Inside Asian Gaming

INSIDE ASIAN GAMING | July 2009 4 Editorial Publisher Kareem Jalal Director João Costeira Varela Editor Michael Grimes 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 Michael Grimes We crave your feedback. Please email your comments tomichael@asgam.com It Never Rains but it Pours A mildly annoying aspect of Macau life is that when it rains heavily many of the territory’s newly paved public spaces become near ankle-deep in water. Those readers with an engineering background suggest three likely causes for this phenomenon: blocked drains; inadequate drainage; or poor surface construction. In the latter case this may be because the surface has insufficient ‘camber’ (curvature) to allow the water to run off. We see some parallels between the occasionally soggy feet of Macau pedestrians and the position of the Macau casino market today. In sunny times, the paved spaces of Macau look impressive. But when stormy weather comes along weaknesses in construction become evident. Macau’s dependence on VIP gaming can neither be ignored nor shrugged off. It is a fact of life and the multiples of revenue it creates are a boon for the industry. Nonetheless any operator that considers it’s enough to hitch a ride on the VIP trade and simply use the mass-market sector as a hedging tool in case of economic downturn does so at his peril. The point surely of the development of Macau’s casino trade and other gaming markets in East Asia is that for sustained success the industry must represent the underlying demographics of the society it serves. If every street in China had a multi millionaire living in it, then using the mass market as a hedging strategy would serve perfectly well. It does not and it will not, especially for those operators with large construction debts to service. The Other Credit Crunch A key structural feature of the Macau VIP baccarat market is that it’s based on credit. Analysts have already told us they believe Chinese high rollers are finding it harder to get credit. That may be true, but there’s another potential difficulty. It’s that those VIPs already issued with credit during the boom times may find it harder to pay their debts in the bust. Few people seem to know the full extent of the level of debt default among gamblers in the Macau VIP trade. Those that probably do aren’t saying publicly at the moment. Adding to this confusion is that in Mainland China gambling debts are not legally enforceable through the courts. In jurisdictions such as Hong Kong where they are, we have already seen glimpses of what’s going on. At least one former high roller has been dragged through the courts there by a Las Vegas-based Macau gaming operator for an allegedly bouncing cheque. Part of the downturn in VIP turnover seen in the first quarter of 2009 could be due to the casinos themselves imposing tougher rules on the issuing of credit to so-called direct players. How much of Macau’s gross gaming revenue for 2008 and the first quarter of 2009 that has already been declared publicly by the authorities will turn out to be phantom income? And we shouldn’t forget that if VIP income goes bad it hurts the Macau government almost as much as the operators and betting agents, given that nearly 40% of the gross comes off the top in tax. Diversification of the industry via integrated resorts was supposed to mitigate some of the risks central to the high roller trade. There are encouraging signs that this is happening, given that City of Dreams, Melco Crown Entertainment’s new resort on Cotai, recorded its millionth visitor less than a month after opening. Two interesting questions are how much those million visitors are spending and on what. It took Las Vegas 50 years to change from a hard gambling town with some entertainment to an entertainment town with some hard gambling. It may be risky to assume China can manage in ten or even five years what it took the US half a century to achieve. Industry orthodoxy in some quarters is that Macau is a live table game market for hard gamblers and will remain so for the foreseeable future. The public’s obsession with live dealer gaming appears evident from the decision of some operators to introduce live tables with minimum bets as low as HK$50 during the downturn. That’s a 300% reduction on the minimum bet levels typically seen in the boom times last year. Given the overheads of running a live table and paying a local resident to act as dealer, we wonder how much economic sense that really makes in the long term without a matching reduction in dealer salaries. Inside Asian Gaming applauds attempts at diversification of the industry, but we think it could be focused more on diversifying the gaming offer rather than the non-gaming one. A point surely about modern gaming is that the range of product and the methods of product delivery have expanded dramatically alongside the technological changes in the wider world. In those terms the debate is less about diverting resources from the VIP sector to build the mass-market offer, and more about bringing brand new customers to casinos. These may be people that are happy to play a computer game on their mobile phone, mahjong on a table at home or to buy a ticket for Mainland China’s state lotteries, but have never thought of going anywhere near a live casino table—whether VIP or mass market. When viewed from that perspective, slots and electronic multiplayer games should be seen not as the poor man or woman’s version of a live table, but as valuable, flexible, tools to bring in new, complementary income. You don’t need to have lost money with Bernard Madoff to understand the value of that kind of diversification.