Okay, let’s start by getting a couple of cliches out of the way.
Sometimes bad news is good news.
You can have addition through subtraction.
Those two often-used phrases may be pertinent to Macau casino operators in the wake of the arrest of Alvin Chau, the just-resigned chairman and CEO of Sun City, the largest junket operator in Macau.
Chau’s arrest and the national Chinese government crackdown on cross-border marketing of gambling to Chinese citizens might just be the blows that lead to the end of junket operations to Macau, bringing the city’s gaming industry completely into the 21st century and ending one of the national government’s concerns.
First, a little history.
Historically, Macau has been a den of iniquity, to use another cliché. Criminal gangs had nearly free run of the city’s casinos.
The image of a Macau casino a generation ago was of dark, smoky rooms where men stood several deep at the gaming tables betting on the games and on each other. There might have been as much illegal as legal activity happening.
Two things changed Macau.
First was the reincorporation of the city into China under the one country, two systems structure that allowed Macau to keep its casinos but that also brought in the Chinese government, which put a virtual end to the criminal triads.
The second was Sheldon Adelson. The Las Vegas Sands and Sands Macau founder saw the potential to develop the Cotai section of Macau into a Las Vegas Strip with mega resorts, upscale shopping, world-class entertainment, world-class hotels and convention centers.
The idea was met with considerable skepticism by those who believed that Macau would always be a city of smoky gambling dens.
I remember being at an investor conference where the CEO and CFO of a Macau hotel company openly scoffed at Adelson’s plans. Americans don’t understand the Chinese gambler, these ethnic Chinese executives said dismissively.
They proved wrong. What Adelson understood is that people are people. In any culture, they want entertainment, attractions, a clean and safe environment.
Today, Las Vegas Sands and other casino operators have invested billions of dollars successfully making Macau a tourism, entertainment and convention center.
Yet, from the start of the modern gaming era when the half-dozen current casino concessions were awarded, Macau still depended on gambling, and the gambling industry depended on junket operators.
The junket operators provided VIP players, but they did it much in the spirit of the old smoky-den era, financing the gamblers by lending them money, collecting their losses if in debt, including on Chinese Mainland, and marketing to mainland residents even though Chinese law prohibits marketing of gambling across borders.
However, from the start of the now generation-old modern era, casinos began marketing directly to players, and the share brought in by junkets steadily declined.
Just a decade ago, junkets provided three-quarters of VIP play. Today, EBITDA attributed to junket operators is estimated at 10 to 20 percent for the various casinos, and just 6 percent or 7 percent for Sands Macau.
Thus, with junkets now a relatively small piece of business, casinos are in a position to take short-term pain in exchange for long-term gain by ending their relationships with junket operators.
They would immediately lose a chunk of business, but over time they can rebuild that business with more profitable direct marketing to players. And, they can end the often-shrouded activities of junket promotions that excite the animus of the national government.
