The Big Squeeze

What a difference a deal makes. After Crown Macau introduced a revolutionary junket arrangement—featuring a steeply higher commission rate—in December 2007, it has risen from an also-ran to clinch the largest share of the Macau VIP gaming market. Other operators look set to follow Crown’s lead, even though it is still not clear that the volume gains from raising commissions will make up for the resulting decline in margins

Towards the end of Stanley Ho’s 40-year casino operating monopoly in Macau, the average commission rate on VIP rolling chip sales in Macau was 0.7%. As new operators started vying for a slice of the VIP pie, the rate had crept up to an average of about 1% by 2007.

Melco PBL Entertainment (Macau) Ltd then decided to leapfrog the rest of the field by offering junket aggregator AMA International a staggering 1.35% commission rate on rolling chip sales at the high-end Crown Macau. Furthermore, Melco PBL gave AMA the further enticement of daily rather than the usual monthly settlement of that commission.

The arrangement went into effect in December 2007 after Crown Macau’s gaming space was reconfigured and AMA and its junket collaborators moved in. There is more to the arrangement than just an escalation of the junket commission war, however. The deal empowers AMA to drive greater VIP gaming volume at Crown. Through a convoluted business relationship, Hong Kong-listed A-Max Holdings receives 80% of AMA’s profits (but is technically only an “associate” company of AMA). A-Max uses its stockmarket listing to raise cash, which AMA then uses to buy VIP rolling chips in bulk from the casinos at preferential rates. AMA passes on some of the savings to its nine junket collaborators, who obviously found it a good deal as they all agreed to bring their clients exclusively to Crown.

Melco PBL must have reasoned that the increase in VIP gaming volume generated by its deal with AMA would more than make up for the inevitable erosion of its profit margin. AMA also boosts volume by extending credit to its junket partners, who in turn can extend more credit to the VIP gamblers they bring to Crown.

The rolling chip commission program—using "non-negotiable" or "dead" chips, which junkets are given a commission on when their clients purchase them to play with—was actually pioneered in the mid-80s in order to reward junket operators not only for bringing their clients to a particular casino, but also for extending credit to those clients and taking on the sometimes troublesome task of enforcing the debts, since the Macau government only made it legal for casinos to extend credit in 2004.

Whereas luxury is the key defining characteristic of VIP areas in casinos in the US and Europe, the main feature of Macau VIP Rooms is the provision of credit to players, especially those from mainland China who are unable to take large sums of cash out of their home country. The arrival of credit is believed to have multiplied gaming revenue in Macau by a factor of five times or more.

Taking the VIP Crown

The AMA deal propelled Crown’s VIP gaming revenue and market share skywards. VIP baccarat accounted for 69.7% of the city’s total casino revenue in the first quarter of this year, and by February, Crown Macau had secured a 21% share of that market—the highest share of any casino in the city.