Inside Asian Gaming

INSIDE ASIAN GAMING | May 2009 4 Editorial Publisher Kareem Jalal Director João Costeira Varela Editor Michael Grimes Business Development Manager Matt Phillips Operations Manager José Abecasis Contributors Desmond Lam Steve Karoul I. Nelson Rose, Richard Marcus Shenée Tuck, James J. Hodl Andrew MacDonald William R. Eadington 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 subs@asgam.com For advertising enquiries, please email ads@asgam.com or call: (853) 6646 0795 www.asgam.com Printed by Unique Network Printing Factory Ltd. Tel: (853) 2828 2832 Fax: (853) 2828 2830 E-mail: unique@macau.ctm.net TheWorld Turned Upside Down Reports that Las Vegas Sands Corp. is considering a lease back scheme on its highly profitable Sands Macao casino—in order to release liquidity for other projects—are a serious antidote to much of the hype that has surrounded Macau since the ‘Big Bang’of market liberalisation in 2002. It’s proof, if such were needed, that the heady days of 2004—when Sands Macao first opened—are over. Back then, it was widely assumed that a Macau gaming licence was a licence to print money. It may well still be, but if you spend money faster than you can print it, trouble tends to follow. Adapt or Die Macau has no natural right to remain Asia’s premier gaming jurisdiction The newspaper publisher Lord Northcliffe once remarked: “News is what somebody somewhere wants to suppress; all the rest is advertising.” No one can accuse Inside Asian Gaming ’s occasional columnist Octo Chang (his nom de plume) of being an advertising copywriter for the Macau casino industry. People inside the sector may not have always enjoyed his analysis of some of the more nefarious business practices of the market, such as the so-called ‘multiplier’ and its alleged use in boosting the turnover of off the books untaxed betting in the VIP segment. IAG takes the view that such frank discussion is in the interests of the development of a truly world class gaming industry in Macau. Our readers are the decisionmakers in Asian gaming. It’s not in their interests for us to give an airbrushed version of current events. The harsh reality may be that if Macau doesn’t reform itself, then the new kid on the block, Singapore, with its focus on business transparency and clear accounting rules coupled with an extremely low tax rate, could potentially undermine Macau’s pre-eminent position in Asian VIP gambling. This could happen not by grabbing huge chunks of the Macau VIP business. Singapore’s capacity is probably too limited to achieve that. It could, however, cream off the best of the best, leaving Macau to scrap for the secondary and tertiary level of VIPs with less solid credit ratings. If that sounds like fantasy, it’s worth remembering that VIP gambling (and by that we mean VIP baccarat) in Macau is working on a very thin margin compared to slots or Texas Hold’em poker. Only its sheer volume makes it a lucrative trade. Singapore’s much lower tax rate could create exciting new opportunities to return value to players and casino operators alike, even on a more modest volume of business. Already in Macau the storm clouds are gathering, with the Macau Gaming Operators’ Association, a trade body set up earlier this year, meeting reportedly to discuss (among other things) the possibility of a cap on commissions paid to VIP players’ agents. Macau’s Chief Executive Edmund Ho has also been lobbied on the possibility of reducing the near 40% tax rate on the VIP gross, though he only has another seven months left in office and is likely to pass that particular political hot potato to his successor. VIP gambling in Macau is a multi-billion dollar business that dominates the territory’s gaming industry, yet is the part least open to outside scrutiny. In 2008 it accounted for 68% of the gross on all games of fortune. VIP baccarat—where themoney staked on a single handmay be equal to a card dealer’s monthly wages—continues to hold its pre-eminent place in the Macau casino industry, despite the best efforts of foreign investors to build a mass market of convention goers and holidaymakers. VIP baccarat turned over US$9.23 billion in 2008—and that’s the official, conservative figure. To put this single product category of the Macau gaming industry in perspective, that’s equal to what Microsoft, the world’s leading computer software company, spends annually on research and development. Despite the volumes of cash being generated, the accounts for VIP play in Macau have none of the transparency normally associated with the balance sheet of a large public company such as Microsoft. Only the raw data on turnover is freely available, and even that must be open to question because of the multiplier issue. There’s no transparency from the publicly owned casino operators regarding what percentage of the house advantage is paid out to agents in commissions and incentives. There isn’t even consensus between operators on what the theoretical house advantage of baccarat should really be. This opacity is tolerated by shareholders of the companies concerned on the grounds of commercial sensitivity. When a casino operator does well from the VIP segment, he takes the credit, claiming it’s the quality and the ambience of his facilities that made the difference. When he loses money in that segment, he blames the inherent volatility of baccarat returns. If trouble comes,“It’s nothing to do with me”seems to be the prevailing attitude of casino operators. In this shifty environment we would argue that our columnist Mr Chang’s only crime (such as it is) has been to point out the source of the occasional bad smell. The Las Vegas operators did try to change the dynamics of the Macau VIP business by cutting out the middleman and bringing in more ‘direct’ premium players in the manner of their core businesses in the United States. The reality is though that it’s difficult to break the grip of the agents in an opaque business environment such as China, where the direct promotion of casino gambling is prohibited; where the local currency is not internationally convertible; where large amounts of cash cannot be legally moved across borders; where the source of a player’s wealth may not always be officially declared to the domestic authorities and perhaps most importantly of all, where casino gambling debts are not legally enforceable in the courts. Singapore has none of the above impediments on its business model and is highly unlikely to choose the low road of back stairs deals in its bid to establish a world class gaming market. Cynics may argue that as long as the multiplier is tolerated (or at least not actively policed) in Macau VIP gaming, then Singapore will effectively be shut out of the ‘big bucks’ available from Chinese gamblers. That may be right. But no one should be in any doubt that in the medium to long term, VIP agents in Macau face an existential threat. That threat is a combination of the tide of history, as China becomes more plugged in to the world financial system, and the tide of consumer retailing. Anyone who thinks VIP agents are here for all time need only remind themselves of the grocery trade. Where are all the middlemen in that industry now? They’re gone, swallowed up by the big retailers dealing directly with the producers. We have been warned. Michael Grimes