Inside Asian Gaming

INSIDE ASIAN GAMING | July 2008 2 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 [email protected] For advertising enquiries, please email [email protected] or call: (853) 6646 0795 www.asgam.com Printed by Icicle Print Management (Macau) Ltd Tel: (853) 2871 2818 Fax: (853) 2871 2898 www.icicleprint.com Michael Grimes Influence and Intervention Lists of the rich have become very popular in modern publishing. It seems to be part of human nature to compare our lot with our neighbour and to compete with him. Our Asian Gaming 50 is a little different. Some of those on the list are clearly very wealthy as a by-product of their success. Others are on the list because of the influence they hold on the industry, rather than necessarily the size of their personal bank account. The list is designed to reflect one of the great strengths of the Asian gaming scene, namely its ability to innovate and create new value from fresh and exciting products. In this respect the Asian Gaming 50 reflects the energy that drives the whole economy of this exciting region. If the cap fits Many feel the influence exerted by junket operators—who supply the bulk of Macau’s VIP players—on the local gaming market has become disproportionate to their financial investment in it and the degree of commercial risk to which they are exposed.What are Macau’s junket agents after all, other than middle men made rich thanks to the logistical and ethical challenges of getting reliable cross-border gambling credit in this part of the world? Casino operators seeking a bigger slice of the lucrative VIP pie had pushed the commission rate offered to junket agents on sales of non-negotiable chips to as high as 1.35%. On July 8, the Macau government sought to halt the escalation by imposing a limit on the commission rate at 1.25%.Those who consider the junkets wield undue influence see this as an unequivocally positive development. There is another argument. This is that the Macau government, having set up a laissez faire system for junket agents in the first place, is setting a dangerous and unwelcome precedent by seeking to interfere in the workings of the market. After all, the new generation of junket agents using the so-called aggregator model is a far cry from some of the shady characters once associated with gaming credit in Macau.They have CEOs in smart suits, they are legally-registered companies—most of them listed in Hong Kong with public shareholders—and have entered legally binding contracts with casino operators and or VIP room operators to feed them a steady supply of VIP gamblers, the lifeblood of the Macau market. No one forced those operators to sign deals with the junket aggregators. They chose to do it to gain competitive advantage over their rivals.Now,because a trade war has started,the government,possibly under pressure from industry lobbyists, is crying foul. As a general principle in a capitalist system, markets are allowed to correct themselves. Intervention in the market is normally restricted to those cases where the public interest is threatened. Is the public interest threatened in this case, or is it more about protecting the private interest of casino operators who have spent billions of US dollars to build some of the world’s most impressive gaming venues and want to see a rapid return on their investment? Will social harmony be disrupted if casino operator margins are further eroded? Arguably yes, it will. VIP play accounted for nearly 70% of all revenue from games of fortune in the first quarter of this year. There would be no VIP rooms to play in at all were it not for the investment of the operators.If the operators’margins are squeezed then their staff are likely to get squeezed too.Only days ago Macau witnessed the rare event of a casino laying off staff rather than taking on new ones, though the GrandWaldo, stuck in the relative no-man’s land of Taipa was arguably a special case. Where does market intervention, once embarked upon, end? If casino operators form the impression the government will come to their rescue every time they face commercial pressure, will it lead them to take unreasonable risks? It’s a question that the outgoing chief executive and his successor will need to consider carefully in the weeks and months ahead. Burnt offerings It’s surprising how often the politics of the schoolyard seem to take hold when the media decides a company is struggling. Commentators have been lining up to lambast SJM’s recent Initial Public Offering in Hong Kong as too little too late, while others have been talking up the prospects of Wynn, one of the American operators,launching a US$3 billion share sale in Hong Kong.Yet SJM is currently outperforming Las Vegas Sands Corp by a ratio of nearly 2:1 when it comes to net revenue yield management.The trade war on VIP commissions suggests that, for the time being at least, Macau’s gamblers are more concerned about getting a good deal at the gaming table, than getting a good dining table at a chic casino restaurant. It may be that SJM’s strategy of modest capital expenditure, firm cost control and aggressive cross marketing won’t look like such a misjudgement in a year’s time. Editorial