Scientific Game

It's a Jungle Out There

In Macau's tough VIP gaming market, anyone can turn into a tasty meal

Tuesday, 09 February 2010 08:00
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"Great fleas have little fleas upon their backs to bite 'em,

And little fleas have lesser fleas, and so ad infinitum."

Augustus De Morgan, mathematician and logician (1806-1871)

If ever there were a rhyme to sum up the pyramid marketing scheme that is the Chinese betting agent system in Macau, then it's Augustus de Morgan's little stanza.

Macau's modern VIP baccarat market may recently have spawned junket agent consolidators busy herding whales into manageable 'schools' to be reeled in by casino operators. But there's still plenty of room left for the quick thinking independents.

One recent development in particular seems to be presenting a great opportunity for the 'little fleas'. This is the ramping up of efforts by the casinos to recruit more VIPs directly without the middlemen agents interposing.

After going to all the hard work of luring the VIP player into a direct relationship with their high limit rooms (in order to gain a better margin on their business), the casinos are finding that their own due diligence procedures sometimes won't allow them to give the player direct credit.

When that happens, it doesn't take much prompting for international marketing agents originally hired by the casinos to bring in whales to redirect those same players back into the arms of the junkets.

It doesn't stop there. Even when a casino has granted a VIP his own line in credit, the marketing agents are always on the lookout for opportunities to boost their own business and are not shy of poaching that same customer and sending him back to the junkets.

"The word is some junkets are offering marketing agents as much as 0.2% of a player's rolling turnover to convert a casino's direct player into a junket player," an industry insider tells Inside Asian Gaming.

It's as if the Macau high roller market were a cross between a spy novel and a wildlife documentary film. Everyone is out for what they can get. From the humble casino worker willing to tip off an agent contact about a new player in town, to the marketing agent hired by the casino who turns out to be a double or even triple agent—playing one casino off against another or one junket agent against another.

"There are reports of high rollers arriving compliments of one casino, being whisked away to another property," adds the source.

"VIP room attendants have been paid gratuities for tipping off junket scouts on the arrival of big players. Hosts have been paid to pass on premium customer information to junkets.

"There was one case recently where a casino flew in a large group of premium players and got them settled down comfortably, only to see them walk across to a competing property the next day," states the insider.

"The suggestion is that inside information leaked out. There were even reports that junior staff members were overheard talking about how much they got paid and how it compared with what went to their supervisors."

Even if VIPs are being 'poached,' they are unlikely to be passive victims in this process. They don't need much persuading to move from one casino to another provided there's something in it for them. That 'something' isn't likely to be whether the guy on the door has a nice smile or remembers their name. That 'something' is likely to be whether he gets a better return to player on the 'roll' of his non-negotiable chips. Why does this happen? What happened to all that talk among the operators about their ability to compete on quality?

High Volume, Low Margin

Why gambling agents matter in the Macau millions race

The whole Macau VIP system is based on huge volumes of play in terms of gambling revenue (79.8 billion patacas or US$9.98 billion in the VIP segment in 2009). But house theoretical win is slight (around 2.5%, though many casinos claim a theoretical win of 3% or more). There are also so many people (such as agents) and so many costs (such as comped rooms and entertainment) in the chain that once the government's tax cut of around 39% is deducted from the top, margins on the VIP gross are low. Deals to bring in players to a particular venue can be made or broken on a few fractions of a percent of commission in either direction (i.e., from junket agent to player, or from junket agent to marketing agent or a combination thereof).

In traditional Macau VIP rooms prior to market liberalisation in 2002, the commission paid to agents on player's non-negotiable chips (non-negotiable chips effectively being money that has been 'loaned' to the player to allow him to gamble) was around 0.7%. In other words, if the player rolled HK$1 million (US$128,000) in a session the agent would make notional commission of HK$7,000. That commission would only be realised, however, once the agent had been paid out of a player's winnings or had been refunded by a losing player. Incentives are also paid to agents if they exceed rolling chip sales targets. In order to keep a player at the table, however, the agent is also expected to give a rebate to that player out of his agent's commission. In 2007, business improved considerably for junket agents generally. Macau rolling chip commission soared during a price war sparked by the decision of Crown Macau (now Altira) to pay 1.35% commission to the junket consolidator Amax. That in turn meant agents could afford to give improved rebates to players, further increasing the players' incentive to stay with Amax at that time.

The other operators joined in the price war and the Macau government threatened to impose a commission cap. In theory, the cap is now in place at 1.25% with regulations to cover 'back door' incentives paid for generating volume on borrowed working capital. Currently, it is generally accepted that junket agents in Macau are offering rebates to players of around 0.8%. By way of comparison, Bank of America Merrill Lynch said recently in a research paper to investors that Resorts World Sentosa, the new Singapore casino resort majority owned by Malaysia's Genting, is likely to offer a 1.1% rebate on rolling chips to direct players. (It's not yet clear whether junkets will be allowed in Singapore)

Charity Begins at Home

Can casinos combat player poaching with greater handouts to players and agents?

An interesting question is can the Macau casinos afford to be more generous to their direct players and head off any player poaching by junkets.

The wiggle room of the casinos must be considerable if figures previously released by Las Vegas Sands Corp (LVS) are accurate. LVS said in June 2009 in a note to investors that its margin on direct high roller play in Macau was 1.0 to 1.2 times higher than the margin on players fed to it by junkets.

When LVS's figure is meshed with other industry data, including an average 0.5% net hold to the casinos on VIP gross (after tax and expenses and after theoretical hold is smoothed out to account for baccarat return volatility), that would mean Macau casinos with direct players are achieving a net hold of 1.0% plus. In other words, they have up to 0.5% to play with as incentives to direct marketers and VIP players before they dip below the returns they can achieve by simply going the junket route.

Worth the Effort

Did the foreign casinos overspend on their casino facilities?

To accept the proposition that Macau's Chinese VIP players and their middlemen are fundamentally promiscuous in granting their favours to casinos—the gambling equivalent of strumpets or gigolos who will bed hop as soon as someone makes a better offer—is to raise a rather worrying proposition for investors in the Macau gaming industry. This is that the operators could have saved themselves the time, the trouble and more importantly the cost of recreating high roller rooms in the style of the French king Louis XIV's Versailles palace, and put up cheap and cheerful traditional Macau VIP rooms instead.

"The first Paiza [VIP] club at Sands [Macao] sat empty for the first twelve months, until the casino finally came to terms with the junkets," states the insider.

"Those beautifully decorated suites are now busy, but the funny thing is they now look more like traditional SJM VIP rooms. They have all the paraphernalia and detritus that seem to accompany the junket staff in any casino in Macau."

In other words, the Western operators' VIP offer has effectively been 'Chinesified'.

Culture Clash

Chinese gambling agents have an advantage over foreign casinos

It might be argued that VIP roomhopping is not just the logical conclusion of intense competition in a high volume, low margin market such as Macau VIP baccarat, but also a function of the local culture, which tends to put more faith in relationships between people (such as the relationship between an agent and player) rather than relationships between institutions (such as a casino brand) and people. For Chinese people, however, personal relationships don't necessarily mean Western-style glad-handing and back slapping, but interpersonal trust over key issues such as money. The Western casino operators are to a certain extent hamstrung in this cultural dance because of their need to introduce relatively impersonal processes into their business such as formal credit checks on players. This is in order to exercise levels of
due diligence acceptable to their institutional investors back home.

Western casino operators, for example, tend to follow the sort of business model propounded by the management consultants McKinsey—i.e., 'What you can measure you can manage'. The reality on the floor in Macau is that few people have the big picture. Opacity not only rules—it's
probably vital to the smooth running of the Macau VIP system.

Many high rollers—especially those from the Chinese Mainland—may be either shy about making formal declarations of their wealth, or have assets in renminbi that are not easily liquidated nor transported across borders via formal channels such as the international banking system.

Junkets well versed in serving Chinese players have more informal methods of measuring whether a player is good for the money, and it doesn't all involve reliance on strong-arm tactics if things go bad. Chinese players care about their standing among their peers and in the community. Failure to pay a gambling debt could in the long term be as bad for their business career outside the casino as any failure to pay a supplier invoice. In those circumstances, peer pressure may be more effective than the formal credit agreements relied on by the Western operators and their corporate lawyers. For all the talk of globalisation, Macau is still a very localised market, with very culture-specific ground rules.

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