INSIDE ASIAN GAMING | May 2008 Editorial Editor and Publisher Kareem Jalal Director João Costeira Varela Business Development Manager Matt Phillips Operations Manager José Abecasis Contributors Michael Grimes, Desmond Lam, Steve Karoul, Richard Marcus Graphic Designer Brenda Chao Photography Ike Inside Asian Gaming is published by Must Read Publications Ltd Suite 1907, AIA Tower, 215A-301 Av. Comercial de Macau - Macau Tel: (853) 6646 0795 For subscription enquiries, please email
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[email protected] Who Are the Oligopolists? Macau’s casino sector is characterised as an oligopoly—namely, a market dominated by a small number of sellers. The assumption is that six oligopolists “sell” casino gaming in the market. They are—in order of appearance of their first casino properties in the city—Stanley Ho’s SJM, Las Vegas Sands Corp, Galaxy Entertainment Group,Wynn Macau, Melco PBL Entertainment and MGM Grand Paradise. Basic economic theory states two distinct outcomes can occur under oligopolistic competition. First, the firms can collude, either through a formal or unspoken agreement. The oil producing countries in OPEC collude formally as a cartel to restrict production and raise prices to achieve what are known as “abnormal” profits. If the collusion is informal, the firms may simply follow the pricing of an acknowledged market leader in order to achieve those profits. The second outcome is fierce competition between the firms, which can lead to a situation approaching that of perfect competition, where only“normal”profit—corresponding to the level of profit that only covers costs— is generated. The international entertainment industry is essentially an oligopoly, dominated by media giants such as Time Warner and News Corp. Other oligopolies include the beer, tobacco and automobile industries. Firms in these industries vie for market share on the basis of product development and differentiation. Gaming under a restricted-license situation could—and perhaps should—develop as an oligopoly in the media industry mould. Players will go to the most attractive or comfortable venues, or the ones they most identify with. When there is insufficient supply relative to demand, however, even weak brands will prosper. Immediately following Macau’s visitor and casino boom in 2004, for example, even uninviting casinos were packed because of the capacity shortage. As capacity boomed, the undesirable properties have now fallen by the wayside and will eventually be rendered obsolete. In the VIP gaming market,Macau’s casino operators essentially offer space to junket operators to bring their customers to play in, since attempts by each new arriving casino operator to attract VIP customers directly have proved futile. During the monopoly era, casinos offered junket operators a commission rate of 0.7% on rolling chip sales, which brought Dr Ho’s company abnormal profits, especially since as a monopoly, it was not compelled to invest in improved facilities or services in order to compete with other operators. Considering Macau’s new casino operators are investing heavily to create glitzy properties with distinct brand identities, it would seem advisable for them to maintain an implicit understanding not to also compete on the basis of commission.The casinos could seek to attract junket operators solely on the basis of product differentiation, while they informally collude to stick to the price of a market leader—the natural leader would seem Stanley Ho, who pioneered the VIP market. This, of course, is not what has happened, and commission rates have raised steadily since new casino operators arrived in Macau in 2004. Each successive attempt by an individual operator to increase market share by raising commission has quickly been followed by the other operators, eroding both that operator’s short- lived market share gains as well as overall margins and profits in the market. The latest escalation was instigated by Melco PBL Entertainment, which had a distinct six-star brand proposition when coming to market, so it is all the more ironic that it has now opted for the strategy of a commodity supplier attempting to increase sales. True, there is more to Melco PBL’s new arrangement than merely an increase in the commission rate,and as discussed in our cover story this issue,the result could be that CrownMacau increases the size of the overall pie,in addition to gaining a larger share of it.Yet all the features of the arrangement can be replicated by the other operators, and when they do so, the VIP market will come closer to a situation where revenues just cover costs. Last month, the Macau government announced it would not issue any new casinos licenses and would put a freeze on approving new applications for additional gaming capacity.This boosted the stock prices of Macau casino operators, as it limits further competition in the market, at least in the short term. Still, the balance of power in the VIP market appears to have already shifted away from the casinos in favour of the junkets. Like the casinos, junket operators had seen their margins eroded as a result of intensifying competition for players.This has resulted in the consolidation of the industry, and emergence of so- called junket“aggregators”—Melco PBL’s arrangement is with junket aggregator AMA Holdings. By consolidating the major junket operators, the junket aggregators gain considerably greater bargaining power relative to the casino operators, who are essentially “buying” VIP business from the aggregators with their commission offering. In the VIP market, the junket aggregators have thus become the oligopolists, while the casino operators have been rendered essentially commodity suppliers of venues for the aggregators to conduct their business within.