Changing Landscape

Tax cuts on the VIP gross and caps on agent commissions are being actively discussed in Macau

The economic challenges faced by the Macau gaming industry in 2009 could be an opportunity to re-engineer the VIP segment of the industry. Major changes, including a reduction in the tax on the VIP gross and possible cooperation between operators regarding VIP commission caps are being actively discussed.

Macau is an overwhelmingly baccarat-centric and in particular VIP-centric place. The game in all its table forms pulled in gross revenues of 95.2 billion patacas (US$11.9 billion) in 2008—equivalent to 87.5% of all Macau’s takings that year from games of fortune. Of that baccarat gross, more than three quarters (73.7 billion patacas) came from the VIP market.

It follows therefore that what happens to the Macau VIP market in 2009—in terms of numbers of players, volume of business, and the commissions paid to agents and sub agents—will have a big influence on the fortunes of Macau and the wider Asian industry. In the first quarter of 2009, Macau’s VIP gross showed a year on year fall of 19.1% compared with the equivalent quarter in 2008 (although it was up 7.8% on the fourth quarter of 2008). Analysts are currently predicting an annualised year on year decline in the VIP gross in Macau this year of anywhere from 4% to 15%.

Boom to not-so-boom

During the boom times of late 2007 and early 2008, the Macau VIP sector was arguably a sellers’ (i.e. agents’) market. Casino operators (especially new entrants to the market such as Melco-PBL as it then was) needed to jump onto the VIP bandwagon in a rising market and weren’t always too squeamish about how they did it. This was seen in the 1.35% commission deal on rolling chips that Crown Macau did with the junket aggregator Amax. Now, at a time of a global credit squeeze, casinos are more focused on protecting themselves from bad debt than at growing VIP market share at any price. As a result, Macau has become arguably more of a buyers’ (i.e., casino operators’) market when it comes to taking on VIP business.

Nonetheless the ability of the VIP agents to adapt to new trading conditions (including the shift from SJM’s monopoly to a liberalised market post 2002) has been one of their strengths. China’s relative isolation from the international money markets has undoubtedly assisted in this—so far. No one should doubt, though, that in the medium to long term Macau’s VIP agents face an existential threat. The history of business has shown that the trend to remove the middleman from the equation is consistent and inexorable. A good example is the grocery supermarket sector, where many large chains use their buying power and economies of scale to purchase supplies directly from producers. Arguably Macau gaming has already seen the start of this process of squeezing the middleman through the growth of the junket aggregators, who suck in the smaller fish and on occasion (in the case of Amax and Crown) have such a symbiotic relationship with the casino operators that they actually interchange senior staff.

Survival strategy

Here’s what Mr Chang wrote in IAG in his piece ‘Long Live the Middle Man’ published in October 2007:

“The VIP Rooms that will survive in Macau will be the ones that can move quickly, and are adept at playing off one casino operator against another. The ultimate winners from more competition will always be the customers—in this case, the players.”

What he didn’t say (because at that time he had no way of knowing Singapore’s planned tax rates on VIP play) was that junket operators might come to play not just one casino off against another, but one jurisdiction off against another. In the case of Las Vegas Sands Corp., which has the advantage over other Macau operators of a presence in the Singapore market, it might actually be in the interests of the operator to help the outside VIP agents it is currently working with in Macau, to up sticks and relocate their VIP players to Singapore.