Casino Giants Are Trying to Kill Middlemen Junket Allies in Macau

Junket operators in Macau are having hard time at the moment, as casino giants are trying to do all the work by themselves, and avoid paying the middlemen commissions.

Macau gambling had provoked disagreements in the past, which were resolved in violent gun fights and unfortunately currently there is a conflict of interests again, which is conducted on a luxurious million dollars stage.

The most recent clash put on opposing sides the previous strong allies – namely large casinos confront the so-called junket operators. These special operators’ job for long years was to attract rich gamblers from China to go gamble in Macau, giving them popular interest-free loans in order to avoid the restricted amounts of cash players were allowed to take out of China’s mainland.

What powerful companies like Sands China, owned by Sheldon Adelson and operating under Chinese gambling laws, are currently promoting, are completely similar services. This is happening as an attempt to avoid middleman operators and eventually kill their business.

The conflict might have revolution outcome

The combat is expected to be severe as the profits coming from the world's biggest gambling market ($45.2 billion revenue in 2013), are currently nearly seven times the size of Las Vegas gambling market.

Grant Bowie, MGM China Holdings chief executive officer, commented: “Direct VIPs give us considerably higher profit margins.”

Karen Tang, an analyst at Deutsche Bank, explained that the reason why casino owners want to introduce the change is because casinos can make 10% to 15% more off major Chinese players, if they host them. Therefore, instead of paying junket operators to do the same in special VIP rooms, which they lease, casinos took the initiative to do the job themselves.

Other analysts think that the potential can reach even 50% higher revenue. Despite the figures, if this works out and casinos start to do everything themselves, this could be serious revolution at the world's richest gambling hub.

The importance of VIP gamblers

Casino giants give hard time to junket operators in Macau, trying to arrange their own high-stakes rooms

• VIP Chinese players bet at least $1 million/per person during every visit in Macau

• Chinese law allows citizens to take across border only up to CNY 20,000 (around $3,300)

• Junket operators earned $13 billion in 2013 paid by casinos

Around 2/3 of Macau’s casino revenue is generated by VIP players. Most of them are Chinese players who live on the main land and they usually bet on the above mentioned credit, due to cash restrictions. Currently, the law allows citizens to take across border only up to CNY 20,000 (around $3,300). Additionally, citizens can also withdraw from an ATM up to CNY 10,000/day.

Naturally, this amount is absolutely not enough for a VIP, who bets at least $1 million during every visit in Macau, according to the industry estimates. This is where the no interest loans fit in the picture, giving rich Chinese casino lovers the opportunity to bet a fortune.

VIP players get together in various private clubs like Sky 33 in Galaxy Entertainment's casino, where every player bets at least CNY 5 million. Sky 32’s levels are even higher at CNY 10 million minimum.

So far, this was possible thanks to the junkets, who make research, find rich Chinese players willing to bet millions and arrange their transportation, accommodation and no interest credit, making sure VIPs have anything they need, so the only thing they have to worry about are their casino pleasures.

Innovative approach

This way of attracting business through junket operators was necessary in 2002 when Macau opened its gambling market. Five new operators were given licenses – Sands China, MGM China, Galaxy Entertainment, Wynn Macau and Melco Crown Entertainment and Macau was turned into a gambling paradise.

These new operators, needed local support as they were not allowed to advertise or collect debts in China, so Chinese agents were used to find VIP players and then make sure they pay their debts.

Unfortunately for junkets, the current gambling news is not optimistic, because after 12 years in the business, big casinos already know who are the big Chinese players and no longer need the middlemen services.

Specialists’ point of view

Richard Huang, a Hong Kong-based analyst commented: “Casinos have a much more in-depth database to tap. They have more opportunities to collect debts too. With most of the rich Chinese having offshore bank accounts or properties that gives casinos increased comfort in extending them credit.”

Kenny Lau, a Credit Suisse Group AG analyst, added: “A junket operator – also known as a VIP or gaming promoter – typically draws a commission for each high-stakes bettor it delivers that's equivalent to 1.25% of the gambler's rolling chip turnover, or the amount of bets made.”

Bloomberg analyzed the collected data on the case of Macau gambling and revealed that close to 44% of the gross revenue from high rollers is commissions’ cost. This means that junkets earned around $13 billion last year, which equals to 29% of the total revenue of casinos.

So it turns out that actual casino profits are not that impressive, as D.S. Kim, a Hong Kong-based analyst at BNP Paribas Securities Asia, said: “After government taxes of 39%, casinos can be left with ‘rather thin’ profits.”

Hard times for the junkets in Macau

Lawrence Ho, co-chairman of Melco Crown and Stanley's son, added: “The influence of junkets is decreasing as the mass and the premium mass segments become more substantial.”

The junkets are still valuable partners to casinos but their role is definitely diminishing. For example Sands are focusing on doing the job itself and not using the junket operators’ services. The company is using its numerous private jets and luxurious accommodation, including concierge service, so that high-roller players can enjoy the best possible stay and bet millions with pleasure.

Despite the fact that more and more casino operators are currently arranging their own high-stakes VIP rooms in Macau, junkets are unlikely to ever be completely forgotten. The major reasons for this are their better database regarding rich Chinese players, as well as their willingness to take credit, which casinos are not so eager to do take.

So no matter the fact that junket operators are having struggles at the moments, there is high chance that they will remain valuable casinos’ partners bringing millions in revenue every year.