43 42 he term junket is defined in the on- line Wikipedia as either: • a dessert made of flavoured, sweet- ened curds • 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 • A party, banquet, or outing • A trip or tour, especially: • One taken by an official at public ex- pense • One taken by a person who is the guest of a business or agency seeking favour or patronage. Under the junket commission program unique to and prevailing in Asia, the term junket describes a player or group of players who play at a given casino in return for some benefits. Junkets represent the holy grail of Asian gaming – as sought after as a parking space in overcrowded Macau. The junket commission program sees A Junket Primer The current, fiercely competitive junket scene in Macau is akin to a barn dance. Partners are being changed faster than you can say “commission,” observes Octo Chang customers play using junket chips (alterna- tively known as NN – non-negotiable or dead chips) and receive commission payments based on the amount of turnover generated. There are various ways to look at this con- cept,but the easiest is to consider it a volume discount. For example, Mr Lee, a typical main hall customer, bets on average HK$500 per hand. Assuming he is the only customer on the gaming table, the theoretical house gross profit margin on his business is: Theoretical Win × Turnover (which is no. of hands × average bet × no. of hours played). Thus, in a typical game of baccarat where the theoretical win (TW) is 1.26 % (cash ba- sis), and assuming an average of 30 games per hour,after Mr Lee has played for 10 hours, the casino will have theoretically won: 1.26% × (30 × 500 × 10) = $1,890 The direct operating cost (DOC – before overheads) associated with running that ta- ble could be the cost of the dealer and the supervisor. If this is $100 per hour, it will be $1,000 for the ten-hour period. Thus, the house TW on Mr Lee’s play is $890. Now consider Mr Wong, who is a high- roller with a penchant for betting $500,000 per hand. Running him through the same formula, the theoretical gross margin from his custom before DOC will be a hundred times higher, or $189,000, but the net margin after DOC will be $188,000, or 211 times greater. It is obvious that Mr Wong is a much bet- ter catch than Mr Lee, and even if the casino gave Mr Wong a discount, it would still earn more from him than from the unloved Mr Lee. The casino operator – operating in a fiercely competitive environment – decides to provide Mr Wong a strong incentive to play at his property. The operator ties the in- centive to MrWong’s play,so that the more or longer MrWong plays,the more he gets back. The casino operator offers Mr Wong a rebate of 40% of the profit generated on his play to encourage him to both play at his casino and to play longer. The theoretical margin on Mr Wong is now: (1.25% × 0.6) × (30 × 500,000 × 10) = $113,400. Take away the DOC of $1,000, and the house still earns $112,400 from Mr Wong, compared to $890 (still 127 times higher) from the hapless Mr Lee. In an environment of fierce competition, casino operator B could well decide to up the ante and offer a 45% discount on his margin. The casino operator may also opt to raise the quality of the service and product offered, such as accommodation, special VIP rooms, personal staff, etc – which in turn raise the operator’s costs. Before you know it, we have a situation like we now have in Macau where VIP room operators are going broke – as an- nounced by Dr Stanley Ho in recent months – as a result of a commission war. The other junket model is the American one,which is a low risk product that sees high- rollers like Mr Wong only get something back when they lose, i.e. a rebate on loss.There are two likely explanations for this model having proven unpopular in Asia: 1. Players have to lose to get something back, whereas they get something either way under the junket commission pro- gram 2. If players have lost everything, they are already on a losing streak and the rebate on their loss offers small comfort. Now, just to complicate things, all the previous calculations were based on cash play, i.e. cash chips that can be exchanged for money at any time. In order to ensure that client plays for a certain minimum time or amount of turnover, the casino uses junket or NN chips. These chips cannot be redeemed for cash. The system works thus: When a junket chip is played,all winnings will be given to the player in cash chip, but if he loses, the casino takes the junket chip. Eventually, the player who started off with a pile of junket chips ends up with a (presumably smaller) pile of cash chips. If he wants to continue playing, he then exchanges the cash chips for an equal value of junket chips, and off he goes again. The computation of the TW on play with cash chips is the average bet per hand times the number of hands per hour. However, with junket chips, only the amount of chips lost to the casino is counted. The odds of winning a game of baccarat is close enough to 1 in 2, so a player betting in junket chips will generate only half the recorded turnover of one using cash chips. Thus, to get a true TW for junket play, you have to double the TW for cash chips, from 1.26% to 2.5%. This is basic junket theory,but surprisingly, there are a lot of middle level managers out there who do not understand the difference. In Macau, the government collects 40% of the 2.5% TW, or 1% of TW as tax. SJM gets 0.5% of TW, leaving the VIP room operator the remaining 1% of TW.In the past,VIP room operators offered their clients 0.7% of TW, leaving them 0.3% to cover their costs and contribute to their net margin. Now, with VIP room operators offering up to 1.0% of TW as commission, they have effectively given away their profit margin. The VIP rooms at Galaxy’s city clubs op- erate along similar lines, but see the room operators receive a share of about 46%. This results in a 1.15% TW, in absolute terms, for VIP rooms at Galaxy’s city clubs.This naturally gives the Galaxy VIP room operators a bit more room to play with. The Americans initially offered no profit share, meaning they got to keep 1.5% of TW for themselves. That was why Sands began offering up to 1.2% of TW direct to custom- ers. Wynn did that too, but when confronted by a huge loss in its first week of operation, decided to unilaterally switch the basis of its agreements with its in-house junket opera- tors to the profit share basis, as used by SJM. The only problem was that Wynn decided to impose the profit share basis retrospectively, which meant that the one major junket op- erator (International Club) whose clients happened to have struck it lucky, was all of a sudden confronted with a profit share (or rather loss share) instead of his expected commission. It came as little surprise that Internation- al Club upped and hoofed it to the Sands and Galaxy StarWorld. This sudden reversal by Wynn left a lot of experienced casino pundits speechless. The house will sometimes experience a signifi- cant 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 custom- ers 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 is that you never go back on your agreement. Wynn appeared to do just that when it sought to share its loss ret- rospectively after developing a sudden dis- like for the commission program. This brings us to trying to understand the American viewpoint. Having conversed with several American executives and having perused their financial reports, it is apparent to me that their focus is more removed from the “action” than that of the “local” operators (SJM and Galaxy). The Americans’ focus is very much on EBITDA (earnings before inter- est, tax, depreciation and amortisation). That is to say, they factor in all the indirect costs such as overheads, utilities, etc. The other thing is, intentionally or other- wise,Wynn has upped the stakes in the junket market. Under the profit share arrangement – at SJM and Galaxy – VIP room operators have to pay either table- or room-leases in order to get a profit share arrangement. The new Wynn offer has given its junkets a big freebie – straight profit share, no underlying lease. And considering that Wynn has higher operating costs per table than any other op- erator, one wonders if it has done its sums. If Wynn’s house edge is 1.5% of TW after government tax, by giving away 1.2% of TW, its net is 0.3% of TW – but that’s before other major costs such as rental, an expensive VIP department, etc, are factored in. One won- ders whether there’s any margin left after all that. SoWynn has snatched business from one of Sands’ major junket operators (Malaysian promoter Phua Wei Seng), and now Sands has returned the favour. The war will ravage on. The main observation I have is this: the Americans’ junket action is too top heavy, relying on a couple of very large clients who will eventually dictate terms or walk if not satisfied – according to Hong Kong daily The South China Morning Post , Mr Phua managed eight VIP tables at the Sands’Shanghai Room and was responsible for 36% of Sands’ total VIP room turnover of US$12.8 billion during the first three months of this year. I will add a new verb variant to our titled word; Jun- ket- ed: a. to lose big time to the junket players; or b. get so confused that you inadvertently give the junket operators a free one. Will that be almond flavoured or plain, Sir? (Please feel free to forward any amusing anec- dotes or observations of the marketing variety to
[email protected] ) T