Big Macau To Go
Can Las Vegas be franchised across Asia?Sunday, 15 November 2009
Anyone wishing to predict the future direction of casino market liberalisation in Asia may be tempted to base his or her analysis on the Macau model.
The Macau model involved a momentous and industry-changing decision to match the financial deal making capability, real estate building skills and venue management ability of the Las Vegas gaming operators to the adrenalin and passion of Asian players.
Australians and New Zealanders also had something to do with Macau's 'Big Bang'. That's in terms of heavy investment from Crown Ltd's partnership with Hong Kong-listed Melco and in terms of the many executives recruited from that part of the world to help set up the new look gaming resorts.
We shouldn't fool ourselves, however, that on the infrastructure front it's anything other than Las Vegas-style financing and Las Vegas-style packaging that has dominated post-liberalisation Macau. If imitation is the sincerest form of flattery, then Sheldon Adelson, Steve Wynn and Terry Lanni should be gratified that their injection of Nevada glamour to the Macau market helped push the incumbent Dr Stanley Ho to up the game of his casino holding company, SJM. He did that by opening new venues and upgrading others, albeit at significantly lower capital cost and with a product offer very tightly focused on Chinese tastes. US standards of product in terms of service and facilities have also proved an inspiration for Galaxy Entertainment Group, the Hong Kong listed company that also joined the liberalisation party.
So when Singapore announced in 2005 that it too was seeking partners with international experience for its two integrated gaming resorts, the template for Asian casino liberalisation looked to be clearly established.
Add to that the fact officials in Taiwan looking at liberalisation have gone on record expressing admiration for Singapore’s approach, then the recipe for success seems even more clear cut. Get a foreign management partner, get foreign money and invite the world to play. Also, let’s not forget MGM MIRAGE’s decision to lend its name to the Ho Tram Strip, the gaming resort in Vietnam planned by Asian Coast Development Ltd. Case closed? Perhaps not.
Look more closely at key Asian markets and the Las Vegas-style liberalisation template looks less monolithic. Macau itself is not necessarily the best example from which to draw wider conclusions. Its economy and story is an exception, rather than a rule in the history of Asian gambling. Even though visitors are often surprised to learn that as much as 30% of Macau's GDP actually comes from outside the casino and tourism industry, no one is in any doubt that without the financial power of its gaming market, Macau would die in its feet overnight. It has been a centre for gambling since at least the mid-19th century, and probably earlier. In that sense, Dr Stanley Ho's acquisition of the first formal gaming monopoly in 1962 was pushing at an open door, rather than some kind of major cultural and political breakthrough in the social acceptance of casino gaming in Asia.
Even allowing for the caveat of oligopoly (i.e., a state monopoly divvied up between a number of different players) which is what Macau post-liberalisation really is, Macau has some distinct elements of exceptionalism. So far, Macau and the Philippines are the only jurisdictions in Asia to have truly liberalised their casino markets in the sense that anyone over the legal minimum age (18 in Macau and 21 in the Philippines), from anywhere in the world, can come to play on the same market access terms (subject to them not being on any watch list as a banned person). It may be no accident that the two most free trade-loving jurisdictions in the region were also for hundreds of years major trading centres for colonial powers. No one should confuse the willingness of countries such as South Korea and Japan to engage with the world through exports as evidence they want to operate their domestic markets on anything other than a restricted-access basis if they can get away with it.
Even free market Singapore has imposed a barrier to entry to the gaming floors of its two resorts for its own citizens, in the form of either a daily or a yearly membership fee. The entrance fee for locals is S$100 (US$71) per 24-hour visit or an annual fee of S$2,000 (US$1,435).
In South Korea, only one of the country’s 17 casinos is open to locals, and that's in Kangwon province, a tedious and torturous three and a half hour, 150-mile road journey to the east of the national capital, Seoul. Taiwan may like Singapore's liberalisation model, but it has arguably hamstrung its own casino project from the beginning by insisting it must be located on a windswept outer island. Such an arm's length approach—apparently designed to make it harder for Taiwan citizens to spend their children's lunch money on baccarat—is likely to succeed only in making the Taiwan market dependent on customers from Mainland China. How Beijing will react to competition for its own gaming haven of Macau is hard to predict. In Vietnam and Cambodia, only foreigners and locals with foreign passports are allowed to use the casinos.
The message in this supposedly liberalising Asian market remains clear: "We support casino gambling, as long as someone else's citizens are the ones losing the money.' 'Liberalisation' of a jurisdiction's casino licensing system without an accompanying liberalisation of market access is a paper tiger. It artificially limits the size of the market and makes it dependent on foreign trade. That foreign trade in turn is vulnerable to factors beyond the casino operator's control, such as cross-border trade and political disputes and even cross-border military clashes. Despite the huge progress made economically in Asia in the last decade, the flaring of historical tensions between nations occasionally gives the region a distinctly Third World feel. Look what happened to trade at some of Cambodia's border casinos after Cambodian and Thai troops started shooting at each other last year.
Flicking the switch
Even Macau's free market access system is subject to external pressures. Officials in Mainland China have shown on repeated occasions a willingness to intervene in the market by controlling the flow of tourists coming from China under the Individual Visit Scheme. The rationale appears to be a desire to stop the Macau market growing too quickly and getting too out of balance with the economy of neighbouring Guangdong province—the part of China currently providing the bulk of Macau's Mainland visitors.
Supporters of the gradualist theory argue access restrictions are just a phase—the equivalent of industry growing pains. They point out that gaming liberalisation is essentially a one-way street with a taxation gold mine at the end of it. Market access gatekeepers are normally governments either at national or state level. And once they start driving down that one-way street and catch sight of the gold mine, they have no inclination to do a U-turn. Gradualists argue, therefore, that market access controls are a necessary hypocrisy; a price to pay politically to win the acceptance of key interest groups such as religious leaders and community leaders. Something similar happened in the United States, where at one time many individual states considered horse race betting a daring break with puritan tradition. Then they allowed off-track betting, and then they allowed a few slot machines. And now, bingo! Nineteen states and one territory at last count directly licence commercial casino gaming and even more states indirectly play host to Tribal gaming within their state boundaries.
A number of commentators believe that in a few years, when Singapore has had time to study the economic impact of domestic casino resorts on the city state's horse racing and lottery monopoly, and the social impact of casino gambling, it will drop its policy of an entry fee for locals. That may happen, but let's not forget that Singapore has already effectively loaded the dice of its casino market by imposing strict limits on the amount of floor space allocated to gaming in the resorts (five percent). An earlier plan to restrict the amount of revenue that could be drawn from gambling to 50% of total revenue was dropped as impractical.
Some analysts initially questioned the wisdom of LVS and Genting spending US$10 billion between them in a market with those kinds of restrictions. While open market access has been a huge factor in the decision of foreign investors to pour billions of dollars into the Macau market, it is not the only factor to be considered. The level of political risk in a market is also important. In that sense, Singapore probably scores better than any other Asian market for its transparency and low levels of risk. Getting into Singapore is tough, but once you're in, Singapore gives every indication it will play fair with its investment partners.
Here's what Wong Kan Seng, Singapore's Minister of Home Affairs, said when introducing Singapore's casino regulatory law to parliament in 2006: "Through this Casino Control Bill, the Government is committed to a number of measures to provide greater certainty and support to investors of our integrated resorts. This is because the integrated resorts require heavy investments. We want them to succeed after the investors have committed to spend billions of dollars on the projects. For instance, the casino tax rates will remain unchanged for 15 years. The two casino operators will also enjoy an exclusivity period of 10 years. During this period, no new casinos will be allowed. The lease of the land on which the integrated resorts will be sited will be for 60 years and they will be allowed to operate a casino for 30 years, subject to the suitability of the casino operators to run them." Contrast this with the macro and micro economic tinkering to the Macau market emanating from across the border in Mainland China.
In South Korea, Asia's second biggest casino market by betting volume, gaming operators were originally incorporated as state owned enterprises, with all the potential for bureaucracy and inefficiency that such a system usually entails. In recent years, however, there has been a movement toward greater market efficiency via privatisation or part privatisation. Grand Korea Leisure, an operator of two casinos in the capital Seoul and one in Busan under the Seven Luck brand, plans to sell off some of its equity soon on the Korean stock exchange. The government is expected, however, to retain a 51% holding. Without the opportunity for foreign investors to take majority ownership and without the opening up of all the casinos to domestic players, the appetite of outside investors for a move into the Korean market is probably limited.
In the Philippines, although market access is open from the players' perspective, market transparency is arguably limited. The Philippine Amusement and Gaming Corporation (PAGCOR) is an operator-cum-regulator tasked with remitting a certain amount of cash every year to central government, but not subject to the market disciplines imposed by private shareholders seeking efficient capital management. That, in itself, is arguably a recipe for trouble. Added to that, public policy on gaming tends to suffer from a lack of continuity, as the top people in PAGCOR are political appointees of the country's president, and the faces change every time there's a change of tenant at the presidential palace.
In Cambodia, there's a twin track approach to market liberalisation. A casino monopoly has been granted within a 200 kilometre radius of the capital Phnom Penh, and a sole concession has been reserved for a project near Siem Reap. But in border towns such as Bavet, serving the Vietnam market, casino licences appear to have been issued on a 'who pays wins' basis. A similar free-for-all has been seen in slot club licensing, with club operators being allowed on occasion to set up what in effect are quasi-casinos next door to the full service concession.
In Vietnam, MGM MIRAGE may be bringing 'brand equity' to the Ho Tram project, but it doesn't appear to be bringing hard cash. Money talks and unless MGM MIRAGE can use its name as leverage to help put a funding package together, it won’t have much clout with the Vietnamese government, nor much ability to protect its brand identity from creeping 'localisation' in terms of things like quality of customer service.
The message from Asia then seems clear. Feel free to use the term 'market liberalisation' in relation to gaming. Feel free to talk about it in terms of an historical trend. Don't assume, though, that Las Vegas-style gaming will spread around the region on a franchise basis in the manner of McDonald's. There are too many exceptions to too many rules for that to happen any time soon.