific Games in 2014).

In 1985, non-traditional games represented 2.2% of units and 1.5% of table games revenue in Nevada; by 2013, these games accounted for 21.9% of units and 14.4% of table games revenue in the state.

Nevada: Non-traditional games

Year

Units

% of Units

Revenue

% of Revenue

1985

85

2.2%

$19.2M

1.5%

2000

970

17%

$546.5M

18%

2013

1,078

21.9%

$572.0M

14.4%

Source: UNLV Center for Gaming Research

Such new games are our area of interest. The next question is how well these new games satisfy the demand for skill games.

Let's establish two key baseline ideas:

1. If a game is going to require any skill whatsoever, the game should have a lower house advantage than that being offered by games with bets requiring zero skill.

2. The more skill a game requires, the lower the house advantage should be.

Requiring skill in a game is pointless if it means reducing the house advantage from 15% to 5%, as a gambler can always find better bets; rather, there must be an incentive for the player to acquire the skills to play a game the player knows is designed to beat him. The best example of this is blackjack, a game which has incentivized gamblers to learn a relatively complex basic strategy by (a) historically being beatable and (b) by offering a lower achievable house advantage under basic strategy than other games like craps and baccarat.

The second point is a natural extension of the first. The more decisions a player has to make, the more mistakes the player will make, and the less likely it is that the player will achieve the theoretically optimal house advantage. This leads to player value risk, or the risk that the player is losing more money faster than he should be. This needs to be compensated for with a lower theoretical house advantage.

In finance and investing, we have a theoretical risk-free rate of return, which serves as a benchmark against which all decisions are made. In casino gambling, we have what I'll call the skill-free rate, which serves as a benchmark house advantage against which games requiring skill should be compared. At a minimum, the adjusted house advantage (better known as "element of risk," which I'll explain in a minute) for a game requiring skill should be lower than the 1.41% house advantage of the Pass Line wager in craps, and should likely be lower than the 1.06% house advantage of the Banker bet in baccarat. These are typically the lowest house advantages offered by the casino without requiring any decision-making or skill.

As the lowest number, the Banker bet in baccarat represents the skill-free rate.

Skill-Free Rate = House Advantage of Baccarat Banker Bet = 1.06%

Of the traditional games -- blackjack, baccarat, craps, and roulette -- only blackjack requires any decision-making or any skill whatsoever.

Traditional games: Strategy profile

Game/Bet

House Advantage

Strategy Rules Required

Skill Level Requirement

Baccarat Banker

1.06%

0

None

Craps Pass Line

1.41%

0

None

Roulette

5.26%

0

None

Blackjack

~0.50%+

20-30+

High

New proprietary table games are often poker-based variants, and have a range of skill requirements. Entry-level games such as Three Card Poker (SHFL), Galaxy Gaming's High Card Flush, and Crazy 4 Poker (SHFL) have optimal strategies that can be expressed in as little as one or two rules.

In Three Card Poker, the player starts with an initial ante wager and is dealt three cards; optimal strategy is to bet with Q-6-4 or better, which is all you need to know to get to the house advantage of 3.37%. In High Card Flush, the player antes and is dealt seven cards; according to Wizard of Odds, the correct strategy is to bet the maximum allowed when dealt four or more cards of the same suit, or a three-card flush of J-9-6 or higher (9-7-5 to J-9-5 are borderline), which will get close to the house advantage of 2.64%. In Crazy 4 Poker, the player starts with two initial wagers (an Ante and equal Super Bonus wager), and is dealt five down cards; the perfectly optimal strategy is to bet the maximum (3x the Ante) with a pair of aces or better, and bet the minimum (1x) with K-Q-8-4-x or better (the best four-card hand plays).

These games are strategically simple by design, and are intended to serve as lowest common denominators. The advantage of these games is that virtually anybody can play these games perfectly or near-perfectly (in the case of High Card Flush), even if very few people who play these games seem to actually know the strategies for them. But at the same time, the limitation of these games is that they satisfy the demand for skill games only on the most cursory level.

Entry-level proprietary games: Strategy profile

Game/Bet

Strategy Rules Required

Strategy

Skill Level Requirement

Three Card Poker (SHFL)

1

Bet Q-6-4+

Low

High Card Flush (GLXZ)

1+

Play J-9-6+

Low

Crazy 4 Poker (SHFL)

2

Max-bet (3x) with A-A-x-x+ Min-bet (1x) with K-Q-8-4+

Low

Clearly, there's room for more sophisticated games. But how well are players being incentivized to learn more complicated strategies?

The classic smash hit Caribbean Stud (SHFL) requires five strategy rules for effectively perfect play, to approximate the theoretical house advantage of 5.22%. Even adjusting for an average bet of 2.04 units per hand (the player antes one unit, and then must bet two units or fold, which the player does on roughly 52% of hands 1 + (2)(0.52) = 2.04), this results in relatively high adjusted house advantage* (more widely known as "element of risk") of 2.56% per unit wagered, or more than double the 1.06% house advantage of the Banker bet in baccarat. This in large part explains why Caribbean Stud is in decline, particularly when compared to other new alternatives.

Adj. House Advantage = House Advantage Avg. Bet Per Hand (Units)

Four Card Poker (SHFL) has a theoretically optimal house advantage of 2.79%, but this is not practically achievable; a simple strategy using only three rules will get the player to 3.40%, while an advanced strategy presented by the Wizard of Odds requires 10 rules to get to 2.85%, or within 0.062% of the theoretical house advantage. At an average of 2.14 units wagered per hand, Four Card Poker has a theoretical house advantage of 1.30%, or roughly in the range of the 1.41% Pass Line wager in craps.

Easily the two most advanced proprietary games with wide circulation at present are Mississippi Stud (SHFL) and Ultimate Texas Hold'em (SHFL). Mississippi Stud is a game that features a currently unique combination of scalable betting (the player can bet 1x-3x the ante on three successive betting rounds, for a total of up to 10 units wagered in a single hand) and scalable payoffs (all wagers pay according to a pay table, resulting in some potentially large payouts). However, the game requires 23 strategy rules to be played optimally, which gets the player to a house advantage of 4.91%; at 3.59 units wagered per hand, this results in an adjusted house advantage of 1.37% per unit also in the range of the Pass Line wager in craps, but requiring a lot more work.

Ultimate Texas Hold'em is by far the most attractive of these games, with a theoretical house advantage of 2.19%, and only 0.53% per unit wagered (4.15 units per hand). This house advantage is not practically achievable Stephen How of Discount Gambling presents basic strategy with 23 categories of rules that get the player to 2.3%. Michael Shackleford aka the Wizard of Odds presents a simpler strategy with 13 rules (six if you are an expert poker player and can count 33+, Ax, K2s+, K5o+, Q6s+, Q8o+, J8s+, JT as one rule), one of which is bet the river with "less than 21 dealer outs beat you"; that strategy gets to 2.43%, and adj. house advantage (termed "element of risk" by Shackleford) of 0.58%.

On a per unit basis, this puts Ultimate Texas Hold'em roughly in the same range as blackjack.

Proprietary games: Skill requirement and adj. house advantage

Game/Bet

Strategy Rules Required

House Advantage

Avg. Bet Per Hand

Adj. House Advantage*

Three Card Poker (SHFL)

1

3.37%

1.67 Units

2.01%

High Card Flush (GLXZ)

1+

2.64%

1.71 Units

1.54%

Crazy 4 Poker (SHFL)

2

3.42%

3.14 Units

1.09%

Caribbean Stud (SHFL)

5+

5.22%

2.04 Units

2.56%

Four Card Poker (SHFL)

3/10+

2.79%

2.14 Units

1.30%

Ultimate Texas Hold'em (SHFL)

13/23+

2.19%

4.15 Units

0.53%

Mississippi Stud (SHFL)

23

4.91%

3.59 Units

1.37%

Source: wizardofodds.com
*Widely referred to as element of risk, a term coined by Michael Shackleford aka Wizard of Odds

In Conclusion: Incentivizing millennials with value
It's tempting to want to say that millennials simply have different tastes and are more demanding of games which are social and skill-based in nature, and that's why they don't gamble as much as the gaming industry would like. That may be true, but it's also a copout.

The simple fact is that even as gamblers continue to get smarter and smarter, there are fewer and fewer games for intelligent gamblers to play.

Card counting in blackjack is being systematically eliminated. This is completely understandable, in the context that there's no fundamental obligation for the casino to offer a mathematically beatable game. But as noted earlier, with the increasing adoption of 6:5 blackjack (with an additional 1.39% house advantage), even the incentive to learn basic strategy for blackjack is also being systematically eliminated. And thusly, blackjack is dying a slow death.

Meanwhile, the new proprietary table games are not filling the void left by countable blackjack, and are not meeting the demand for skill games. Many of the most popular games currently on the market (such as Three Card Poker, High Card Flush, and Crazy 4 Poker) are extremely simplistic by design. And aside from perhaps Ultimate Texas Hold'em (with an adj. house advantage of 0.53% per unit), the modern intelligent gambler is not being properly incentivized to learn sometimes-complex strategies for games they know are designed to beat them.

The point is, if casino operators are serious about marketing to a more sophisticated generation of gamblers millennials there's clearly room to offer games with both higher skill components and lower house advantages to compensate.


The article The Death of Blackjack and What Games Are Replacing It originally appeared on Fool.com.

Fool contributor Jeff Hwang is a game inventor, and is President and CEO of High Variance Games LLC. Jeff is also the best-selling author of Pot-Limit Omaha Poker: The Big Play Strategy and the three-volume Advanced PLO series. Jeff owns shares of MGM Resorts International.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.