Crown’s competitors are reeling from the rapid fall in their market share—although the loss of share was mitigated by the impressive 73.3% year-on-year jump in VIP baccarat revenue in the first quarter. Still, if they do not respond, there may be little to prevent Crown gobbling up further market share. Although Crown is a swanky property, and boasts some of the nicest rooms in town, its less-than-ideal location and lack of attractions beyond fine dining suggest it has been grabbing greater share primarily as a result of the higher commission rate.

Crown has a mere 216 hotel rooms, but apparently that is enough to support the highest-grossing VIP operation in town. There is a clear divide between high-rollers in Macau and those in Vegas. A baccarat table is pretty much all the entertainment a typical Macau high-roller needs. Around 20% or more of Macau’s casino revenue is currently generated within one of its smallest venues, supporting the view that operators will have a hard time drawing high-rollers without a competitive commission offer.

Thus, the VIP rolling commission offered by the other operators will probably soon follow Melco PBL’s lead. There are also plans to expand VIP gaming facilities at most properties. Galaxy Entertainment Group Ltd announced it was planning a new “Jumbo sized” VIP facility, which will add a further 100 plus VIP tables at its flagship StarWorld property. To put that expansion in perspective, StarWorld currently has a mere 69 VIP tables.

The coming widespread adoption of higher rolling commissions and expanded VIP facilities will probably result in growth of the VIP market continue to outstrip that of the mass market. When Sands Macao opened in May 2004, becoming the first foreign operated casino in the city, many predicted the mass market would rise steadily to overtake the hitherto dominant VIP market, seeing initial confirmation of their view when VIP baccarat revenue declined 3.1% in 2005 following Beijing’s crackdown on Chinese government officials and heads of state owned enterprises gambling in Macau, while the mass market soared 48.2%.

Since then, however, growth of VIP revenue has outstripped that of the mass market by a steadily widening margin, with VIP baccarat’s share of total casino revenue rising from 62.7% in 2005 to 67.2% in 2007. It further spiked to 69.7% in the first quarter of 2008.

Operators seeking to raise their commission rates claim the strong growth of VIP gaming revenue in the first quarter of 2008 was driven primarily by Crown’s higher commission rate, but another possibility is that it is merely a continuation of the steady rise of the VIP market since 2006. VIP baccarat revenue increased 27.4% year-on-year in 2006 and 51.6% in 2007, while the mass market grew 15.5% and 37.4% over the respective periods.

Skinny bottoms ahead?

As with any price war, rising commissions could easily lead to losses. It could behove the other operators to wait until Melco PBL releases its Q1 2008 results, due later this month, and ascertain how the AMA deal has affected Crown’s bottom line, before they commit to aggressive commission rate hikes and expansion of VIP gaming capacity.

The likely impact on Crown’s margin can be roughly estimated. The theoretical house edge on VIP baccarat is 2.52%, but most operators work on higher win rate assumptions, as most players do not bet optimally (the optimal strategy is to simply bet banker on every hand).