Remember the price war that started in the Macau VIP baccarat trade back in 2007 when Crown Macau offered a junket aggregator 1.35% rolling chip commission? It seems the price wars are back, but this time in the form of competition over profit sharing.
Industry rumours suggest one Macau operator is now dangling in front of junkets the carrot of a 57% share of the VIP profit, keeping only 3% for itself. To put that in perspective, that’s 15% more than Wynn Macau has reportedly being offering junkets under its profit share set up.
Few industry insiders expected the 1.25% commission cap imposed by the Macau government in September 2009 to end for all time the tough competition in the VIP segment. There are a considerable number of ways in which the operators can create incentives for the junkets, and in turn for the junkets to attract the players. The most common incentive on offer from operators to junkets is to share profits.
If the latest reports on a heating up of profit share competition are correct, it would mean the advent of a 40:57:3 model in the Macau VIP trade that could be as revolutionary (and potentially as provocative of a price war) as anything seen during the VIP commission battles between late 2007 and the autumn of 2009. The rumoured new VIP model would mean the government gets 40% in tax off the top, and the net (i.e., the gross, less player win) would be split 57% to the junket and 3% to the casino operator.
A 40:57:3 model probably only makes economic sense for the operator if the operator no longer has to staff and directly manage the VIP rooms involved and passes that responsibility instead to the junkets.
That already happens at some of Stanley Ho’s satellite casinos (i.e., casinos that have an SJM licence but are developed and/or operated by other parties). There, SJM has modified its traditional 40:40:20 model (40% to the government in tax, with 40% of the net to the property owner and 20% to SJM). In SJM’s case it has gone to a 40:55:5 model with some satellites. In return for surrendering 15% of the profit, SJM has been freed from the responsibility of staffing the relevant VIP rooms.
Overseas-based operators wishing to follow that SJM model by allowing junkets effectively to manage VIP rooms within their Macau properties would probably need to ensure that they retain ultimate oversight of those VIP room operations. That would produce the benefit of keeping their home regulators happy.
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