Inside Asian Gaming

October 2010 | INSIDE ASIAN GAMING 25 thrown back in the water. Some of those smaller fish went rotten on them, creating a bad debt problem for all the operators (except Wynn Macau, which declined to join thewhalewar).Itallendedrathermessilywith the Macau government eventually imposing a cap of 1.25% on rolling chip commission deals. When that happened, the rationale for junkets to use Altira disappeared almost overnight. In the third quarter of 2009, when the commission cap came into effect, Altira’s VIP rolling chip volume fell 31% year on year (from US$14.2 billion in Q3 2008 to US$9.8 billion in Q3 2009). Junkets, no longer lured by the possibility of top rate commission, deserted the property enmasse. Net revenue at Altira Macau fell 31.4% year on year in Q3 2009 to US$182.6 million. Sowhatmakesoperatorsthinkapricewar on profit share will be any more sustainable thanAltira’s rollingchipcommission-induced bubble? Union Gaming Research certainly doesn’t sound optimistic. “Simply put, we don’t believe this activity is sustainable for any relevant period of time,” it stated. A gaming industry source spoken to by IAG put things slightly more colourfully. “The answer isn’t for operators to drop their pants to try to lure junkets,” said the insider. “They would be far better served making sure they have the right, visionary, leadership so that they can strategically build their businesses to work properly. What they need is new ideas, a different approach, not just more of same old baiting of junkets that failed so badly in the case of Crown Macau. “Market share is one thing, true profits are the real aim. Turnover is great, but if you don’t hold enough of it at the end of the day, you still can’t pay the bills,” added the source. “Where does the auction stop when you try to outbid the next guy? Junkets will simply move to the highest bidder again, starting more price wars, and still the poorer performing casinos won’t make enough money.” Wiggle room Union Gaming Research points out that a 57% profit share leaves little room for manoeuvre by the casino operator if its actual hold is below theoretical hold. “At this 57% level, there is virtually no room to under-hold,” states Union Gaming. “In fact, we estimate a minimum of just 2.72%hold (versus a normal 2.85%) to be the break-even threshold below which casinos would actually lose money when offering 57% commissions on a win-rate basis to junket operators.” Profit share is the term used locally in the Macau industry to describe this particular form of junket incentive, but win-rate commissions as Union Gaming refers to it might be a less confusing and more helpful phrase. That’s because the level of house ‘profitability’ in baccarat can be quite volatile, compared to the generally accepted theoretical house win rate of 2.85%. A casino’s actual win rate can fluctuate by plus or minus 50 basis points, which is what managements and analysts mean when they refer to ‘bad luck’ or ‘good luck’ in relation to casino win rates during a particular reporting period. And by having in mind the theoretical win rate, one can more easily assess from actual win rates just how narrow or wide a casino’s margin is going to be if it gives more of its house win to its junket partners. In a free market system, and barring the Macau government stepping in to act as referee in the manner mooted, an operator is of course entitled to offer to junkets whatever deals it thinks will bring in business. Often when a price war starts in an industry, those most critical of the alleged aggressor are those participants with a vested interest in maintaining a cosy status quo. But equally the sustainability argument seems a very powerful one, reinforced all the more strongly by the Crown (Altira) experience. Union Gaming estimates if a shooting war has indeed broken out over prices, the maximum win rate commission possible before losing money (EBITDA) is 1.68% for rolling chip deals and 59% for win-rate arrangements. Junkets and high rollers may be happy to move from one Macau VIP room and one casino venue to another in pursuit of the best pricing deal, like potentates touring a kingdom. But the banks and shareholders who risked billions to build the place will probably be less sanguine. Consumer power is a good thing, but not at the expense of rational competition. That’s the challenge for the industry, and that’s the question upon which the Macau government may ultimately be required to adjudicate. Whale hunting—not so fashionable in the rest of the world VIP Market Outlook