The ‘pile ’em high sell ’em cheap’ approach to VIP table gaming in Macau could get a little harder in future following a bilateral deal between Melco Crown Entertainment Ltd (Nasdaq: MPEL) and Las Vegas Sands Corp. to cap Macau VIP agent commissions at 1.25 percent.
What this means in practice is MPEL yielding 0.10 percent commission to the market. This has been on the cards for more than a year following a price war started when MPEL signed a deal with the Hong Kong listed junket consolidator Amax late in 2007. In the deal MPEL took a gamble that cutting its margin on VIP play would deliver volume by creating impossible-to-ignore incentives for the agents. Those economies of scale would ultimately mean restoration of MPEL’s margin, the company reasoned. And so it came to pass–for a while–until other operators joined the price war; rolling chip volume started to drop off during the recession and the effects of baccarat house return volatility kicked in.
An interesting question from Asian Gaming Intelligence’s perspective is why the commission deal was bilateral and not universal among the operators. The Macau government indicated last year it would be minded to knock heads together and legislate a 1.25 percent commission cap if the industry didn’t put its own house in order.
One possible explanation is that MPEL and LVS were currently the only Macau operators competing against each other at a commission rate above 1.25 percent.
In any case an industry insider tells AGI that when it comes to commission caps, the devil is in the detail. The purpose of the cap in the first place was to prevent so-called irrational competition between operators to the detriment of operator margins and ultimately the detriment of local industry jobs and social harmony. That doesn’t mean the end of cut throat competition for VIP customers and turnover.
The insider told AGI: “The structure of VIP room agreements often means working capital is provided via a third party company to a betting agent who then extends credit to players. Commission on the resulting rolling chip volume need not come in whole out of the operator’s end of the deal.
“It can come via incentives offered to the VIP agents via the capital-providing entity. Essentially it’s a question of ‘borrow more working capital from us and we’ll do you a better deal on price’. That way the operator can perfectly safely say to the government ‘We’re sticking to the commission cap’ when in reality its VIP room partners are still battling away for customers,” adds the source.
