Inside Asian Gaming

January 2016 inside asian gaming 31 percent of monthly rolling chip turnover volumes. As a percentage of gaming revenues, this commission rate should result in about 50 percent of the premium play win being paid to the junket aggregator, who then distributes payments to the sub-junkets. (Not all of the contractual arrangements between concessionaires and consolidators, or consolidators and junket operators, are presently reviewable by Macau’s regulators, and none are released for public scrutiny.) Because the government taxes gaming revenues at about 40 percent of actual win, the residual margins on such premium play are disconcertingly thin. This commission rate is significantly higher than arrangements which existed for some time in the past in Macau, where major junket operators received commissions equivalent of about 40 percent of revenues. These were called 40/40/20 deals, or 60/40 deals for simplicity here. Under the 60/40 deal, the casino would retain only 20 percent of theoretical win after taxes and commissions. With the new rates (assuming no other adjustments), margins would drop to only 10 percent, not to mention the fact that the casino has to absorb the volatility risk of fluctuations in wins and losses, which at high-end baccarat can be dramatic. Casinos — as with other businesses — can make up for thin margins if volumes are large enough to generate adequate revenues and overcome volatility, and if the contractual agreements with consolidators are sensibly structured to ensure that fixed operating overheads are covered before other obligations are met. Nonetheless, in comparison to the pre-2004 monopoly STDM and SJM days, margins have significantly eroded and competition has dramatically increased. Reaction to this junket aggregation model in the premium play sector has been swift. Market shares among the concessionaires swung dramatically in the last few months of 2007 and early 2008 and, as would be expected, emulation and pricing pressures to match these trends have emerged elsewhere in the industry. Some concessionaires, such as Wynn and Venetian, seem to be engaging in the price war on commissions, while still suggesting that they do not have to pay premium prices for commissions due to their size, brand power and quality of facilities. Nonetheless, the traditional 60/40 structure is increasingly evolving to a 55/45 structure — perhaps not yet meeting the market price between AMA and PBL Melco, but still reacting to these competitive changes and attempting to win back market share or prevent further player or junket operator desertion. Other companies, such as MGM, have decided so far to concentrate on the mass market, and avoid the headaches and risks of this cutthroat competition. Competition is therefore increasingly evident among all participants in the Macau market—at the junket agent level and among casino concessionaires as they vie for new players and fight to retain existing ones. Supplier Power Supplier power is significant in Macau, and the major junket agents have emerged as strong and powerful suppliers of VIP customers. While the concessionaires have sought disintermediation strategies, they have had significant difficulties in dealing with customers directly — not wanting to take on the substantial credit risks as well as having to deal with complex funds transfer arrangements in China. (They may also lack the personal connections and cultural understandings that junket operators exercise.) Furthermore, high-value customers are notoriously disloyal, and will move from one casino to another to try their luck elsewhere if they have been on a losing run or can get a better offer. An advantage for the junket operators is that they can offer their services across a number of the various concessionaires’ properties (unless, of course, they have signed an exclusive deal, as with PBL Melco and AMA). Commission rates in Macau have therefore risen in recent times, eroding margins and putting pressure on competitive responses. Pricing is often considered a “low-level strategy” due to the ease of replication. This apparently is the case in Macau, where supplier power in the hands of the junkets has made them a very strong force with which to contend. As they become even more powerful, the Macau SAR government and regulators may be forced to consider ways of gaining control over them. Commission rates cannot go much higher. At the extreme, the maximum that the commission rate could be extended on the non-negotiable chip program would be somewhere between 1.42 The Emperor and Crown Macau . MGM Grand Macau Blast from the Past June 2008