Brave New World

Singapore could create a new VIP model

Singapore’s tax take of only 5% on the VIP gross (plus 7% GST) opens up the prospect of a completely different VIP world—one with considerably more transparency and with considerably more potential for profit on lower volumes of roll. This would mean agents could pass on enhanced deals to players in terms of chip bonuses or discounts on chip sales or discounts on player losses.

Projecting the split

If we extrapolate from the current 40:40:20 model and for the sake of argument apply to Singapore VIP play the 2:1 ratio on the sharing of the gross currently existing between agents and casinos in Macau (i.e. 40:20), it would produce in Singapore a split (after 5% tax off the top) of 63.3% of the gross to the agents and 31.6% to the casinos. Once costs are netted out, that revenue split ratio could also theoretically be applied to the house edge (assuming junkets in Singapore were as influential in the VIP supply side as they are in Macau). In reality, given that they are starting with a clean slate, the Singapore casinos are unlikely to sit back and accept such a simplistic transfer of formula from the Macau market. Nonetheless if they wish to attract VIPs from Mainland China, and the Singapore authorities are willing to allow them to do it, there will in all likelihood be at least premium available to the agents for bringing in the business. If however the Singapore operators are focused more on bringing in high rollers from neighbouring Malaysia and other Asian markets outside China then a completely different style of business model could apply, with customer relationship management and junket operations more reminiscent of the Las Vegas model.

The down side of Singapore from the players’ perspective is that under the table bets known as the multiplier (where in effect the Macau government is cheated of tax and the Macau casino operators are cheated of revenue by the operation of a parallel and undeclared side market in VIP room betting) will in likelihood be impossible. The disincentives for junket agents to promote such behaviour in Singapore are very great because of the city’s rigorous regulatory system. Under the Singapore Casino Control Act 2006, agent contracts can be cancelled if they, quote: “affect the credibility, integrity and stability of casino operations”.

The Las Vegas operators did try to change the dynamics of the Macau VIP business by cutting out the middleman and bringing in more ‘direct’ premium players in the manner of their core businesses in the United States. The reality is though that it’s difficult to break the grip of the agents in an opaque business environment such as China, where the direct promotion of casino gambling is prohibited; where the local currency is not internationally convertible; where large amounts of cash cannot be legally moved across borders; where the source of a player’s wealth may not always be officially declared to the domestic authorities and perhaps most importantly of all, where casino gambling debts are not legally enforceable in the courts.

Action plan

Faced with a squeeze on gaming revenues and on their business model by the politicians, the VIP agents and wider recessionary economy, casinos in Macau are now moving beyond the notion of simply a voluntary cap on VIP commissions to talk about full blown strategic cooperation. The possibility of a link up between SJM Holdings and Las Vegas Sands Corp. (and possibly other operators) was announced following a lunch meeting between Dr Stanley Ho and Sheldon Adelson in mid-April.

“Everyone agreed not to compete, to have enough rice to eat and to get more taxes for the government,” Dr Ho told reporters after the meeting.

It turned out, after closer inspection, that this ‘lunch’ was not the bipartisan summit characterised in some parts of the regional media but in fact a meeting of a trade body called the Macau Gaming Operators’ Association formed this year between the six licensees.

Pledge

Dr Ho was quoted by the Chinese news agency Xinhua as saying he had “promised” (presumably to the junket operators themselves) not to talk about the commission rate for junket operators. But if he’s not going to talk about commissions, then what’s the point of cooperation, except perhaps to cap staff wages? In this context it’s worth mentioning Macau Law 16/2001 contains prohibitions on anti-competitive behaviour.

The idea that the MGOA is just a cosy trade association is rather punctured by the fact that it’s the key decision-makers rather than their underlings that have been meeting for discussions. And Dr Ho’s assertion that VIP agent commissions are off the agenda seems to be contradicted by Francis Lui, Vice Chairman of Galaxy Entertainment Group, who told IAG ahead of the next meeting on 18th May that he expected that agent commissions would indeed be a topic for discussion.

Wild card

Such levels of casino operator cooperation weren’t factored in to Mr Chang’s analysis of the VIP market back in October 2007 as they seemed extremely unlikely at the time. As recently as November 2008 Dr Ho—in reaction to the news that LVS was suspending development on Cotai because of the credit crisis—called on the Macau government to take back Cotai land allocated to LVS and offer it to the open market.

Singapore has none of the historical impediments on its business model of the sort faced by Macau. Singapore is also highly unlikely to choose the low road of back stairs deals in its bid to secure its place as a world class gaming market. Cynics may argue that as long as the multiplier is tolerated (or at least not actively policed) in Macau VIP gaming then Singapore will effectively be shut out of the ‘big bucks’ available from Chinese gamblers. That may be right. But no one should be in any doubt that in the medium to long term, whatever the competitive threat from new and emerging Asian gaming markets, the VIP agents in Macau face an existential threat. That threat is a combination of the tide of history, as China becomes more plugged in to the world financial system, and the tide of consumer retailing. Anyone who thinks VIP agents are here for all time need only remind themselves of the grocery trade. Where are all the middlemen in that industry now? They’re gone, swallowed up by the big retailers dealing directly with the producers.

Time and economics wait for no man. And that includes Macau’s VIP gambling agents.