An old adage in gambling is that “the house always wins”. No matter what game you’re playing the casino will be making money off it.
But exactly how do online casinos make money?
Revenue Models Of Online Casinos
Let’s start by looking at the revenue sources an online casino has:
House edge is the amount a casino is expected to profit from each bet made on a particular game.
For example, if a player bets $100 on red playing roulette there are 18 red slots, 18 black slots, and 1 green slot. 18/37 times the bet will win, netting the player $100. However, 19/37 times the bet will lose, meaning the player loses their $100 bet.
To figure out the expected value of making a bet we use this equation: EV = ($ win x probability) + ($ loss x probability)
Plugging in that equation with our numbers it looks like this EV = ($100 x 18/37) + (-$100 x 19/37)
EV = ($48.65) + ($51.35)
EV = -$2.70
We can see that the expected value of making this $100 bet is -$2.70, which means that the house edge in this bet is 2.70%. That 2.70% is the profit casinos make in a day.
This equation can be used to figure out the house edge in any casino game and gives you an idea of which games are the best to play. Not all casino games have the same house edge and not all bets in the same game have the same house edge. Here are the lowest possible house edges for the most popular casino games (assuming no advantage play):
- Blackjack house edge – 0.5%
- Baccarat house edge – 1.06%
- Craps house edge – 1.36%
- European Roulette (single zero) house edge – 2.70%
- American Roulette (double zero) house edge – 5.26%
While these edges don’t seem particularly big, over the long run they really add up. Take our roulette example, from a $100 bet their expected value is $2.70. Say the total amount of red/black bets made on roulette for a day is $1,000,000 – their expected value is $27,000. That’s just for one bet type of one game!
Another way the casino can make money is by hosting a poker game. When a casino hosts a poker game they charge a fee for doing so and this fee is called the rake.
The fee can be taken in different ways depending on the game type being played. In cash games, they will either take a small percentage of each pot played or will charge the players a certain amount of money per half hour if they want to keep playing. Rakes are similar to vigs in the sports betting market, which is a cut of a wager. Like how sportsbook operators use vigs to make money, poker operators profit from rakes.
A common rake structure you’ll see is 5% capped at $7. This means that when a hand of poker sees the flop, the casino will rake 5% of the total pot, with a maximum of $7 being taken from one pot.
For example, if a $70 pot is played in this rake structure, the casino will take 5% of it, which is $3.50. However, if a $700 pot is played in this rake structure, then 5% of it would be $35, which is above the cap, so the casino only takes $7.
In tournaments, they will keep a percentage of the advertised buy-in as the rake and add the rest to the prize pool.
For example, if the tournament buy-in is $100, it will usually be advertised as $85+$15 – meaning that $15 will be taken as a rake for hosting the game and $85 will be added to the prize pool that the players can win.
Again, these numbers might not seem very big but if 500 players enter that $100 tournament the casino is taking $7,500 in rake!
How Online Casinos Keep Making Money
Given that we now know that the casino will always win in the long run if we play their games, how do they get us to keep playing?
Free Online Slots
One way they do it is by making some of their games, such as slots, free to play. Now, you can’t win money from these free-to-play games but the hope of the online casino is that you hit a “jackpot” on this game and think to yourself “man if only this was for real money”, which then tempts you into playing slots with real money.
It’s a lot easier to burn through fake money than it is real money, and it’s quite common for players to not notice their losses when they’re playing for fun and only think of the “jackpot” they won. By the time they start to play for real money, they quickly realize how many spins they had to get through before they got their jackpot.
Online Casino Bonuses
Another way casinos draw players in is by offering enticing bonuses. Offers such as bet $10 get $50 free, or wager $20 and get 100 free spins, that on the surface look too good to be true. Unfortunately, it often is.
While these bonuses seem appealing, there are terms and conditions that don’t make them quite as profitable as they seem. They often have a “wagering requirement” attached to them, meaning you can’t just deposit your $10 and withdraw $50 – you have to play through the “free” money they give you before you can take it. A lot of times these wagering requirements can even be as high as 40x or 100x your bonus!
Meaning that if you get your $50 free after betting $10, you’re required to play through at least $2000 before that money is available to withdraw. Thanks to this incredibly high requirement, bonuses are powerful promotional tools that encourage patrons to spend money on their casino games.
Online Casino Affiliate Program
Affiliate programs work in a similar way to the bonus offers but instead of the casino running the promotions, they get players to do it for them. They will give the player a special offer on a bet or improved odds on a certain line and get them to encourage their followers to sign up to take advantage of it. One example is the Playamo affiliate program that pays its partners every 1st of the month.
The casino increases its revenue as it gets more players to sign up and the affiliate wins as they get a cut of the revenue the casino makes from the players that signed up. Even the players win to a degree as they get to take advantage of a special offer.
Expenses of Online Casinos
While it seems like online casinos are like a license to print money, they do incur a good amount of expenses.
In order for an online casino to be reputable and offer real money games in certain jurisdictions, they need to be licensed. These licenses aren’t cheap either, and the more reputable a license you want, the higher the cost will be.
For example, getting a license in Gibraltar (one of the more reputable gambling commissions) will set an online casino back between $30,000 and $70,000 depending on the company type and structure. This license is good for five years and also requires an annual extending cost of $2,800 – not the kind of thing you can start up from your bedroom!
The website an online casino operates from is the equivalent of a storefront. A slick, eye-catching site will draw players in and convince them that this is the right site to spend their money, whereas a dodgy, half-finished site will immediately make players click off and find another.
There are a lot of costs that go into setting up a site as they’ve got the design, front-end development, backend development, software integration, and web hosting fees to worry about. The online casino wants their site to look, the more it costs them – but they consider it a worthwhile investment.
As well as developing and hosting a website, the online casino needs to think about its software platforms. They need to be able to host a wide range of games in order to entice players, they need to look appealing to play on for long periods of time and they need to be able to accept various payment methods.
Some companies will design their software from scratch, some will buy the framework of the software and then add their themes on top, and others will buy what’s called “turn-key” software which is ready to deploy immediately.
The choice that online casinos make in this regard will have a big impact on the cost but it also impacts how much they’re able to change the software.
While it seems like a lot of these online casinos run themselves once they’re set up, they require a large amount of manpower to keep ticking over. They need to have software developers on hand in case there are any major bugs/glitches with the site, technical support to assist players if they have any queries, marketers, management, accountants, and many more!
Some of these jobs are highly skilled and require large salaries to attract the best employees, and if they want to become one of the most popular sites they can’t afford to skimp in any of these areas.
The amount that an online casino will outlay in taxes depends on the jurisdiction it operates from. Different countries have different attitudes to gambling tax and corporation tax and that difference can add up to tens of millions of dollars for an online casino.
For example, the Isle of Man has a very attractive 0% corporation tax rate but will require the casino to pay the gambling duty which can be between 0.1-1.5% depending on the gross profit made that year. Malta also has an attractive tax law. Operators who are running their business within this jurisdiction can look forward to a small 5% gaming tax.
However, in the UK, online casinos currently have to pay 21% of their gross profits as tax (as of 1st October 2019).
As you can see this is a huge difference so casino operators need to consider whether it’s worth the added income of the UK market before offering real money games there.
Marketing an online casino may not be as easy as you think. A lot of websites/TV channels refuse to host ads for gambling companies on moral grounds, meaning that a large number of online casinos are forced to compete in a smaller space. Therefore being able to outspend your competition can make a big difference in how recognized your brand name is.
Online casinos can market through regular advertisements, sponsorship of sporting events/teams, or affiliate marketing. The more eyes that they want to see their product, the more it will cost them with some online casinos paying millions of dollars in sponsorship every year.
The answer to the question “how do online casinos make money” is by offering games that give them a small, but discernible edge that is magnified by large volume.