Scientific Game

Golden Rules

Our beginner’s guide to the complex relationship between casinos, junkets and VIP players in Asia

Monday, 01 November 2010 16:07
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If Macau is the engine of global casino gaming, then VIP play—specifically VIP baccarat—is the oil that keeps that engine turning. If that metaphor sounds too analogue for our digital age, then Macau VIP gaming can be seen instead as the processor powering the fancy new smart phone that is 21st century Macau.

The VIP gross in Macau was already stratospheric even in recession-hit 2009. It managed to rise 57% year-on-year in the third quarter of 2010 to a record MOP34.05 billion (US$4.26 billion), from MOP21.74 billion in the same period of last year, according to the Gaming Coordination and Inspection Bureau (DICJ), the territory’s casino regulator.

The term ‘casino junket’ is familiar to most casino professionals around the world and also to the general public, but it means very different things to different people. In Macau in particular, it refers essentially to those businesses that recruit VIP players from China and Hong Kong via sub agents and then provide gambling credit to those high rollers.

Chinese VIPs are passionate players. During the holiday period following China’s National Day on 1st October, the volume of betting in one high roller room with 20 tables visited by Inside Asian Gaming reached HK$1 billion (US$128 million) in a single day.

Even beyond Macau’s borders, Chinese high rollers are impatient for more action at baccarat—known universally to Chinese people as ‘the fair game’ because of its low house advantage.

Some Chinese VIP players are so enthusiastic about baccarat that they will install their whole family in a suite aboard one of the casino cruise ships sailing nightly out of Hong Kong, says an industry insider. They will even set up part of that suite as an office so they can conduct their business afloat. That way they can visit a casino every night of the week for weeks on end without having to go to the time and trouble of getting a ferry or helicopter to Macau. Most of these players also attend the high roller rooms in Macau.

 

Kaboom!

Is Macau’s runaway VIP growth a bubble or a trend for years to come?

Can Macau’s VIP boom go on indefinitely? The number of Chinese people qualifying as rich enough to play in those often gilded and finely upholstered casino rooms—usually located well away from the bustle of the mass gaming floor—is certainly rising sharply.

Rupert Hoogewerf founded the Hurun Rich List—a cross between a league table of publicly documented wealth for mainland China and a cat burglars’ to-do list—in 1999. In its 2010 edition, it names 1,363 individuals with personal wealth of at least RMB1 billion (US$150 million). That’s a 36% rise on 2009, when there were 1,000 people qualifying. In the year 2000, there were just 24, according to Hurun.

Perhaps even more significant for Macau is the fact that Hurun identifies Shenzhen in Guangdong province, just across the border from Hong Kong and Macau, as one of the Chinese cities (along with Beijing and Shanghai) where high net worth people are most likely to live. That suggests there are plenty of potential VIP room customers within less than an hour’s chauffeur-driven ride of Macau.

History suggests that in most markets, for every bull run there’s a bear pit waiting just around the corner. The 25 basis point interest rate rise announced by China’s central bank in mid-October seems intended to cool slightly the hotspot areas of the Chinese economy. In particular, it may be designed to combat two issues: i) use of personal bank loans to fund speculation in the property and equities markets, and as a knock-on effect of asset inflation and commodity price hikes; ii) steep rises in the price of basic commodities including food and fuel. But Hong Kong-based analysts seem to think the central bank’s rate rise won’t have a major effect on the Macau gaming market either in terms of junket capital availability or player liquidity.

In China’s new five-year economic plan also announced by the central government in mid-October, the country’s leaders emphasised their commitment to creating economic growth by stimulating internal consumer demand, rather than simply serving the less predictable foreign need for electronic and other mass market goods. That could serve to cushion the Chinese economy from external shocks related to recession or currency volatility in Western countries.

If anything does slow down Macau’s VIP boom, it’s most likely to be politics. In the heady atmosphere surrounding this year’s revenue numbers, some seem to have forgotten the visa restrictions imposed by China on its citizens visiting Macau during 2007 and 2008. Although Macau can be seen as an effect rather than a cause of China’s economic boom, the general thrust of the country’s new five-year plan due to start in 2011 hints that the brakes could be reapplied in Macau if the gaming market continues to heat up. The plan refers to the need to rebalance the level of development seen across the country. At the moment, most of the growth is in the coastal regions such as Macau, Shenzhen and Shanghai, with inland areas often remaining poor—especially in the far west.

For the foreseeable future, however, VIP gambling will remain key to the fortunes of Macau’s six casino concessionaires and sub-concessionaires and their investors. For those readers who have yet to visit Macau, here’s a beginners’ guide to Chinese-style high rolling.

 

The Sweet Life

What is a junket, and how does it work in Macau?

The term junket is defined in the online resource Wikipedia as variously:

• a dessert made of flavoured, sweetened curds, or

• a cheap or free trip to a casino on the guarantee that players will gamble for a specific period of time or wager a specific amount of money, or

• a party, banquet, or outing, or

• a trip or tour, especially one taken by an official at public expense, or

• a trip taken by a person who is the guest of a business or agency seeking favour or patronage.

In the public’s mind, the term ‘casino junket’ tends to be associated with the perks that can accrue to high rollers for their high volume casino play, such as an upgraded suite, or in the most extreme cases, transfer to the casino via private jet.

To industry specialists, the focus tends to be not on these headline-making overheads, but on how much of the house’s win on each VIP player can be kept by the people in the chain that delivers those high rollers to casino VIP rooms in the first place, and in what proportion for each supplier.

US casino operators prefer, where possible, to develop a direct relationship with high rollers via the operator’s own in-house casino hosts, rather than using a licensed middleman outsider. A crucial difference between these independent middlemen agents in say Las Vegas and those in Macau is that that the Macau agents are also allowed by law to oversee the issuance of credit for gambling independent of the casino, thus absorbing credit risk. In the US, only the casinos can legally issue credit for gambling.

Credit issuance by junkets in Macau has come about partly as a result of the challenges of moving money out of the People’s Republic of China. Under rules issued by China’s central bank in 2004, travellers are officially only allowed to take RMB20,000 (just under US$3,000) in or out of the country. Unless a Chinese citizen has an account denominated in foreign currency or in renminbi outside the People’s Republic (only Hong Kong- and Macau-licensed banks currently have the right to  offer RMB accounts outside the PRC), then it’s hard for Macau casinos to create a direct credit relationship with a player. Even if the player meets the criterion of having a relevant bank account outside the PRC, there’s no guarantee that the casino will be able to execute on its credit arrangement if the player defaults—especially if the player disappears back to China, where gambling debts are not legally recognised by the courts. The difficulty of cross-border money transfer is only part of the reason why the current junket system has come about in Macau. Over time, necessity has become the mother of a very Asian invention. Asian players have got into the habit of expecting credit for gambling and can be quite choosy where they get it, frequently shopping around among the sub-agents or among the junkets, looking for the best deal.

To the American casino operator, ‘junket’ also means credit—but in the form of markers issued by the house. It also means rebates from the house to the player on his or her losses. The latter keeps the player locked in to that property and into high stakes play, while addressing to some extent the political and social issue of problem gambling.

Rebates on losses have never been very popular with Asian high rollers. Under the junket commission programme prevailing in Asia, customers receive commission payments based on the amount of turnover generated. There are various ways to look at this concept, but the easiest is to consider it a volume discount. That means Asian junket players get something back from the house regardless of whether they win or lose. If an Asian player happens to be on a losing streak (and inevitably at some point he will be), US-style rebates on losses are hardly going to make him feel more at peace with the world.

The Asian junket commission programme works as follows: Commission (a current government-stipulated maximum of 1.25% in Macau) is paid when junket chips (alternatively known as NN—nonnegotiable or dead chips) are purchased. These junket chips cannot be redeemed for cash—they must be played. When a junket chip is played, all winnings will be given to the player in cash chips. Eventually, the player who started off with a pile of junket chips ends up with a pile of cash chips. The player can then either cash out, or if he wants to continue playing, exchange the cash chips for an equal value of junket chips, earning 1.25% commission once again.

The blended average house advantage on baccarat is around 1.3% (with house advantage on cash play determined by dividing house win by handle). The win rate using NN chips in Asian VIP rooms is calculated according to a slightly different metric: house win divided by NN chip sales (with NN chip sales used as a proxy for turnover). Since the Player and Banker bets on baccarat are close enough to even money wagers, each NN chip has an expected life of just under two bets.

Thus, the win rate on VIP baccarat is a little over twice the house advantage on baccarat. Although casino operators have varying win rate assumptions on VIP baccarat, a generally accepted figure is about 2.75%.

 

Behind Closed Doors

We shed some light on what goes on inside Macau’s gilded VIP rooms, beyond the prying eyes of the main floor public 

 VIP rooms are often mentioned in reports about gaming revenue in Macau, but most people don’t really know how they operate.

The VIP room is essentially a symbiotic and highly specialised marketing operation that exists within a host casino operation, providing a pipeline of high rolling players to the property. Although the table game operations within the rooms are run by the casino operator, all the other action inside is controlled by the VIP room operator (who is either a junket himself and brings his own players to the room, and/or allows one or more other junkets to operate in the room).

The VIP room operation recruits players, provides them credit to play with, then collects all gambling debts, and does so independently of the casino operator, who can disavow knowledge of any questionable methods used to transfer funds or collect debts.

VIP rooms are owned by the casino in which they reside. Independent VIP room operators can either lease out a room at a fixed rental, or be allowed to operate within a room by the casino if they can meet certain turnover targets.

The VIP room usually has its own junket cage or cashier counter, where a set or sets of chips unique to that room are used.

Although the casino operator provides the VIP room with dealers and security personnel, the other staff within the room are generally employed by the VIP room operators. These staff are mostly public relations (PR) hosts (who perform the function of ‘rolling’ chips between the players and the cage, exchanging cash chips for junket chips) and junket cashiers. You can easily tell the VIP room operator’s staff apart from the casino’s staff because the former are usually adorned in strikingly colourful two-piece suits. The PR hosts are predominantly young, good looking Chinese ladies, while the cage is mostly staffed by middle aged ladies. The VIP room managers will be older, and may be either male or female. The junket cage manager is usually a long-serving, loyal and trusted employee, who more often than not has a direct reporting line to the VIP room operator, independent to that of the room manager.

Above the managers sits the general manager or the owner’s representative, who is the primary liaison for all the different junket operators who bring their clients to that particular room.

By contrast, the VIP rooms in casinos in Las Vegas and Australia are a direct extension of the casinos themselves—i.e. all the staff and action within are directly controlled by the casino.

In Macau, VIP rooms deal almost exclusively with junket customers—players who wager sums of money in return for a percentage commission on their turnover. Western-style VIP rooms, on the other hand, are for customers whose play is large enough to qualify them for a higher level of service and comps.

The first and main differentiating feature of a Macau VIP room is the presence of a VIP cage. The main currency in the VIP cage is the junket chips. Depending on how many arrangements the VIP room operator may have, the VIP cage may deal with one of more sets of junket chips. The reason for this is to keep track of the players belonging to either different junket agents or playing under different commission schemes. A single VIP cage may have to deal with several sets of chips—a casino resort owned by Jack Lam in the northern part of the Philippines contained four VIP rooms, which were reported to have 32 different sets of chips.

The other main difference between Macau VIP rooms and their Western equivalents is the prevalence of credit. In Australia, where some states ban casinos from offering credit, the casinos use a mechanism called the cheque cashing facility (CCF). VIP patrons are ‘permitted’ to cash their personal cheques, and the casino will agree to hold those cheques for a certain number of days before presenting them to the bank (usually around five working days). The patron can ‘buy’ or redeem their cheque back at any time prior to that deadline. Some casinos may even require the client to have played and lost some money before this facility is granted.

The credit arrangements within the Macau VIP rooms are more straightforward, where players are simply given a ‘marker,’ which commonly range from hundreds of thousands of Hong Kong dollars to the tens of millions, and at the very highest level, the hundreds of millions (tens of millions of US dollars).

Although commonly known as a credit marker, in some instances, the marker may not actually involve credit at all. It just means that the VIP room is issuing chips without any cash changing hands inside the room. In reality, the cash may have already been transferred to the VIP room operator’s offshore account, and all the VIP cage knows is that the VIP room operator has directed it to issue a certain value of chips to this particular patron.

In most cases, however, credit is involved, and the risk shared by both the VIP room operator and any junket agent involved. A common arrangement sees the junket agent put up a deposit, of say HK$2 million (US$250,000), while the VIP room operator in turn grants a maximum credit facility of HK$4 million to the agent’s players.

The Macau PR host’s main function is to ‘roll’ the chips on behalf of the players. What this means is that they will take the cash chips won by the players to the VIP cage, and exchange them for junket chips, in order to earn the rolling commission. Beyond that, the typical PR host in Macau is a ‘Jill-of-all-trades’, having to perform the duties of a companion, host, waitress and assistant. Macau PR hosts take orders and serve F&B. They may also be required to physically record each bet as it is placed, as well as keep a real-time up-to-date record of the players’ (and house’s) win/loss performance.

Macau PR hosts will even do the scorekeeping for the baccarat outcomes, but most importantly, they are sometimes trained and permitted to advise the customers on which bet to place next.

To the Western-trained mind, gambling is all about statistics and odds, and baccarat is one of those games where the experienced floor manager will tell their underlings that there is no system that will affect the house advantage.

To the Chinese mind, baccarat is about patterns. Therefore, the PR hosts will help record the scores (even though the table may already have an electronic display screen), and should the customer venture a query as to what the next outcome would most probably be, the hosts will be ready with an answer, depending on the pattern they have charted. In the event the customer wins, the host will more than likely get a nice little tip, and should he lose, there are generally no repercussions for the host as it was the customer who asked in the first place.

Whereas the Western-style VIP room is usually a large, single room within a casino housing many tables, Macau casinos typically contain several separate smaller VIP rooms. The Western VIP room caters to a much broader range of customers, some of whom would be labelled as mass hall players in Macau if one was to only consider their average bet per hand.

The Western VIP room is also more like a club lounge than a serious gambling room, and customer loyalty is mostly rewarded with comps in the form of show and event tickets, rooms, meals, etc, rather than the all-important commission programme used to incentivise VIP players in Macau.

While Macau PR hosts provide very individual and attentive service, appealing to the basic needs of ego and recognition, their Western counterparts are arguably more empowered and productive. The hosts in Western VIP rooms usually have to look after all the guests within the room whilst performing a wide range of functions, from manning the reception desk to making limousine bookings for customers. They rarely have the time or inclination to sit down and watch individual customers play each hand.

 

Agents of Fortune

How the VIP marketing system works

As we reported in our September 2008 cover story, ‘The Secret Life of Agents’, the Asian commission system is in practice a marketing scheme based not so much on a pyramid, but more on a water wheel principle. It works from the top down, and from the bottom up. Looking at the top down part first, the play-based commission relationship isn’t directly between the player and the casino. The commission is paid by the casino to the junket and then the junket shares it with the sub-agents and their players. In reality, the player generally gets most of the commission because the junket and the sub-agents want to keep him or her in the fold.

Turning to the ‘bottom up’ part of the VIP commission equation, it’s important to remember that junkets—whether they are big investors effectively consolidating and funding smaller VIP operations under a single branding; or small operations in their own right—rely on a network of sub-agents both to feed players to the VIP rooms and to collect on any player losses.

As we explained in ‘The Secret Life of Agents’, money, in the form of credit, flows downhill from the gaming service provider via a principal agent (the junket). The junket passes that to sub-agents who in turn pass it to their players. The credit then flows back uphill in the form of player bets. Every time the player loses, liquidity flows back into the scheme, as long as the sub-agent system is successful in getting the player to pay up.

The junket takes the bulk of the market risk, because it (via a business partner whose name is on the VIP room licence issued by the Macau government) is the entity that funds the pre-buying of VIP chips from the casinos in order to sell them on to the VIP players. Ultimately, what mitigates risk and reinforces the whole scheme is that agents at the bottom of the pyramid quite literally know where their customers live and what their personal circumstances are. As we reported in our story ‘Tough Love’ in July this year, junkets further insure against bad debt. They typically require a warming up period with new VIP players of up to six months and may ask them for a deposit before granting credit.

Tom Hall, vice chairman of AsianLogic, one of the region’s largest online gaming companies, knows the Asian agent system well. While the system for online gaming agents is not precisely equivalent to that used by the casino VIP trade, it is close enough to be a useful illustration. Mr Hall speaks on the topic at industry conferences, and uses the flow chart below to show how it works.

Mr Hall refers to the principal agent (the online equivalent of the casino junket) as a ‘super master affiliate.’ A series of sub agents (known in this example as master affiliates and affiliates) subdivide and pass down the cash. Each level expects a commission on the cash it passes on, as each layer is taking on a degree of commercial risk. The ‘affiliate’ is the sub agent in direct contact with the players (often known as ‘members’). In the non-VIP gaming market, the members are granted lines of credit typically ranging from US$5,000 downwards. It is not unknown for members themselves to further subdivide their credit allocation into parcels of micro credit for lower income players, again taking a commission for their trouble. With so many people in the chain taking a cut, the agent structure sucks up a good deal of the revenue.

“The agent system is good, but it is very expensive. An online player may give as much as 50% of his win or loss to the person in contact with him, and so back on up. Everyone gets a share,” explains Hwa-Min Hsu, founder of iFaFa, a Philippines-based and -licensed provider of services to the online gaming industry.

 

Network Marketing

How are Macau high rollers recruited within China?

An obvious question is how do these third party betting agents make contact with such potentially lucrative players in the first place? In China—a key source of players for casinos in Macau and overseas—the advertising and marketing of gambling is, after all, illegal.

As Inside Asian Gaming reported in our story ‘Winning Friends and Influencing People’ published in December 2008, they do it in many different ways—some of them through introduction or social networking and some of them through a growing system of VIP clubs.

“You can think of the junket network as the foot soldiers of a multi-level marketing strategy, rather like that you might find for a company selling consumer products such as Amway,” an industry insider told IAG.

“They have thousands and thousands of people in China. In each province and each city, they know all the important people. They know who’s who. They know who are the big factory owners, they know the business people, they know what business they’re in, and by knowing them they have a way to help these ‘customers’ to come to Macau and gamble.

“Because advertising of gambling is clearly prohibited in China, the junkets provide an important network,” he adds.

The source says the network of VIP clubs is growing within Mainland China. They have many of the luxury facilities found on the VIP floors of Macau casinos—with the crucial difference that there are no gaming tables or machines, and no gambling is permitted.

Since that story was written, some junkets have stepped up their VIP marketing effort by issuing stored value cards to players in either China or Macau. Depending on a player’s level of roll, he can be credited electronically with either cash or tokens that can be redeemed for goods and services such as hotels, therapeutic massages or even gifts. It’s another way of locking the players into one particular VIP brand.

 

The Borat Factor

The culture gap that makes it hard for foreign-owned casinos to recruit Chinese VIPs

There are times in Macau when it seems that life might be imitating art. That’s in terms of the occasionally comic levels of cultural misunderstanding that have occurred between the foreign casino operators and their Chinese host community. Just like in the cult comedy film ‘Borat’, the story of an ill-fated trip around America by a fantastically filthy-minded and ill-informed tourist from Kazakhstan, so the relationship between some Macau operators and locals seems almost an exercise in miscommunication.

“The Western operators are very good at building a fancy casino, but they don’t know the Chinese customers. So in Macau they have to rely on the junkets,” says one source. That’s a pretty sweeping statement, but one that seems to be borne out by the experience of the Las Vegas operators in Macau.

Probably the most difficult thing culturally-speaking for the US operators to get to grips with in Macau has been the relative informality of the business relationship between the junkets and sub-agents and their high value players. North American business culture is used to formal contracts and the commoditizing of entertainment and even of consumers themselves. It’s virtually impossible, therefore, to expect executives from that kind of commercial culture either to accept or to be comfortable with the idea of doing business on a handshake.

Deals between Macau casinos and VIP agents and sub agents used to be formalized on scraps of paper in the old days of Dr Ho’s casino monopoly. Sometimes investors were lucky even to get a scrap of paper. On one famous occasion after the ending of the monopoly in 2002, a Hong Kong company engaging in due diligence on plans to buy an interest in a Macau casino junket operator couldn’t even find a paper trail to confirm whether there was a business to buy.

A key point about the handshake business culture found in China is that it relies totally on trust. Anyone breaking that trust can effectively be ostracised by the local business community. In Western corporate culture, anyone wishing to get out of a business commitment typically hands the matter over to lawyers. It then becomes a beauty contest or battle of wills, depending on who’s got the best lawyers or the deepest pockets.

There are certainly examples of the latter approach being used in Macau by Las Vegas casino operators. On several occasions, operators have tried to renegotiate deals with junkets retrospectively when they discovered the arrangement wasn’t as beneficial to the house as they had hoped. Culturally-speaking, as taboos go in Macau VIP gaming, this is up there with patting a Buddhist on the head in Thailand, or a man sitting next to an unrelated female on public transport in a Muslim country.

Las Vegas Sands Corp’s Sands Macao was the first foreign operated casino to open in Macau, in May 2004, and struggled to draw high rollers directly in its first year of operation, before acknowledging the need for junkets and beginning to offer up to 1.2% junket commission. Wynn Macau, which opened in September 2006, started out offering junket chip commission as well, but when confronted by a big loss at the hands of a few lucky players in its first week of operation (and faced with the prospect of having to pay commission on top of the loss), decided unilaterally to switch the basis of its agreements with its in-house junket operators to the profit share model, as used historically by Dr Ho’s SJM. The only problem was that Wynn decided to impose the profit share system retrospectively. One major junket operator (International Club)—whose customers happened during that period to have struck it lucky—was all of a sudden confronted with a share of Wynn Macau’s losses instead of its expected commission. It came as little surprise that International Club abruptly switched its business to Sands Macao and Galaxy Entertainment Group’s StarWorld.

This sudden reversal by Wynn left a lot of experienced casino pundits shocked. The house will sometimes experience a significant loss, but given the odds, the customers will come and give it all back in the long run. That is unless the casino causes the customers to walk away, which means there is no chance of making back the loss. The second cardinal rule Wynn may have broken in the eyes of the Chinese back in 2006 is that you never go back on your agreement. Wynn appeared to do just that when it sought to share its loss retrospectively after developing a sudden dislike for the commission programme.

This brings us to trying to understand the American operators’ viewpoint. The Chinese-owned companies, SJM and Galaxy, are no less focused on the balance sheet than the US gaming businesses. But the American companies are arguably more focused on analysing their business from the balance sheet up, rather than from the customer down. Squeezing ever more hands per hour out of players with the help of say tableside technology is fine, but such  operational efficiencies alone don’t address the cultural and personal needs of players—especially Chinese players with their communal culture, card squeezing and chatter between points. That’s where the ‘software’ of the junkets with their cultural insights is crucial to the Macau high roller trade.

 

The Multiplier

Private side betting in the Macau VIP market

Getting the VIP player to the table is half the battle. The other half is getting him to spend big, and doing so in such a way that everyone—including the player, the casino, the junket and ‘society’—gets a piece of the action in the form of public money raised from taxation.

This is where the infamous ‘Multiplier’ comes into the story. Like sightings of the Yeti or the Loch Ness Monster, there are many as yet unconfirmed reports of ‘The Multiplier’ being employed at Macau VIP gaming tables. Just as with the Yeti or Nessie, there are people—especially journalists— with a vested interest in keeping the story alive. Then there are those—such as the government and the local regulator— with an equally strong interest in playing down the tale of The Multiplier. If it exists on any scale at all in the high roller market other than sporadically here and there, The Multiplier could be depriving the government of large amounts of tax revenue. And there are many good, practical reasons for The Multiplier to exist and to thrive in the sometimes-dark waters of Macau’s VIP segment.

The Multiplier is in essence a private arrangement between junket agents and their customers, governing the size of the bets placed. Most commonly, it occurs in two basic forms, with essentially the same outcome.

The first is when the agent agrees with players that whatever thevalue of chips placed on the table, the real ante is multiplied by an agreed number. For example, if the customer placed a HK$1,000 bet and the agreed multiplier is 10, then the ‘real’ bet is HK$10,000.

The second common form of Multiplier is when it’s agreed that the ‘real’ bet is denominated in a different currency to that of the actual chips placed. For example, the customer places a HK$1,000 chip on the table, but agrees with the junket operator that the bet is in reality denominated in US dollars, so the ‘real’ bet is US$1,000, which represents a multiplier of 7.8 times.

Such arrangements are particularly convenient because the majority of junket customers in Macau hail from Mainland China and do not—and in any case cannot—bring money with them, but rather rely on credit extended by junket agents. When a customer requests HK$1 million credit, the junket agent merely requests the casino provide HK$100,000 worth of chips, with the implicit understanding between the junket agent and customer that a ten times Multiplier is in effect. In the first scenario, where The Multiplier is ten times, the result is that the government and casino licensee’s share of revenue is reduced to a tenth of what it should be. That means the government is getting only around 4% of the ‘real’ gross, rather than 40%.

Under the 40:40:20 revenue sharing arrangement pioneered by Stanley Ho, the government and VIP room/junket operator each get 40% of gaming revenue, and the casino license holder the remaining 20%. When a ten times Multiplier is in effect on the nominal value of bets placed, the junket operator’s margin goes from 40% of revenue to 94%, while the government’s take is reduced from 40% to 4% and the casino license holder’s share from 20% to 2%.

The Multiplier has been around for quite a while, even before the liberalization of Macau’s casino industry. It is also fairly common in other countries, though the potential benefits to junket agents are obviously greater in Macau, given the city’s high gaming tax rate.

 

Taxing Times

Singapore’s lower gaming tax rate makes it an attractive destination for direct VIP players

As we reported in our story ‘Direct Play’ in August this year, if Las Vegas Sands Corp (LVS) is going to convert a junket player to a direct one, it would rather do so in Singapore. There, VIP gaming revenue is taxed at 12% (5% VIP gaming tax plus 7% goods and services tax) compared to just under 40% in Macau. Recruiting direct VIP players may be the only option, because Singapore’s fastidious Casino Regulatory Authority has effectively barred Macau-style junkets from operating in the Lion City.

In the absence of the junket middleman, LVS is also able to offer greater incentives to VIP players at its Marina Bay Sands (MBS) casino in Singapore than those at its Macau properties. In Macau, junkets ‘pull’ a maximum of 1.25% commission from casinos on rolling chips, keeping between 20 to 35 basis points in order to cover their margins, and giving the rest to players. In Singapore, MBS ‘pushes’ the whole of the 1.2% commission it offers on VIP chips to its direct players.

In Macau, the rolling chip commission that an operator can pay a junket is currently fixed by law at 1.25%, following the price war that broke out in December 2007 that pushed the top commission rate to 1.35% overnight. Over in Singapore, where the lower gaming tax allows operators to offer more aggressive commissions, anecdotal reports suggest Genting at Resorts World Sentosa (RWS) is rebating as much as 1.4% to 1.5% to direct VIP players, (including high rollers from Japan). IAG sources also suggest Genting’s motive in attracting direct players from Malaysia to Singapore is the high gaming tax in Malaysia (25% for VIP and for mass play) and political uncertainty regarding Genting’s Malaysian gaming licence, which is currently being renewed by the Malaysian government on a rolling basis every three months, whereas its Singapore licence is guaranteed for at least ten years.

From the operators’ perspective, it’s clearly potentially more profitable to have direct players doing most of their rolling in a low tax destination such as Singapore, rather than in a high tax destination such as Macau.

On $100,000 worth of bets placed (roll) via a junket in Macau, assuming a win rate of 2.75% and less 40% government tax on the win and 1.25% of the roll going to the junket as commission, the casino would be left with $400. LVS said in a note to investors in June 2009 that its direct VIP play in Macau was 1.0 to 1.5 times more profitable than junket originated play. That would suggest LVS could retain from $800 to $1,000 in the above scenario were the bets placed under direct play.

In Singapore, when a direct VIP player places $100,000 worth of bets, assuming a win rate of 2.75%, 12% tax and 1.2% rolling chip commission rebated to the player on  his or her ‘roll’, the casino would be left with$1,220. Singapore dealers are also paid less, in general, than their Macau counterparts. It’s clear, therefore, that the economic benefit to a Singapore-based casino of direct VIP play is considerably greater than either Macau-based junket VIP play or even Macau-based direct play.

In any case, although the middleman may be alive and thriving in Macau, it will be some time before he will make an official appearance in Singapore.

“I am still convinced that the Macau-style junket reps will not submit to the probity checks and provide the information that the [Singapore] government will need to put them through the investigatory wringer,” said Mr Adelson in a recent LVS earnings call.

“And even if they do, and even if there are some Macau-style junket reps that will do that, I don’t believe its going to be done this year at all,” he added. 

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