What Stays in Vegas Read online

  Loveman found it hard to abandon the university lectern in the style of his presentations. One member of the Harrah’s board of directors was Walter Salmon. A former HBS student who had earned a master’s degree and a PhD, Salmon had joined the faculty there in 1956. In a long career, he had served on many corporate boards as an expert on consumer marketing. Even years later, he remembered Loveman’s premiere performance before the board. The chief operating officer treated the group—his ultimate bosses—as though commanding a class at his beck and call. “If you asked him a question, you got an academic response,” Salmon says, implying “that the board member was one step above an idiot, or one step below an idiot.”6

  Several board members approached Satre after Loveman’s debut meeting to demand that Satre have a stern talk with his protégé. “He almost got fired,” says Satre.7 “The reaction was that Gary was being too professor-like with the board and lecturing them in his first presentation, and it outraged a couple of board members.” The board members were not the first to grumble about Loveman’s arrival. At the Harrah’s annual meeting, one shareholder complained about the business school outsider. Some employees wrote the CEO privately, asking why he had turned to someone without any casino experience.

  Loveman realized he had a lot to learn. In the corporate world, he had to not only possess insights but implement them. Early on he did not always appreciate how much work it took to turn a plan into reality: “I had never managed anything. I really had not had any managerial duties. Oh, there was all sorts of stumbling. I was good at certain things and challenged in others.”

  Loveman pushed his managers hard. He welcomed differences of opinion, but his wrath came down on those who did not embrace his data-focused approach. David Norton, a former senior vice president who was one of Harrah’s top data officials, remembers Loveman growing irritated if property managers were losing money and not focusing sufficiently on data to solve the problem. “He’d pound his fist on the table and say, ‘What the hell is going on here!’” Norton recalled. “If we couldn’t get the bottom-up compliance, his force of personality would really make people feel badly for not coming through.”

  Gary Loveman at Caesars Palace in Las Vegas.

  Source: Caesars Entertainment.

  Some years after Harrah’s bought the Las Vegas Rio Hotel and Casino for $518 million in 1998, Loveman grew displeased with the property’s financial results.8 He met with the hotel’s general manager and some top aides, who gave presentations on their operations.

  “Don’t we need to be thinking about this business differently?” Loveman asked.

  An hour into the meeting, he had had enough. “Guys, look, I haven’t heard anything that makes any sense here. The problem is ill defined, the analytics is completely absent, and all you guys are talking about is sort of magical, you know, fairy dust stuff.”

  The hotel casino’s manager was quite proud of the style and flair of the property, which had been designed by a legendary Strip architect. He felt his hotel was something special. He puffed up his chest a bit and set his eyes on his new boss: “Gary, you just don’t understand: we’re the Rio, you know, and all we’ve got to do is get the panache back in the Rio.”

  A look of stunned disbelief seized Loveman’s face. Within a few weeks the Rio’s longtime general manager was gone.9

  Loveman learned from his off-pitch initial board presentation and changed his tone. The former academic diffused tensions with biting humor, including self-deprecating jokes, and slowly won over members of the team. He communicated effectively and clearly, and he wowed people with his knowledge. But he never became an easygoing, backslapping kind of executive. He was not the type to ask random visitors about the wife and kids or wander through hotel lobbies to greet guests. “I don’t think there are very many customers who ever said, ‘Gee, I really love Gary Loveman,’” says Satre.

  In his heart, Loveman remained simply a numbers guy, a math nerd. He had traded the classroom for the corporate boardroom and was earning money beyond the wildest dreams of most academics. Yet he still thought like a professor. Following the logic of his famous 1994 article, he focused on building long-term customer loyalty. Nothing spelled success better than customers coming through Harrah’s doors again and again.

  The Elevator Pitch

  At every turn, Loveman sought to use data, whether about an individual client or a large group of clients, to gain an edge. One day in the early 2000s, inside a wood-paneled elevator at Harrah’s Hotel and Casino on Las Vegas’s fabled Strip, an older couple were grumbling to each other. They liked playing slot machines, but their luck had apparently run out.

  “I hate Las Vegas,” the man said to the woman.

  Loveman, who happened to be in the elevator with them, grew curious and decided to strike up a conversation. He learned that the couple were avid gamblers from Philadelphia who usually played at Harrah’s in Atlantic City. When he asked them why they hated Las Vegas, the man answered, “The slot machines here are so goddamn tight! We never win any money!”

  As Loveman replayed the Philadelphia couple’s conversation in his mind, he experienced a “eureka” moment. When it came to slot machine odds, the couple had no idea what they were talking about. In fact, no gambler could tell if a slot machine was loose or tight—with especially good or poor odds—and data could prove his point.

  Exterior of Harrah’s Las Vegas Hotel and Casino in Las Vegas. Source: Author photo.

  Loveman knew Harrah’s slot machines in Las Vegas were looser than those at its property in Atlantic City, returning $95 of every $100 plunked into them. In Atlantic City the company had the machines return just $93, giving them what the industry calls a slot hold percentage of 7. The wheels of his business mind began to spin. Slot machines make more money than anything else in casinos and do not require the extensive costs of table games to operate. Nothing was more important to the bottom line.10 From the Philadelphia couple’s experience, Loveman concluded that a customer has very little capacity to tell the difference in holds from one machine to another. Increasing the hold, even by a tiny amount, might send profits through the roof.

  Soon after the exchange with the couple in the elevator, Loveman brought the idea to Harrah’s executives. Some on the team resisted. At the time, conventional wisdom held that especially generous slot machines would lure customers into casinos and earn the company more money. Harrah’s had even kicked around the idea of launching an ad campaign highlighting the generosity of its slot machines. No one wanted to change tack just because of a rookie executive’s chance conversation in an elevator. Loveman needed hard evidence. He loved such a challenge. The idea of developing a way to demonstrate conclusively that the public couldn’t perceive the worsened odds intrigued him. A puzzle like this reminded him of his previous life as an academic.

  Loveman turned to MIT, the university famed for excellence in math, science, and engineering, to solve the puzzle. He asked some math experts there to test how many times a gambler would have to play the slots to detect any difference in hold over a cycle of millions of spins. The experiment confirmed Loveman’s supposition: it would take many, many thousands of times to notice any difference. The math was clear. Still, he wanted to see if gamblers had some special sensory ability to find the better-paying machines. The former professor programmed two sets of slot machines side by side on a casino floor. One kept a 5 percent hold, the other a less generous 7 percent. Casino officials monitored how many people played the different machines, watching closely to see if they would swarm the machines with better odds. Gamblers played the same on each set. Nobody noticed any difference.

  Since the chance elevator ride, Harrah’s, the world’s largest casino company—it renamed itself Caesars Entertainment in 2010—has kept a few pennies more on each dollar plunked into its slot machines.11 It now sets its hold rates at about 8 percent in Las Vegas, 9 percent in Atlantic City, and 10 percent in some regional markets. Some rivals offer better odds.12 But t
he change has brought Caesars hundreds of millions of dollars, maybe even billions in extra revenue.13 Data had disproved instinct. “Every bit of intuition in the old-time casino business was that we couldn’t do that,” Loveman says. “And it really was driven by the fact that most people didn’t ever understand the difference between the mean of a distribution and what people were experiencing across the distribution.”14

  The former business school professor and his company have not only led the way in tightening the odds of slot machines, but they have bet Caesars’ future on harvesting personal data rather than developing the fanciest properties. Loveman has watched as Las Vegas rivals continue to outshine Caesars Entertainment by opening ever more glamorous new casino hotels. The company’s flagship Las Vegas hotel, Caesars Palace, dates back nearly half a century. Back then, Frank Sinatra and his Rat Pack friends could also visit the Stardust, Aladdin, Sahara, or Sands hotels. Other than Caesars Palace, all those hotels have met the Las Vegas developer’s favored solution for old age: dynamite clearing the way for new construction. Many of the Caesars Entertainment Las Vegas hotel casinos are decades old. Singing gondoliers do not navigate canals in front, as they do at the Venetian, nor do fountains explode in a choreographed dance throughout the day and night, as at the Bellagio.

  Still, every day many thousands of people pour through the always-open doors of Caesars Palace and the company’s other Vegas hotels, such as Harrah’s, the Flamingo, Paris, and Bally’s, just a few of more than fifty properties worldwide. That’s because Caesars have an unrivaled asset that enables them to overcome their other shortcomings: vast amounts of personal data.

  Sometimes, details gathered from individual customers apply to far larger groups. The Philadelphia couple led to Loveman’s insights that work broadly on millions of slot players. In other cases, management may know which small group of high-spenders in southern Florida gamble enough money to deserve a free flight to Las Vegas during the March Madness college basketball tournament. That’s the power of personal data.

  To learn so much about its customers, Caesars followed in the footsteps of the airline industry and set up a loyalty program. By assigning you a number, they can track all of your activities in their establishments, much as American, Delta, and United follow your history of flying with them. If you sign up, which the overwhelming majority of clients do, Caesars record how much you typically wager in a day, to the penny if you play electronic games such as slot machines. They know which games you prefer, what food you like to eat, when you like to visit, and whether you would like standup comedy, ’80s rock concerts, or shows where transvestites lip-sync while pretending to be Cher, Dolly Parton, or Madonna. Your personal file may note if you have a favorite hostess at Caesars Palace, whether you prefer the six-foot-tall comely blonde or the diminutive hostess who speaks Chinese.

  Mastering data analytics, and customer data in particular, has given Caesars an edge in a business where rivals compete fiercely with the same games. Every casino offers the same product: the excitement of gambling, the dream of sudden riches. The roulette ball bounces and the cards snap with the same unpredictability everywhere. Scoffing at the instinctive approach of fellow bosses past and present, Loveman fills his executive suites with math nerds from prestigious colleges. He lays down the law with a simple mantra: “Tell me what you know, not what you think.” And personal data—the minutiae of our likes and proclivities, habits and patterns—lies at the heart of the knowing.

  For the former business school professor, the gaming business has become the ultimate research experiment into consumer behavior. He uses cutting-edge technologies to gather personal details on millions of customers—with their consent, even if few understand all the intricacies of what happens behind the scenes. All of this takes place to tweak visitors’ experiences in such a way as to get them to open their wallets just a little more. Within the walls of their casinos, Caesars record everything they can about tens of millions of people. And in doing so, Loveman, now CEO, has become a modern-day emperor of customer information.

  By prospering on the backs of so much personal information, Caesars have inspired companies across the economy. Everyone wants to learn more about customers in hopes of marketing more successfully. Rivals closely watch to see what Loveman and Caesars will come up with next.

  Patti Hart has unusually good access to the biggest casinos and their top management. She is the CEO of IGT, a leading slot machine manufacturer, so she talks with everyone. A rare woman in the macho world of casino management, she has a keen sense of industry sentiment. Over the years she has developed great respect for Loveman’s leading role. “He sets the pace for everyone else, and he doesn’t always appreciate the fact that everyone else watches him and sets their cadence based on what he is doing. And I think that really is a very tough position to be in, one that he respects and one in which he performs amazingly well,” she says. “Gary is not afraid to live in a constantly innovative world. He will even innovate his own idea. I think that really sets him apart from lots of leaders that I work with in every business. Gary is a person that never sees an end in sight to the innovation.”

  Over the years, Loveman’s rivals not only started collecting data about what clients do in their casinos. Some have also turned to outside data brokers to buy ever more personal information. Data brokers learn where customers have lived throughout their lives, whom they marry and divorce, and how many children they have. Data dossiers detail hobbies, economic situation, and consumption habits. Companies across the economy regularly buy and sell information about us all, a trade largely hidden from those whose data are contained in the dossiers.

  Even if you never set foot in a casino, companies gather data about you at every turn. If you buy a fishing pole online, the details may be recorded to market to you in the future. Depending on its privacy policies, your gym could let others know you are interested in fitness. Magazine subscribers will often receive offers in the mail and email from companies to whom the publisher has sold their names. Whether you are a gambler or not, the proliferation of personal data affects your life at every turn. Some consumers complain that companies invade their privacy by collecting so much about them. Others like advertising and offers targeted to their interests. In any case, personal data often work in targeting products to the right people, whether by conventional ads or via the Internet. So the trade in such information has increased dramatically in recent years.

  Caesars had always shunned outside personal data. The company had focused only on information that its customers gave voluntarily by joining the Total Rewards loyalty program. But continuing economic woes lasting many years after the financial crisis of 2008, and billions of dollars of debt, changed the landscape in Las Vegas. Some of the Caesars data whiz executives wondered if they should do things differently and embrace some of this outside torrent of information about clients. Many businesses were wondering the same thing for their own enterprises.

  3

  Loyalty

  Slot Machine Points

  Casinos have long tried to make guests feel special so that they keep coming back. An episode of The Twilight Zone that aired in 1960 portrays such hospitality. The city was growing in popular imagination. That was the year the Rat Pack—Frank Sinatra, Dean Martin, Sammy Davis Jr., and others—filmed the original Ocean’s Eleven and entertained at the Sands Hotel. The Twilight Zone episode, written by Rod Serling, opens with an elderly couple arriving at a Las Vegas casino after winning an all-expenses-paid weekend. A well-groomed casino official walks over to greet the couple and asks if their room is comfortable and if there is anything he can do.

  “You know, you make us feel . . . important,” the wife gushes.

  “You are important, Mrs. Gibbs. It isn’t every day that we entertain celebrated contest winners.”

  A wary photographer brought along to capture the moment for the hometown paper can’t help but interject: “No, not every day. Maybe every other day.”

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p; Ever since the days of Bugsy Siegel, casinos have pampered high rollers and special guests, rewarding them with free rooms, food, drinks, and other perks. Dealers kept manual records on gamblers. But without computers and precise calculations, many managers embraced a seat-of-the-pants instinctual style.

  Benny Binion, the legendary Texan owner of the Horseshoe, a pioneering Vegas casino that opened in 1951, was famous for making the rounds and chatting with guests. He’d ask their names and where they were from. He might gab about anything that popped into his head. If he decided he liked them, or if he was just feeling particularly generous, he’d take out a slip of paper and authorize a free meal. He would scribble out something like “Feed James lunch,” and sign an ornate B at the bottom. “He didn’t know if you were playing nickels or dollars,” says Eddie LaRue, who moved to Las Vegas in 1962 and fondly remembers the Texan.

  Binion drew people into his casino with services such as his paycheck wheel, where customers would cash their paychecks and get a free spin on a wheel of fortune, hoping to win a prize that might be something as modest as a glass of beer. Once their pockets were filled with money, some stayed at the bar or placed a few bets before heading home. The casino owner described his philosophy to a fresh-faced newcomer: “Listen, boy. People hate to be fooled. If you lie to them, they will hate you forever. But people love a chance to fool themselves. And I give it to them.”1 In the early days of Las Vegas, standard accounting may have been a less exact science, and some casinos skimmed money from the till to line the managers’ pockets. In the 1950s Binion, not able to fool the government, spent years in jail after a conviction on income tax evasion.