Inside Asian Gaming

INSIDE ASIAN GAMING | June 2010 30 Ironically, Amax Entertainment happened to be a 49.9% owner of Crown Macau’s competitor fromacross the road, the VIP-focused New Century/Greek Mythology casino, whose close links to Stanley Ho are well known, not least because SJM supplies the gaming licence for the property. One could say that in tacitly giving his blessing for the Amax-Crown Macau commission deal, Dr Ho may have killed two proverbial birds with one stone—i.e., provided a white knight for his son Lawrence Ho, co-chairman of Crown Macau’s owner Melco Crown Entertainment (Nasdaq: MPEL), and at the same time demonstrating to the foreign newcomers (in a controlled, calm, Chinese kind of way, of course) that he can himself ‘turn up the heat in the kitchen’. Some have even suggested that a third ‘bird’ suffered collateral damage from Dr Ho’s single and well-aimed ‘stone’ in that the Amax deal gave SJM a back door into Crown Macau at no cost whatsoever to SJM. Peace and profit sharing It was shortly after that that the Western operators themselves started complaining about the “unreasonable competition” posed by Crown Macau, and gracefully accepted the Macau government’s offer to broker a ceasefire, with none other than Dr Ho himself in the chair. Taking stock of where the Macau VIP market is today, the 1.25% cap is ostensibly in place, or is it? The one issue that was deliberately left off the junket commission cap discussions was the issue of profit sharing. Profit sharing, for the uninitiated, is an alternative junket arrangement where instead of the casino paying the junket operator commission based on rolling, the former agrees to split the win/loss result from designated VIP rooms with the latter. You could almost say that it is a business partnership; however we will leave that one to the New Jersey Gaming Commission to reflect on. Profit sharing started with what is known as the 40:40:20 model, which is the core business model for SJM and has since spread to the other casino operators. Simplistically, the government gets 40% of the gaming revenue in the form of tax; the casino owner (or VIP room owner) gets 40%, leaving the casino operator with 20%. In another form, if we accept that the theoretical house win (we can view this alternatively as profit margin on turnover) on the most common game, baccarat, is 2.85% as argued by some, then the following split would be shared out of every dollar that is bet: Dividing the Spoils Theoretical House Win 2.75% 2.85% 3.00% Amount bet $100 $100 $100 Amount won $2.75 $2.85 $3.00 Govt share @ 40% $1.10 $1.14 $1.20 Casino share @ 20% $0.55 $0.57 $0.60 VIP Room Operator share @ 40% $1.10 $1.14 $1.20 @ 45% $1.24 $1.28 $1.35 @ 47% $1.29 $1.34 $1.41 Sheldon Adelson—toughing it out Market View As one can see from the table bellow, the equivalent of a 1.34% junket commission would be a 47% profit share to the Junket on an assumed house edge of 2.85% (see the middle column). Given that some operators have been claiming a near-God experience of 3% actual house win (final column), a 47% profit share would equate to a junket commission of 1.41%. Dénouement So who is offering these deals and why would operators still be trying to undercut each other? Reality is often stranger than fiction—unless the fiction is a Dickensian melodrama like The Tale of Two Cities . The Macau commission cap history might start something like this: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of