Inside Asian Gaming

INSIDE ASIAN GAMING | October 2012 28 I n the 1980s, at around the mid-point of his casino monopoly, Stanley Ho developed Macau’s unique VIP market structure— involving operators of private high-limit rooms and the rolling chip commission program. This junket-based play generates the bulk of casino revenue in Macau and most of the other legal casino jurisdictions in Asia. In 2011, it accounted for 73% of Macau’s total gaming gross of US$33.5 billion. The proportion looks set to decline a bit in 2012. But the dominance of VIP over the revenue mix continues despite the efforts of the Las Vegas-based operators, when they first came to Macau, to cut out the junket middlemen. The first VIP rooms, located within Dr Ho’s casinos, took on some of the administrative burden of the gaming operations in exchange for a share of revenue. Meanwhile, junkets received a commission on the purchase of non-negotiable or “dead” chips by the players they brought in. The commission served not only as a reward to junkets for bringing their clients to a particular casino, but also for extending credit to those clients, since the bulk of VIP gamblers in Macau nowadays hail from mainland China and are unable to bring large sums of money out of the country to play with. In addition, gambling debts are not legally enforceable in China, so the junkets (or rather the sub-agents that feed them players) are also charged with the sometimes onerous task of collection. Winning bets are paid in normal cashable chips which players can exchange for more dead chips to play. The more cash or cash equivalents the promoters induce their clients to exchange, or “roll,” in this manner, by providing credit, the more they earn, hence the term “rolling chip volume” (or “rolling chip turnover”) for denoting the churn on income statements and revenue reports. During 2009, the Macau government became concerned about what some analysts had referred to as “irrational” competition in theMacauVIPmarket, with new casinos (chiefly Crown Macau, now Altira) buying new business by offering an eye-watering 1.35% commission on rolling chip sales. Faced with lobbying also from the other casino operators alarmed that their margins were being dangerously eroded by the commission price war, in August 2009, the government drafted a regulation to cap VIP rolling chip commission at 1.25%. Since that time most of Macau’s casinos have moved away from commission-based payments to revenue-sharing—another way of dividing the spoils between casino and junket operator—in which the junkets partake in both the win and the losses. Payments under this system are not capped. (The Macau government looked at doing it, but decided it would be impractical.) The split ranges currently between 40 and 55%. The blended average house advantage on baccarat is around 1.3% (with house advantage on cash play determined by dividing house win by handle). The win rate using rolling chips is calculated according to a slightly different metric: house win divided by dead chip sales (sales used as a proxy for turnover). Since the“Player”and“Banker”bets on baccarat are close enough to even money wagers, each dead chip has an expected life of just under two bets. Win rate is a little more than twice the house advantage. Although casino operators employ varying win rate assumptions on VIP baccarat, a generally accepted figure is about 2.75%. However, the effects of this narrow margin are ameliorated by sheer volume of play. Operators rake in their enormous profits even after the tax man and the promoters and junket operators take their shares because the roll in dead chips is enormous. Turnover last year exceeded US$773 billion, translating into roughly US$26 billion in gaming revenue. That was more than four times larger than the gross gaming revenue on the Las Vegas Strip. But even with the casinos sharing revenue with their outside promoters, the house hold volatility inherent in baccarat can make it a tough—and risky—business for the casino. Gary Loveman, chief executive of Caesar’s Entertainment, was once quoted as saying he didn’t like high-stakes baccarat in his business mix because one lucky whale could potentially wipe out in a single session a significant portion of a casino’s quarterly profit. The ‘Dead Chip’ System In Focus