13 12 he Multiplier: No, it’s not the title of Arnold Schwarzenegger’s big-screen come- back, nor is it a reference to the exploits of our floppy-eared friends mentioned in the Playboy casino piece on page 10. If you were to do a quick Google search, you may get some results detailing the multiplier effect on the economy, but certainly nothing per- taining to junket activities. As far as we know, this is the first pub- lished article on the issue as it pertains to Macau’s gaming industry. “So what is The Multiplier?” you might ask. Before we answer that question, did you know that there are commission rates of up to 1.6% being offered to junket players in Macau? No, we do not digress for the two issues are related. Refer to the arrangements we outlined in our previous column, A Junket Primer (in the January 2007 issue of Inside Asian Gaming ). Enabling unfeasible commissions If the theoretical house edge on VIP baccarat The Multiplier Casino marketing columnist Octo Chang teams up again with Ben Lee, VP-Casino Projects with the Diamond Casinos Group, to reveal one of the lesser known aspects of the Macau VIP/junket business, and explains why lowering the gaming tax rate could result in a bigger take for the government is 2.52%, after subtracting the government tax of 40%, the net theoretical house edge is 1.512%. How then is it possible for Macau junket agents to offer 1.6%, which is higher than what they are getting, and which does not even include the gaming operator’s cut, not to mention their own operating over- heads? This 1.6% is the ‘grey market’ rate, mean- ing it’s not talked about openly in polite circles. The common rates offered in Macau are in the vicinity of 1.0-1.3%. Compare this with the 1.2-1.6% being offered in South Ko- rea, 1.5-1.8% in the Philippines, and 1.3-1.6% in Australia and New Zealand. Most of these places have gaming tax rates of 10-25%, compared to Macau’s 40% (35% as direct tax, and the remainder as mandatory social and welfare contributions). Singapore will impose a maximum rate of 15%, dropping to only 5% for “premium” (i.e. junket) play. This will conceivably allow the two Singaporean casino licensees to offer commission rates as high as 2.0%. The ‘grey’ rate in Macau of 1.6% is clearly not feasible unless a way is found to effec- tively reduce the government’s take. In comes The Multiplier. 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. How to Multiply The first is when the agent agrees with play- ers that whatever the value 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 multi- plier is 10, then the “real”bet is HK$10,000. The second common form of Multiplier is when the “real” bet is agreed to be denomi- nated in a different currency to that of the actual chips placed. For example, the cus- tomer 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 conve- nient because the majority of junket custom- ers in Macau hail frommainland China and do not – and in any case can not – bring money with them, but rather rely on credit extended by junket agents. When a customer requests $1 million credit, the junket agent merely re- quests the casino to provide $100,000 worth of chips, with the implicit understanding be- tween 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 re- duced to a tenth of what it should be, or in Macau’s case, a mere 4%. Referring back to the 40:40:20 revenue sharing arrangement pioneered by Stanley Ho whereby the government and VIP room operator each get 40% of gaming revenue, and the casino license holder the remaining 20%, $100 of revenue is shared in the follow- ing proportions under the official and ‘grey’ (i.e. with The Multiplier in effect) markets: As you can see, from the table on the right, by using a ten times Multiplier on the nominal value of bets placed, the junket agent’s margin goes from 40% of revenue to 94%, while the government’s take is reduced from 40% to 4% and the casino license hold- er’s share from 20% to 2%. With a ten times Multiplier in effect, VIP baccarat yields a 2.37% net theoretical house edge, offering plenty of room to offer 1.6% player commissions – especially if the VIP room operator also functions as the junket agent. Believe it or not, The Multiplier has been around for quite a while, even before the lib- eralization of Macau’s casino industry.It is also fairly common in other countries, though the potential benefits to junket agents are obvi- ously greater in Macau, given the city’s high gaming tax rate. Implications The implications of The Multiplier are obvi- ous. Gaming revenue in Macau is likely to be substantially higher than the official figures suggest, and Macau probably surpassed the Las Vegas Strip in terms of actual gaming revenue much before the international press trumpeted it as having done last year. After all,the bulk of casino revenue inVegas comes from slot machines, where there is no scope for fiddling with multipliers, whereas even post-liberalization, most revenue in Macau is generated in private VIP rooms – 65% of the total in 2006 according to official figures, though probably considerably more. The Multiplier lowers both the govern- ment’s and casino license holders’ share of gaming revenue. The winners appear to be the junket agents and their clients – the lat- ter receive higher commissions by agreeing to such arrangements. It may seem logical that the practice would be rife in a high gam- ing tax environment such as Macau.The real- ity, however, is not so clear cut. There are some downsides to The Mul- tiplier, one of which is the junket agent has to assume a bigger share of risk. How big de- pends on the size of The Multiplier employed. The other downside is that in order for the scheme to work effectively, the junket agent must be able to isolate and accurately moni- tor their customers to ensure there is no leak- age or addition of junket chips. Slip-ups Furthermore, junket agents using The Multi- plier risk being caught – all it takes is a slip by a customer or a junket staff member. Con- sider the following example – a player tosses a HK$100 chip to the dealer after a spectacu- larly big win in the hundreds of thousands. The dealer grumbles about the size of the tip (such was the prevalent attitude among ca- sino staff before liberalization, when dealers would often tip themselves when they saw players winning big). The customer then re- torts that the HK$100 chip is actually worth HK$1,000 or perhaps US$100, depending on The Multiplier in effect, alerting the casino to the junket agent’s dealings. So how prevalent is The Multiplier? There is obviously no data available, though anec- dotal information suggests it is quite com- mon. Given the risks, however, junket agents and VIP room operators generally tend to restrict such arrangements to a handful of trusted customers. Furthermore, The Multi- pliers used are more commonly in the low single digits, and where currency substitu- tions are involved, it is generally with players from countries such as China,Korea or Taiwan where there are monetary restrictions on the amount of funds individuals can take out of their respective countries, So why haven’t the casino operators and the governments moved to stamp this prac- tice out? For one, it is difficult to investigate short of calling your main revenue generators cheats and liars to their face. Secondly – which may be the more common reason - as long as the junket agents are still generating enough revenue for the operators,why upset the applecart? Competitive pressure If anything, the use of Multipliers may in- crease in the wake of greater competition from the big new foreign casino operators, who have bid up junket commission rates to a point where there is very little margin to cover overheads. The glitzy new properties from the likes of Las Vegas Sands Corp,Wynn Resorts and Galaxy Entertainment Group of- fer plush VIP suites and servants and minders at the beck and call of high-rollers. The only way for the smaller traditional VIP room op- erators to retain their customers may be to raise the junket commission rate by either engaging in more Multiplier transactions or using higher Multipliers. The only alternative, dare we say it, is to lower the government take to a rate that is competitive in the international arena. It may turn out that a lower rate of gaming tax results in a larger take for both the government and concurrently the casino license holders. Octo Chang is the pseudonym of our Macau- based casino marketing columnist, who has extensive qualifications in the gaming industry. Please feel free to forward any amusing anec- dotes or observations to
[email protected]. Ben Lee has an extensive background in casino marketing in Asia and Australia, particularly in profiling the Chinese market segment. Under Under “Grey Market” Official Market with 10x Multiplier Government $40 $40 Junket Agent $40 $940 Casino License Holder $20 $20 Share of $100 Nominal Gaming Revenue T