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May 2008 • MOP 30 The Big Squeeze In Macau’s VIP market USPC’s Winning Hand Galaxy’s Star Performance More monetisation: Safe at Heights ESL Gaming Indices Eastbound Traffic Hot Spots Data visualisation at work CONTENTS May 2008 The Big Squeeze 7 The Big Squeeze 17 Hot Spots 20 Winning Hand 23 Star Performance 29 Safe at Heights 31 The Best Gets Better 32 ESL Gaming Indices 36 Eastbound Traffic 40 Regional Briefs 7 42 International Briefs 44 Know Your Casino’s VCL 29 44 48 In Praise of Progress 50 G2E Asia Exhibitor List 52 Events Calendar 17 2 INSIDE ASIAN GAMING | May 2008 May 2008 | INSIDE ASIAN GAMING 3 Editorial Who Are the Oligopolists? Macau’s casino sector is characterised as an oligopoly—namely, a market dominated by a small number of sellers. The assumption is that six oligopolists “sell” casino gaming in the market. They are—in order of appearance of their first casino properties in the city—Stanley Ho’s SJM, Las Vegas Sands Corp, Galaxy Entertainment Group, Wynn Macau, Melco PBL Entertainment and MGM Grand Paradise. Basic economic theory states two distinct outcomes can occur under oligopolistic competition. First, the firms can collude, either through a formal or unspoken agreement. The oil producing countries in OPEC collude formally as a cartel to restrict production and raise prices to achieve what are known as “abnormal” profits. If the collusion is informal, the firms may simply follow the pricing of an acknowledged market leader in order to achieve those profits. The second outcome is fierce competition between the firms, which can lead to a situation approaching that of perfect competition, where only “normal” profit—corresponding to the level of profit that only covers costs— is generated. The international entertainment industry is essentially an oligopoly, dominated by media giants such as Time Warner and News Corp. Other oligopolies include the beer, tobacco and Editor and Publisher automobile industries. Firms in these industries vie for market share on the basis of product Kareem Jalal development and differentiation. Gaming under a restricted-license situation could—and perhaps should—develop as an Director oligopoly in the media industry mould. Players will go to the most attractive or comfortable João Costeira Varela venues, or the ones they most identify with. When there is insufficient supply relative to demand, however, even weak brands will prosper. Immediately following Macau’s visitor and casino boom Business Development Manager in 2004, for example, even uninviting casinos were packed because of the capacity shortage. As Matt Phillips capacity boomed, the undesirable properties have now fallen by the wayside and will eventually be rendered obsolete. Operations Manager In the VIP gaming market, Macau’s casino operators essentially offer space to junket operators to José Abecasis bring their customers to play in, since attempts by each new arriving casino operator to attract VIP customers directly have proved futile. Contributors During the monopoly era, casinos offered junket operators a commission rate of 0.7% on rolling Michael Grimes, Desmond Lam, chip sales, which brought Dr Ho’s company abnormal profits, especially since as a monopoly, it was Steve Karoul, Richard Marcus not compelled to invest in improved facilities or services in order to compete with other operators. Considering Macau’s new casino operators are investing heavily to create glitzy properties with Graphic Designer distinct brand identities, it would seem advisable for them to maintain an implicit understanding Brenda Chao not to also compete on the basis of commission. The casinos could seek to attract junket operators solely on the basis of product differentiation, while they informally collude to stick to the price of a Photography market leader—the natural leader would seem Stanley Ho, who pioneered the VIP market. Ike This, of course, is not what has happened, and commission rates have raised steadily since new casino operators arrived in Macau in 2004. Each successive attempt by an individual operator to increase market share by raising commission has quickly been followed by the other operators, eroding both that operator’s short- Inside Asian Gaming lived market share gains as well as overall margins and profits in the market. The latest escalation is published by was instigated by Melco PBL Entertainment, which had a distinct six-star brand proposition when Must Read Publications Ltd coming to market, so it is all the more ironic that it has now opted for the strategy of a commodity Suite 1907, AIA Tower, 215A-301 supplier attempting to increase sales. Av. Comercial de Macau - True, there is more to Melco PBL’s new arrangement than merely an increase in the commission Macau rate, and as discussed in our cover story this issue, the result could be that Crown Macau increases the Tel: (853) 6646 0795 size of the overall pie, in addition to gaining a larger share of it. Yet all the features of the arrangement can be replicated by the other operators, and when they do so, the VIP market will come closer to a For subscription enquiries, situation where revenues just cover costs. please email Last month, the Macau government announced it would not issue any new casinos licenses and [email protected] would put a freeze on approving new applications for additional gaming capacity. This boosted the stock prices of Macau casino operators, as it limits further competition in the market, at least in the For advertising enquiries, short term. Still, the balance of power in the VIP market appears to have already shifted away from please email the casinos in favour of the junkets. [email protected] Like the casinos, junket operators had seen their margins eroded as a result of intensifying or call: (853) 6646 0795 competition for players. This has resulted in the consolidation of the industry, and emergence of so- called junket “aggregators”—Melco PBL’s arrangement is with junket aggregator AMA Holdings. www.asgam.com By consolidating the major junket operators, the junket aggregators gain considerably greater bargaining power relative to the casino operators, who are essentially “buying” VIP business from the aggregators with their commission offering. In the VIP market, the junket aggregators have thus Printed by become the oligopolists, while the casino operators have been rendered essentially commodity Icicle Print Management (Macau) Ltd suppliers of venues for the aggregators to conduct their business within. Tel: (853) 2871 2818 Kareem Jalal Fax: (853) 2871 2898 www.icicleprint.com We crave your feedback. Please send your comments to [email protected] INSIDE ASIAN GAMING | May 2008 May 2008 | INSIDE ASIAN GAMING 5 Market Outlook 6 INSIDE ASIAN GAMING | May 2008 Cover Story The Big Squeeze What a difference a deal makes. After Crown Macau introduced a revolutionary junket arrangement—featuring a steeply higher commission rate—in December 2007, it has risen from an also-ran to clinch the largest share of the Macau VIP gaming market. Other operators look set to follow Crown’s lead, even though it is still not clear that the volume gains from raising commissions will make up for the resulting decline in margins May 2008 | INSIDE ASIAN GAMING 7 Cover Story owards the end of Stanley Ho’s 40-year casino operating monopoly in Macau, Tthe average commission rate on VIP rolling chip sales in Macau was 0.7%. As new operators started vying for a slice of the VIP pie, the rate had crept up to an average of about 1% by 2007. Melco PBL Entertainment (Macau) Ltd then decided to leapfrog the rest of the field by offering junket aggregator AMA International a staggering 1.35% commission rate on rolling chip sales at the high-end Crown Macau. Furthermore, Melco PBL gave AMA the further enticement of daily rather than the usual monthly settlement of that commission. The arrangement went into effect in December 2007 after Crown Macau’s gaming space was reconfigured and AMA and its junket collaborators moved in. There is more to the arrangement than just an escalation A Macau VIP room of the junket commission war, however. and taking on the sometimes troublesome The deal empowers AMA to drive greater task of enforcing the debts, since the Macau VIP gaming volume at Crown. Through a government only made it legal for casinos to convoluted business relationship, Hong extend credit in 2004. Kong-listed A-Max Holdings receives 80% Whereas luxury is the key defining of AMA’s profits (but is technically only an characteristic of VIP areas in casinos in the US “associate” company of AMA). A-Max uses its and Europe, the main feature of Macau VIP stockmarket listing to raise cash, which AMA Rooms is the provision of credit to players, then uses to buy VIP rolling chips in bulk especially those from mainland China who from the casinos at preferential rates. AMA are unable to take large sums of cash out of passes on some of the savings to its nine their home country. The arrival of credit is junket collaborators, who obviously found it believed to have multiplied gaming revenue a good deal as they all agreed to bring their in Macau by a factor of five times or more. clients exclusively to Crown. Melco PBL must have reasoned that the Taking the VIP Crown increase in VIP gaming volume generated by The AMA deal propelled Crown’s its deal with AMA would more than make up VIP gaming revenue and market share for the inevitable erosion of its profit margin. skywards. VIP baccarat accounted for 69.7% AMA also boosts volume by extending credit of the city’s total casino revenue in the first to its junket partners, who in turn can extend quarter of this year, and by February, Crown more credit to the VIP gamblers they bring Macau had secured a 21% share of that to Crown.

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