The phrase, ‘The House Always Wins’ is one of the most well known and overused in the gambling industry.
It is trotted out by anyone and everyone – especially people who don’t really gamble, they love saying it – and while it may be true, there is not usually much more detail beyond that stock phrase.
A casino, be it online or offline, is a business like any other, so it will have its own structure, business plan, financial models etc., and is run for profit at the end of the day. So yes, it does always win so long as it is run properly, just like any other profit-making business.
We all know that casinos make a profit when gamblers lose their bets, and excitable news articles often publish huge numbers in their headlines to grab our attention, but have you ever wondered exactly how much of a margin the casino makes from year to year?
It’s a very difficult question to answer, because unlike a specific game which has a published RTP and/or house edge, the casino as a whole is a much more complex machine with many more financial layers. Especially if you start looking at gambling groups like Entain or Flutter.
We have had a right good go though, and while there is not a definitive answer to the question it is possible to talk around the matter and get a decent idea.
Gross Profit vs Net Profit
For anyone not used to looking at company reports and balance sheets, this sort of article could get very confusing very quickly.
We will try and keep things simple for this reason, but there are two terms that you really do need to understand to have any hope of wrapping your head around this:
- Gross Profit
- Net Profit
It’s nice and simple; the gross profit is the amount of money left once the cost of the goods/services you are selling have been deducted; the net profit is the amount of money left once the costs of running the business have been deducted from the gross profit.
So if you make £1,000 on a hot weekend selling 1,000 ice lollies at £1 a pop, but each ice lolly cost you 50p to buy, your gross profit would be £500:
- £1 – 50p x 1000 = £500
That’s a 50% gross profit margin.
But you also need to pay for your fuel for your ice lolly van (£50), 1% of all card sales go to the payment provider (£5), and it cost £100 for a license to sell ice lollies in the park, coming to a grand total of £155. So your net profit is £345 because:
- £500 – £155 = £345
You would then have to pay tax on that final amount, but the net profit margin would be 34.5% – which is high actually… perhaps we are in the wrong business.
Coming back to casinos then, and while their gross profit margin might look very healthy indeed – there are few costs of goods or services so it can be as high as 80% – the costs of running the business are pretty high too, so net profit margins are much lower.
And the net profit is the bottom line, so this is the one that really matters.
That said, some gambling companies don’t use gross profit as a metric at all, even reporting their cost of sales as zero, for reasons we will explore next.
How a Casino Business Works
It’s understandable that a company might want to keep some of the finer details of their business private – after all, knowledge is power.
However, all public companies have to publish detailed annual financial reports, and even private companies will sometimes talk about broad figures such as annual revenue and net profit.
That said, getting hold of concrete information that hasn’t been creatively massaged by accountants is nigh on impossible, so the best we can really do when trying to figure out a company’s true profit margin is to work out our own calculations based on the information available.
If there is information available.
There are a few other things to get to grips with for casinos though.
Gross Gambling Yield (GGY)
A key difference between a gambling business and most other businesses, is that a casino or bookmaker pays out an awful lot of money in winnings as well as taking an awful lot in losses. This means that their income isn’t as simple as a business that sells shoes, for example.
If a shoe shop sells a pair of shoes they have a cost price, a sale price, and the bit is the middle is the gross profit from which they deduct any other expenses to get the net profit. They don’t have to give some of the money back to the customer like a casino does.
For this reason, casinos use something called the Gross Gambling Yield (GGY). This is the amount of money left over from all takings during the accounting period, once all winnings have been paid out.
So if a casino took £10,000,000 all year but paid back out £8,000,000 in winnings, the GGY would be £2,000,000.
This is not just the same as gross profit because there are other assorted expenses to deduct from that £2 million, and the £8 million paid out in winnings isn’t technically a ‘cost’ of goods or services. There are special gambling taxes to pay on bets too, but we will get into that later.
The thing with casinos, is that their product is an experience rather than something tangible, but unlike a concert or a theatre production, the experience doesn’t have a set price. We gamble to our pocket and our mood on the day.
This is why GGY exists, and it is unique to the gambling industry. It is actually much more similar to revenue than profit.
Payback Rate
You will hopefully already know that every casino game comes with an RTP, a return to player percentage.
On a slot this might be 96%, on a blackjack table this might be more like 99.5%.
This means that for every £100 the casino takes in bets, they only actually keep 4% (£4) and 0.5% (50p) respectively.
These percentages are theoretical of course, worked out over countless numbers of spins and hands, and don’t account for people playing blackjack poorly and giving the house more of an edge, for example, but you see that it is not as simple as saying:
“A casino takes £100, minus running expenses of £20, that means they make £80.”
A lot of it goes straight back out to other players in winnings.
Well, some casinos give an overall RTP figure for their business that takes into account every single game that was played that year. And this figure will not be theoretical, it will be based on the actual amount of money that exchanged hands the previous year.
You might see a claim at the bottom of an online casino’s website that says they have paid back, let’s say, 97.2% of all money taken in prizes.
This would mean they have kept 2.8% of the money taken. This would be their GGY, but this would not be their net profit because we would need to subtract their operating expenses from that figure.
If they took £10 million over the year, then at 2.8% their GGY would be £280,000. If the casino cost £100,000 to run that would leave them with £180,000 in the bank before tax.
That’s a profit margin of 1.80%.
Again, these figures are not supposed to be accurately representative, they are just being used to demonstrate the point.
Now, that demo margin is a small percentage, but if that same company was doing £1 billion rather than £10 million, even that tiny 1.80% would equate to £18 million net profit, so it’s about volume for casinos.
The True Profits of Casinos
Having talked around the subject to get a basic understanding, and having used some made up numbers to demonstrate the point, let’s now look at a real life example.
Unfortunately, we can’t look at a single casino or online casino, because there are no single venue/single site companies that are publicly owned, so they won’t publish detailed financial reports. We are going to look at Entain instead, who are a huge multi brand conglomerate with names like Ladbrokes, Coral, Party Casino, Gala, Foxy, and others under their umbrella.
That means that the numbers we will be looking at include everything from online bookies and casino sites, bookmakers on the high street and gaming machines, plus potentially some B2B services. Oh, and just to make things even more difficult, they operate in many different jurisdictions with different tax laws too.
For this reason, we will be sticking to group wide overall figures rather than just those of their casino brands, as quite frankly it would take an army of accountants to write this article otherwise!
In the 2021/22 financial year, Entain had an online net gaming revenue (revenue before deducting VAT) of £3.1 billion, but made a net profit of ‘just’ £275.6 million after tax. You can see the financial report for yourself here.
Their net profit before tax, which is what we are interested in when trying to establish a profit margin, was £393.2 million.
That’s a net profit margin of about 12.68% overall.
If you are wondering where the rest of Entain’s £3.1 billion went, gambling companies have to pay a pretty hefty levy on every bet placed with them (before getting taxed on any profits), as well as paying for licenses, royalties to software providers, affiliate commissions, their own marketing costs, fees to payment providers, and on it goes.
Although these figures relate to a company with many casinos and other betting businesses in its group, an independent casino or online casino will be facing the same sorts of costs against their income, just on a smaller scale.
This sort of margin seems fairly standard for the bigger companies, as if we look art the same figures for Flutter, the group that owns Paddy Power, Betfair, Sky Vegas, and many others, we get a net profit margin of 11.36% overall.
On the other hand, 888 who are a much smaller company, come out with a much lower 8.77% net profit margin.
Lower even than The Rank Group with a 10.07% net profit margin. We went back to 2019 for them because any results post 2019 would be hugely impacted by the covid lockdown and not give a true indication of usual market conditions. Rank operate Grosvenor Casino and Mecca Bingo which are obviously real world venues, so this is where the majority of their income is from.