A bilateral deal on Macau VIP commission could spell a new era of operator cooperation
The ‘pile ’em high sell ’em cheap’ approach to VIP table gaming in Macau could get a little harder in future following a bilateral deal between Melco Crown Entertainment Ltd (Nasdaq: MPEL) and Las Vegas Sands Corp. to cap Macau VIP agent commissions at 1.25%.
What this means in practice is MPEL yielding 0.10% commission to the market. This has been on the cards for more than a year following a price war started when MPEL signed a 1.35% commission deal on rolling chip turnover with the Hong Kong listed junket consolidator Amax late in 2007. In the deal MPEL took a gamble that cutting its margin on VIP play would deliver volume by creating impossible-to-ignore incentives for the agents. Those economies of scale would ultimately mean restoration of MPEL’s margin, the company reasoned. And so it came to pass—for a while—until other operators joined the price war; rolling chip volume started to drop off during the recession and the effects of baccarat house return volatility kicked in.
An interesting question from Inside Asian Gaming’s perspective is why the commission deal was bilateral and not universal among the operators. The Macau government indicated last year it would be minded to knock heads together and legislate a 1.25% commission cap if the industry didn’t put its own house in order.
One possible explanation is that MPEL and LVS were currently the only Macau operators competing against each other at a commission rate above 1.25%. Another is that the other operators can’t agree among themselves on a cap and so MPEL and LVS are leading the way in the hope the others will follow. A third is that the remaining concessionaires won’t disclose to rival operators—even within the highest executive circles—what commission deals they have struck with agents, for fear of being gazumped by the competition.
The prospect of some sort of price fixing arrangement on the commission issue and other topics such as casino staff pay may however have moved a little closer in Macau. At the end of July senior representatives from the six licensed and sub-licensed operators met at Sociedade de Jogos de Macau’s (SJM) Grand Lisboa property to sign an agreement that formalises the establishment of a trade body—a sort of ‘G6’ for the operators.
As an indication of the significance of the new arrangement, the signing ceremony for the grouping—known officially as the Chamber of Macau Casino Gaming Concessionaires and Sub-concessionaires—was held in the presence of a who’s who of the industry. Those attending from the government side were: Edmund Ho, Chief Executive of the Macau SAR; Francis Tam, Secretary for Economy and Finance, and Dr Manuel Neves, Director of the Gaming Inspection and Coordination Bureau, the territory’s gaming regulator.
From the operators’ side, the representatives were: Dr Stanley Ho, Managing Director of SJM, S.A.; Francis Lui, Vice Chairman of Galaxy Casino, S.A.; Linda Chen, COO of Wynn Resorts (Macau), S.A.; Stephen Weaver, President of Asian Region of Venetian Macau, S.A.; Pansy Ho, Managing Director of MGM Grand Paradise, S.A.; and Lawrence Ho, Co-Chairman and CEO of Melco Crown Jogos (Macau), S.A.
Such a pubic show of harmony by the operators would have been hard to imagine even late last year. Back then, the operators were in a war not just for customers and revenue but also in a war of words over their respective approaches to investment in Macau.
Now, during a recession, the operators probably have more commonality of interest—not least in keeping overheads down and margins stable or if possible rising upward. Even before the signing ceremony at the Grand Lisboa, the operators had been meeting regularly this year to discuss issues of mutual interest, including pricing and intensity of competition. One of the striking things about the association is that in those initial meetings it was the very top people such as Dr Ho and Mr Lui, or their immediate deputies, who were getting together for discussions. This suggests they had a mandate for direct policy making rather than merely acting as a talking shop. It may be that as the Association matures and broad principles are agreed among the operators, more discussion and negotiation will be delegated to subordinate executives at committee or sub committee level. This makes practical sense given that the time and availability of the top people is often limited.
What the whole trade body trend does suggest is that Macau’s political leadership has in effect conceded it is willing to allow the industry to put its own house in order. The area where politics and commercial interests can sometimes overlap—such as competition over VIP commission—is an especially sensitive one for local politicians. They appear to prefer a laissez faire approach and small government as far as management of the gaming sector is concerned.
How much of this new togetherness by the trade association is window dressing and how much of practical benefit to the industry, workers and consumers, time will tell. Unions might argue a cap on wages helps operators and their investors but doesn’t help workers very much. The operators might equally counter that a wage war during a recession risks damaging the very industry that created the jobs in the first place.
The fine print
When it comes to commission caps, as one industry insider pointed out to IAG, the devil is in the detail. The purpose of the cap in the first place was to prevent so-called ‘irrational’ competition between operators to the detriment of operator margins and ultimately the detriment of local industry jobs and social harmony. That doesn’t mean the end of cutthroat competition for VIP customers and turnover.
The insider told IAG: “The structure of VIP room agreements often means working capital is provided via a third party company to a betting agent who then extends credit to players. Commission on the resulting rolling chip volume need not come in whole out of the operator’s end of the deal.
“It can come via incentives offered to the VIP agents via the capital-providing entity. Essentially it’s a question of ‘borrow more working capital from us and we’ll do you a better deal on price’. That way the operator can perfectly safely say to the government ‘We’re sticking to the commission cap’ when in reality its VIP room partners are still battling away for customers,” adds the source.