Image Conscious

The Serious Slot Player

Building the Complete Package

Chinese Are Not All the Same

Brand Change

Casino Marketing and Brand Building in Macau

February 2007 • MOP 30

61014182224283540424446

T4-375Gaming 31/1/07 12:55 P�gina 1

Composici�n

C M Y CM MY CY CMY K

February 2007

Image Conscious

Page 6 ~ The Serious Slot Player

Page 10 ~ Building the Complete Package

Page 14 ~ Chinese Are Not All the Same

Page 18 ~ Brand Change

Page 22 ~ Mahjong Buzz

Page 24 ~ High-Roller Accessories

Page 28 ~ Tour of the Properties: Hot Mocha

Page 35 ~ Terminal Velocity

Page 40 ~ Super Casino Controversy

Page 42 ~ Regional Briefs

Page 44 ~ International Briefs

Page 46 ~ A Private affair

5

Editor and PublisherKareem Jalal

DirectorJoão Costeira Varela

Business Development ManagerRicardo Carvalho

Operations ManagerRita Horta

ContributorsOcto Chang, Ben Lee, Glen McCartney

PhotographyIke

Graphic DesignersRicardo Borges Karen Yiu, Vincenzo Zaccaria

Editorial

Inside Asian Gaming is published byMust Read Publications LtdRua de S. Domingos, nr 16-i, Ed. “Hin Lei” 7A - Macau Tel: (853) 6646 0795

For subscription enquiries, please email subs@asgam.comor call José Abecasis Tel: (853) 2838 9055

For advertising enquiries, please email ads@asgam.comor call Ricardo Carvalho Tel: (853) 6682 8475

www.asgam.com

Complacency has given way to “cutthroat” competition in Macau’s casino sector, according to erstwhile monopoly operator Stanley Ho. In response to the competition, Dr Ho’s Sociedade de Jogos de Macau (SJM) is getting increasingly image conscious. During Dr Ho’s 40-year monopoly, relationships, rather than image, drove customers to his properties, with the bulk of casino revenue deriving from high-stakes baccarat played in private VIP rooms. The main floor of Dr Ho’s flagship Casino Lisboa was left to decay, and customer service was only a vague concept among the often surly dealers known for tipping themselves from the winning chips of gamblers at their tables.Competition has eaten into SJM’s market share at a faster rate than analysts had originally predicted, proving Macau casinos can no lon-ger neglect image, even in the VIP market. Following the opening of the crowd-pulling Sands Macau, SJM undertook a series of refurbish-ments at the Lisboa, but the company’s most important branding initiatives lie ahead.In an interview with Inside Asian Gaming, Dr Ho’s right-hand man Ambrose So conceded “Lisboa was built in the sixties, the ceilings are low and it’s very cramped, and now people are looking for a more comfortable environment.” SJM will provide that at the Grand Lisboa, which will open on February 11, in the run up to the Chinese New Year visitor influx to Macau. SJM promises to give HK$10,000 (US$1,300) to a random visitor at the Grand Lisboa every 15 minutes to mark the property’s opening.Stanley Ho may possess more marketing savvy than observers awed by Vegas-style glitz credit him with having. Last year, Stanley Ho earned ridicule for his attempts to lure more visitors to his prop-erty with offers of complimentary dishes of barbecued pork rice. Gamblers losing all their money at Wynn Macau’s casino and being presented with their bill at its Red 8 noodle shop may form a differ-ent opinion.SJM’s new president of joint ventures and business development, Frank McFadden – the former COO of Las Vegas Sands Corp’s local subsidiary, charged with running Sands Macau – informed Inside Asian Gaming that unlike the foreign newcomers developing Vegas-style facilities in Macau, SJM will maintain gaming as its core attrac-tion. The octogenarian Dr Ho remains a shrewd operator, but his son, Lawrence Ho, has proven more adept at building a brand – after all, Asia’s youth is a lot more brand conscious than the older generations. In 2003, the younger Mr Ho established Mocha Slot, which now runs

Image Conscious

six conveniently-located café-style slot machine outlets throughout Macau. Mocha Slot was the first gaming operation in the city to establish a distinct brand identity, and this issue’s “The Serious Slot Player” on page 6 discusses how the company plans to retain its niche in Macau despite the impending arrival of mega resorts offering thousands of slot machines. Mocha Slot General Manager Ted Chan believes Mocha’s sole focus on slots will allow it to continue demanding the loyalty of gaming machine aficionados, despite the glitz and glamour offered by the mega resorts, which will attempt to serve the needs of all types of visitors.Macau casino operators are still finding their way in the wake of the ever-growing deluge of mainland Chinese visitors, with brand build-ing in the city very much in its nascency. The marketing efforts of the casinos are still focused on Hong Kong customers, and tend to treat mainland Chinese as a homogenous entity. As pointed out in “Chi-nese Are Not All the Same” on page 14, the mentality of “it works for me, then it must work for all the other Chinese,” neglects the myriad cultural differences among the various regions of China.“Brand Change” on page 18 outlines how Macau casinos are fol-lowing the lead of their Las Vegas counterparts in their marketing endeavours. The arrival of casino branding in Macau is regarded as another sign of the maturing of the industry since it was liberalised in 2002. Some of the branding efforts are, shall we say, “quaint,” such as the Grand Emperor’s mock Beefeaters – pictured on page 18 – performing the changing of the guard while grumbling in Russian. Others are market revolutionizing and go on to be imitated around the region and even world, such as the stadium-style gaming floor at Sands Macau, which remains, in our view, the most exciting place for mass market customers to place their bets in the city.Virgin Group founder Richard Branson was in Macau last month to explore the possibility of getting involved in what has become the world’s pre-eminent destination for tourism and gaming investment. Mr Branson’s interest in Macau is apt considering the city still offers virgin ground for international resort developers. Rather than emu-late, however, these developers could opt to innovate and tailor their marketing efforts to meet the specific needs of the mainland Chinese market. The real sign that Macau has matured will come when Vegas starts looking east for inspiration.

Kareem Jalal

We crave your feedback. Please send your comments to kareem@asgam.com

76

n late 2003, Mocha Slot entered the Macau market by opening a modest 3,000 sq ft outlet at the Royal Hotel, establishing the city’s first real gaming brand.

Mocha Slot is the brainchild of Lawrence Ho, son of Macau casino tycoon Stanley Ho, who is himself trying to revive his company by elevating its image – the first step will be opening the glitzy Grand Lisboa later this month.

During Macau’s 40-year casino monop-oly, Stanley Ho was happy to generate huge

The Serious Slot PlayerMocha Slot is not afraid of competition from the vast gaming halls of Macau’s upcoming mega-resorts, which are set to swamp the market with thousands of new slot machines. Mocha Slot General Manger Ted Chan believes the company will continue to thrive by providing small but conveniently-located venues devoted solely to machine gaming

profits by neglecting the main floor and con-centrating on the VIP market, where relation-ships rather than image drive business. Pun-dits predicted it would take many years for the new foreign casino operators to tap into the VIP market because of the importance of established relationships. However, the rapid and unexpected rise of the newcomers’ share of the VIP market since 2005 – the first for-eign operated casino, Sands Macau, opened in May 2004 – has proven image is important for everybody.

Slots were distinctly lacking an image during the monopoly era, when Lawrence Ho believes casinos only included slot ma-chines in order to “look more like a casino.” While slots continue to contribute only a small proportion of total gaming revenue, they are showing explosive growth. Macau’s slot revenue in 2006 reached US$249.5 mil-lion – a 64.4% increase over the US$151.8 million collected in 2005. Slots contributed 3.6% of total Macau casino win in 2006, which though paltry compared to their 70% contri-

bution in Vegas, is a vast improvement from before 2003, when they did not even make up for one percent of total revenue.

In 2003, Macau had a mere 814 slot ma-chines, but even so demand outstripped supply, as witnessed by the banks of idle machines at Casino Lisboa. In order to make slots more appealing, Lawrence Ho came up with Mocha Slot, a string of trendy and cosy outlets which focused exclusively on ma-chine gaming.

Getting Them Through the DoorAs discussed in the last issue of Inside Asian Gaming, convincing table-loving Chinese gamblers to try out slots required a novel ap-proach. Mocha Slot’s solution was to first in-troduce electronic versions of popular table games such as sic bo, baccarat and roulette. These electronic table machines, known as multi-terminal games, offer a hybrid between tables and slots, and are a fairly new innova-tion globally.

“Most of our players started with multi-terminals because they are familiar with these games,” explains Mocha Slot General Manager Ted Chan. “But slowly they became curious about the slot machines next to the multi-terminals. When they saw more and more people actually winning jackpots, they began to see the point of slots.”

At first, multi-terminal games made up 70% of the machine mix at Mocha and made up for a similar proportion of the company’s total revenue. Following a “migration we have witnessed over the past three years,” multi-terminals make up less than 50% of capacity and revenue, having been replaced by regu-lar slot machines, according to Mr Chan.

Mr Chan believes strongly in the poten-tial of slots, given their “variety of interface, theme and design,” which makes them “more entertaining” than tables games, which are “always played the same way.”

Steady Slot ReturnsMacau now has 6,546 slot machines, repre-senting a 91% increase from the 3,421 ma-chines in 2005. The table count as of 2006 was 2,762, representing a 99% year-on-year increase.

Whereas both tables and slots saw simi-lar capacity growth in 2006, the average win per slot per day only declined from US$138 on average in 2005 to US$135 in 2006 (a 1.8% decline), while win per table fell from around US$11,600 in 2005 to US$8,500 in 2006 (a 26.4% reduction). Previously, invest-

ment in slot machines was held back by the high marginal returns from putting in more tables. As wins per table continue declining, the explosive growth in slot capacity could pick up further.

Mr Chan predicts Macau will have 14,000 slot machines by the end of 2007 – a more than doubling in capacity. Venetian Macau alone will add 4,300 slots when it opens in July. Mocha, which currently has six outlets, is

I

The popular Vegas Star

8

also looking to open a further two venues in 2007, though it will only make a modest ad-dition to the total count, with its outlets each containing an average of 150 machines. Mo-cha’s target is to have 1,400 machines by the end of this year, up from the current 1,000.

The new casinos offer huge capacity and increasingly luxurious surroundings, but Mocha is “outperforming more than 60% of the market,” claims Mr Chan. Wynn Macau, which opened in September 2006, is the top performer, says Mr Chan, because “they have a fantastic property. It’s a must-go place.” This, along with the property’s novelty fac-tor and a relatively low machine count gives Wynn Macau an average daily win per slot of around US$375, compared to the market av-erage of US$138. Mocha has three times as many slot machines as Wynn, and despite its lack of casino glitz, its average daily win per slot is about US$213.

Machine FocusedAsked whether he is concerned about the arrival of mammoth properties like Vene-tian Macau, Mr Chan responds: “I don’t really compete with the casinos. Sands and Wynn focus on visitation of property. They don’t care if visitors play tables or slots. Mocha’s focus is 100% on gaming machines. No tables, no hotel rooms, no retail. We focus on that, we build our membership loyalty – which takes time. It’s growing. They are play-ing the same Aristocrat machines. Why are they playing here? Because they know this guy, they know this attendant, they know this floor manager.”

Mocha offers conveniently located out-lets throughout Macau and aims to “accom-modate the needs of serious gaming ma-chine players. There are a lot of choices for tables. But if you are a serious slots player, come and play in Marina Plaza.”

Exclusivity at Marina PlazaThe Marina Plaza outlet opened on Decem-ber 23, 2006, including the ultra-exclusive Royal Members’ Lounge. The Members’ Lounge has 31 machines, but limits access to only 50 of Mocha’s 76,000 members – with final access to the lounge to be re-stricted to 100 members, alongside plans to grow total membership to 150,000 by 2008. As of January – within one month of open-ing – the average daily win per machine in the Members’ Lounge was double that of the rest of Mocha, with Mr Chan predicting the lounge will prove a much bigger earner

relative to the rest of the operation over the coming months.

Whereas the big casinos are targeting visitors from all over China, the serious slot players sought by Mocha Slot predominantly hail from Hong Kong, Macau and neighbour-ing Zhuhai in mainland China. Of Mocha’s current members, 50% are from Macau, with the remaining members split evenly between Hong Kong and China. Mr Chan reveals “the Hong Kong figure is growing faster than that of China. This year we will do more market-ing in Hong Kong, although there are lots of restrictions on promoting gaming in Hong Kong. Hong Kong is a mature, international city. We will do some technical things to tar-get that market.”

Mocha employs player tracking to de-termine its members’ preferences and of-fer loyalty points which can be redeemed for F&B and other services. Apart from the Royal Members’ Lounge, the second floor of Marina Plaza operates as a premium area restricted to 1,000 members. Access to the premium area is granted to customers ac-cording to a matrix of criteria including vol-ume of play and number of visits, as well as by invitation. Mr Chan emphasizes Mocha’s focus on visitation, with access granted to both high-spending customers who come once or twice a month, and average-spend-ing customers who come every day. Access to the Royal Members’ Lounge is by invita-tion only.

Benefits of the Capacity BoomMr Chan does not worry about the huge ex-pansion in Macau’s slot capacity. In fact, he believes it will benefit the entire market by promoting “leisure gambling” in a city long dominated by hard core table-gaming. Mo-cha’s parent company Melco will be part of the capacity boom. Melco PBL Entertainment – a joint venture between Lawrence Ho’s Melco and Australia’s Publishing and Broad-casting Ltd – will install 3,000 machines at its flagship City of Dreams mega-resort, sched-uled to open in 2008 along the burgeoning Cotai Strip.

Venetian Macau, City of Dreams and other mega-resorts will bring greater entertainment, retail, dining and other non-gaming draws to Macau, drawing a new breed of visitor to the city. Mr Chan believes this, along with the big growth in the size of China’s middle-class, will raise demand for slots relative to tables, and Mocha will seek to further establish its niche as the only slot-focused venue to capitalise on that market-shift.

Star PerformersMr Chan says stand-alone games from Australian manufacturers, including Stargames, are Mocha’s top performers. Australian games dominate in Macau, with more than 50% market share.

As for the multi-terminals, In-terblock products imitate the feel of “real tables,” whereas Stargames’ Vegas Star employs a “theatre fit-out.” Mr Chan says both types of interface do equally well at Mocha, with customers generally prefer-ring one or the other type.

n Macau, 90-95% of the revenues of casino operators derive from gaming activi-ties, compared to only around 50% in Las Ve-gas. Macau’s current revenue mix is akin to that of Vegas in the 1960s. Vegas moved on, and so will Macau, presumably at a much ac-celerated pace.

CLSA’s Aaron Fischer predicted in his authoritative Macau Mania report that the share of non-gaming revenue in Macau will increase rapidly over the coming years, “par-ticularly as the Cotai Strip develops and casi-nos attract visitors for business conventions and family entertainment as seen in Las Ve-gas.” He predicted non-gaming “will increase to at least 25% of total revenue by 2010.” However, “given the inherent love of gaming

Building the Complete PackageMacau casino operators will increasingly rely on non-gaming attractions to differentiate themselves and maintain profit growth. Last month, developers broke ground on Macau Studio City, one of a number of upcoming mega-resorts that will transform the city into a more complete tourism destination

in Asia, this will still be below the 50% of rev-enue derived from non-gaming activities in Las Vegas.”

Good for MarginsThe CLSA report pointed out that “hotel op-erations typically generate an Ebitda [earn-ings before interest, taxes, depreciation and amortization] margin in excess of 70%, while food and beverage and entertainment is nar-rower than the gaming activities’ margin of closer to 50%.”

The gaming activities’ margin in Macau, however, is likely to be significantly lower than that in Vegas, given the differences in the gaming markets of the two places. Slots,

which have low overheads, contribute over 60% of gaming revenue in Vegas, but only 4% in Macau, where tables dominate. Meanwhile, the bulk of table gaming revenue in Macau comes from high-rollers playing VIP baccarat, and rising junket commissions are eating into casino operators’ profits. As pointed out in “A Junket Primer” in the last issue of Inside Asian Gaming: “VIP room operators used to offer their clients 0.7% of theoretical win (TW) as commission, leaving them 0.3% to cover their costs and contribute to their net margin. Now, with VIP room operators offering up to 1.0% of TW as commission, they have effectively given away their profit margin.”

Gaming revenue in Macau is also taxed at a much higher rate than in Vegas, and rela-

1110

tive to non-gaming revenue. Macau’s effec-tive gaming tax rate is 39% (35% as direct tax and a further 3-4% as compulsory social and welfare contributions) compared to 6.8% in Nevada and 8% in Atlantic City.

Macau makes up for it high gambling tax rate with lower labour costs, however. Las Vegas Sands Corp (LVS) Chairman Sheldon explained to Inside Asian Gaming that the labour rate in Vegas works out to approxi-mately 35% of revenue, compared to 5-7% in Macau, “so overall it’s almost the same.”

Excessive ReturnsGaming in Macau continues booming, and in 2006, the city’s gross casino revenue over-took that of the Las Vegas Strip. LVS’ Sands Macau has scaled back its unsuccessful high-end dining facilities to make way for more gaming tables – the high marginal returns on which have thus far discouraged investment in non-gaming attractions.

Following the liberalisation of Macau’s gaming industry in December 2002, Vegas-based operators made bold declarations about bringing world-class entertainment to Macau, but the theatre at Sands Macau has yet to stage performances, and Wynn Macau has left its theatre for the second phase of development.

Macau had 2,762 gaming tables as of end-2006, with supply increasing 99% year-on-year, compared to the 22% growth in ca-sino revenue. CLSA estimates 2,870 gaming tables will be added to Macau’s current sup-ply by 2008, leading to a marked decline in

wins per table. Macau casino operators have thus far enjoyed a windfall from a spectacu-lar gaming boom, but they will have to start pursuing non-gaming revenue and invest in transforming the city into a more complete Vegas-style tourism destination in order to continue generating healthy returns.

As a slew of ambitious new casino-cen-tred properties come online over the next few years, operators will increasingly turn to non-gaming attractions to differentiate them-selves and lure visitors. The introduction of major non-gaming draws, in turn, will trans-form Macau’s tourism and gaming market.

Macau currently lacks “stickability,” with the average visitor stay around 1.1 days. “There is a serious lack of non-gaming ele-ments that are needed to draw tourists to stay a day or two longer,” explains Paul Steel-man Design Group (PSDG) Asia Managing Architect James Wong.

PSDG – designer of Sands Macau – has been commissioned to design the US$2 bil-lion Macau Studio City – “Asia’s first leisure resort property combining theatre, televi-sion and film production facilities, and Studio RetailTM, with gaming, entertainment and world-class hotels.” Studio City will sit along the Cotai Strip, where LVS and other Macau operators are frantically working to develop “Asia’s Las Vegas.”

Mr Wong emphasizes the need for Macau casino operators to increase their non-gam-ing offerings: “People in the industry say the [gaming] pie is getting bigger, but the tables are increasing in number, which means ev-eryone’s profit margins will go down. Any-body who is doing a project is now looking at putting in more entertainment elements. You can thereby retain more family business and keep people here for a day or two longer. You give them more to do than just going to the tables. You give them shopping, you give them entertainment. That’s the best way for everybody to make Macau a real tourist des-tination.”

Gaming Will Decline in the MixMacau Studio City is amongst the ten larg-est casino projects currently being built in the world. Phase one of the 2,000 hotel-room

I

complex is scheduled for completion in the first quarter of 2009. The property will have 3.7 million sq ft of gross floor area, of which about 1 million sq ft will be devoted to re-tail space, film and TV studios, a concert hall and expo facilities. There will be 2,000 hotel rooms, and a relatively small 200,000 sq ft set aside for gaming, with 400 gaming tables and 1,000 slot machines. Construction of the second phase of the project will likely start in 2009, and pending government approval, the gross floor area could be increased to 6 million sq ft by 2011.

A comparatively small proportion of Ma-cau Studio City’s total area will be devoted to gaming. LVS’ US$2.3 billion Venetian Macau, by comparison, will have 700 tables and 4,300 slot machines when it opens in July 2007. Mr Wong points out that “the development and design of Macau Studio City is more into the way of a complete entertainment experience for people, rather than singling out gaming as the theme.”

Macau Studio City is being developed by three partners. Hong Kong-listed eSun Hold-ings (through its subsidiary, East Asia Satellite Television Holdings) has a 40% share of the project, New Cotai LLC, through a consortium headed by former LVS executive David Fried-man, also has 40%, and CapitaLand, one of Singapore’s largest property developers, ac-quired the remaining 20% in January.

The casino will operate under the license of Melco PBL Entertainment – one of Macau’s six gaming concession holders. Marriott In-ternational has submitted a letter of intent to manage both a Marriott hotel and a Ritz-Carlton hotel at Macau Studio City. Phase One of the project will also include a new 6-star boutique hotel concept called The Tang Hotel, created by David Tang, founder of the China Clubs and Shanghai Tang.

Entertainment DNAThe entertainment element of Macau Studio City will be provided by eSun, a major player in the Chinese live entertainment and film-star market. The company says it will “inject its media and entertainment ‘DNA’ across the full range of activities and experiences that guests will enjoy at the property.”

CLSA’s Gavin Ho elaborated on eSun’s role in the project: “For example, it will lever-age its satellite network and have live-audi-ence television events taped on its prop-erty in which guests can participate – game shows, music events, contests and the like, with Asia’s favourite talents. It also plans to work with major retail partners to have tele-

vised fashion events, and film, television and star-tie-ins and sponsorships that will excite audiences and guests alike, and bring Asia’s most important stars to the shopping mall’s walkways.”

The entertainment facilities at Macau Studio City will include a 2,300 seat theatre, a 4,700 person capacity multi-function venue capable of hosting sporting and MICE (meet-ings, incentives, conventions and exhibitions) events, stand-alone state-of-the-art televi-sion and film production facilities and a 1.4 million sq ft Studio RetailTM complex.

Studio RetailTM

“Studio RetailTM will integrate live-audience taped lifestyle and fashion programming throughout the retail environment,” accord-ing to PSDG. Shopping at Macau Studio City “is an experience whereby you are continu-ously interacting with the entertainment element, which is either in the film or music area,” explains Mr Wong. “You will be visually and sensually entertained at the same time as you are going through your shopping ex-perience.”

Several attraction corners will be inter-spersed in the retail area, where visitors might witness a film shoot, celebrity-interview, or small-scale music or theatrical performance. The multi-function venue could see taping of TV shows and other performances in front of a live studio audience, and “we also have small recording studios peppered around the place,” adds Mr Wong.

In January, Taubman Asia was appointed as Macau Studio City’s preferred retail part-ner. Taubman Asia is a subsidiary of Taubman Centers, one of America’s biggest shopping mall developers. Taubman’s retail projects in-clude The Pier at Caesar’s in Atlantic City, the future MGM MIRAGE CityCenter retail district development in Las Vegas, and other retail properties spanning from Beverly Hills to Or-lando, Florida.

Taubman Asia President Morgan Parker was initially concerned about retail over-ca-pacity in Macau, given the forecast creation of 6 million sq ft of new retail space in the city over the next three years. In October 2006, Mr Parker said the development was too much too soon, but he has since changed his assessment. On the announcement of his company’s partnership with the Macau Studio City project, he commented: “We are extremely confident Macau won’t be over-supplied with retail” as long as the pace of development for casinos, convention centres and resorts continues.”

Mr Parker says further research on the market convinced Taubman to enter Macau. Taubman manages 23 regional shopping centres in eleven US states, and the company feels it could use its strength and experience to establish a dominant position in Macau’s nascent resort-centred retail market. Mr Park-er also called into question the 6 million sq ft forecast, pointing out “a lot of the supply is ei-ther delayed or not being built. There are big question marks about what’s being built.”

Furthermore, Mr Parker adds that even if the 6 million sq ft gets built around new ho-tel rooms, Macau will only have 17 sq m of retail space per hotel room compared to 33.5 sq m per room in Las Vegas. Vegas currently has 41 million sq ft of retail space compared to Macau’s 1 million sq ft.

So Long Hong KongMacau bulls believe the massive new supply of quality retail space in the city will allow it to draw mainland Chinese visitors who cur-rently travel to Hong Kong to shop, especially since Macau will soon also offer a wider vari-ety of entertainment and cheaper and higher quality hotel accommodation.

Mr Wong echoes that sentiment and

scoffs at the suggestion that it will take sever-al more years for gambling-hungry mainland Chinese to start demanding non-gaming attractions to a sufficient degree to support Cotai’s mega-resorts. “I think they would come if this project opened tomorrow. I think only because of a lack of it are they turning to Hong Kong. When such facilities become available in Macau – and they may be even better than the Hong Kong ones in terms of novelty and design – people will find that Macau is where they want to come and spend their money and stay a couple of days more before they go to Hong Kong just to go to Ocean Park, and god forbid, even Disney.”

LVS is the most fervent follower of the supply-creates-demand thesis in Macau. The company is developing some 20,000 hotel rooms along the Cotai Strip in properties that include a total 3 million sq ft of retail space. Sheldon Adelson has a knack for knocking his competitors, and says he is not worried about the Taubman project. “If you were a shopper and you were staying in one of our 20,000 rooms, would you leave the proper-ty, walk down the street and go to another property simply because it’s stand-alone and Taubman developed it?” he asked. “I can as-sure you that American developers mean

little or nothing to Asian retailers.”

Entertaining PotentialEntertainment in Macau has even greater growth potential than retail, if only because the base is so low. As CLSA’s Gavin Ho points out, in 2005, 71% of visitors to Las Vegas at-tended shows during their stay, taking in an average of six shows. Vegas visitors spent an average US$137 and US$49 per trip on shopping and entertainment, respectively. Meanwhile, Macau’s mainland Chinese visi-tors spent an average US$237 – 73% higher than Vegas visitors – on shopping in 2005, but because of the almost complete absence of shows in Macau, spent almost nothing on entertainment.

Considering the cash they splash on shopping, mainlanders could at least theo-retically afford to splurge on entertainment as well. “Affordability aside, we believe shows and concerts should have strong appeal, pro-vided they are the programmes these visitors are looking for,” writes Mr Ho. “Andy Lau, for example, who has won countless music and other awards in mainland China, Hong Kong and overseas, could easily pull a full house in a mainland show for which tickets sell at up to Rmb1,000 (US$130).”

More About the OwnersMacau Studio City is being devel-oped by Cyber One Agents Limited, a 60/40 joint venture between East Asia Satellite Television Holdings (a subsidiary of Hong Kong-based eSun Holdings) and New Cotai LLC.

eSun Holdings is one of Asia’s leading media and entertainment companies and an associate compa-ny of Lai Sun Development, a lead-ing hotel and property developer. Both companies are part of Hong Kong’s Lai Sun Group. eSun holds 66.6% of East Asia Satellite Televi-sion Holdings (giving it a 40% share of the Studio City project), while the remaining 33.3% is held by Singa-pore’s CapitaLand.

New Cotai, LLC is a consortium of US-based investors including Da-vid Friedman, Co-Chairman of Ma-cau Studio City, and funds managed by Silver Point Capital, a private US-based investment firm, and Oaktree Capital Management, a global inde-pendent investment management firm. Mr Friedman is a veteran resort and gaming developer who led Las Vegas Sands Corp’s entry into Ma-cau. He also holds a Nevada gaming license.

1312

In designing Macau Studio City, PSDG President and CEO Paul Steelman says he “wanted to make a modern project – a building that is seamlessly relevant for any time period. We want it to be functional and deemed as a great design and special tourist attraction forty years from now.”

PSDG follows the same principles in designing its other projects, including the striking Ho Tram resort in Vietnam, pictured here.

1514

ll Chinese look the same.”Many Caucasians – often apparently un-

prejudiced ones – are guilty of having uttered that statement on arriving in the Orient. The reverse is also true. A Chinese traveller land-ing in a predominantly Caucasian country for the first time can also have trouble dis-tinguishing between individuals. Why is that so?

The answer lies in our respective back-grounds and the resultant filter we use to view the world.

If one grows up in a multi-hued society where the colour of the eyes and hair differ, as well as the colour of the skin, one would naturally select those as distinguishing fea-tures. If, on the other hand, one grows up in a society where the common physical traits are

Chinese Are Not All the SameIn sending marketing messages to mainland Chinese, Macau casinos generally make the mistake of assuming all Chinese have similar cultural attitudes and preferences. Casino marketing guru Octo Chang teams up with Ben Lee, VP-Casino Projects with the Diamond Casinos Group, and Macau tourism academic Glenn McCartney to point out the need to differentiate marketing messages in different parts of China

dark hair and brown eyes, one ends up look-ing for other facial features like shape of the eyebrows, shape of the eyelids or the face, skin tone, etc, to tell individuals apart, and ig-noring what would seem to the Caucasian to be the most obvious distinguishing features.

Just as Caucasians may experience dif-ficulty in distinguishing physical differences between individual Chinese, they may also fail to distinguish cultural differences. The various Chinese communities in this part of Asia have had divergent cultural evolu-tions, and the savvy international marketer understands they need to be approached differently. For example, the marketer may tailor different messages for the Chinese communities of Malaysia, Singapore, Indone-sia, Vietnam, Philippines, Taiwan, Hong Kong,

and last, but certainly not least, mainland China. The marketer may congratulate him-self on his sensitivity in making the above distinction, but would still be making a huge mistake – namely, thinking that all mainland Chinese are alike and can be considered a homogenous entity.

Chinese themselves are guilty of such ignorance, and you will find examples of it in everyday life in Macau and neighbouring Hong Kong. An overseas-born Chinese friend who happened to speak a different dialect to the dominant Cantonese in Macau was told he couldn’t be Chinese if he didn’t speak Can-tonese. That’s perhaps not surprising given that local schoolchildren in Macau and Hong Kong refer to the Cantonese dialect as “The Chinese Language.”

If it Works for Me…This cultural arrogance has made its way into the marketing media, and Hong Kong-style promotions and slogans pervade the mar-keting efforts of all of Macau’s casinos, from US-based giants Sands and Wynn to smaller players like Rio and President. The mentality of “it works for me, then it must work for all the other Chinese,” neglects the myriad cul-tural differences among the different regions of China.

Some basic facts to consider – the popu-lation of Beijing is 12.8 million, Shanghai 20 million, Guangdong 84 million , Fujian 34 mil-lion, and so forth. These cities and provinces are bigger than most countries, and each have their own unique and continuously evolving dialect and cultural roots. Disre-garding the written language, most of these dialects are considered unique languages by language professors.

In a recent survey conducted in the de-parture areas of various regional airports, re-search found that the messages that would influence the travellers to choose a destina-tion differed consistently depending on the origin of the travellers. In particular, the sur-vey found that the perception of Macau as a destination varied quite markedly among travellers from Hong Kong, Shanghai, Beijing and Taiwan.1

Macau gaming operators send out a bar-rage of messages across a multitude of me-dia, yet according to the survey findings, a message that may be suited to one market

segment may actually alienate another seg-ment. For instance, Taiwanese travellers in-dicated that safety is an important criterion, but to emphasize it in a marketing commu-nication to travellers from another market may instead raise questions as to why safety should even be an issue at all.

The following two graphs are examples of the leading image components of Macau in the mind of travellers from Hong Kong versus those from Shanghai. “Common” im-

ages are positive attributes also possessed by other destinations, while the “unique” im-ages refer to attributes offered by Macau in particular, and generally absent in compet-ing destinations

The two graphs show that both sets of travellers perceive Macau’s sole unique draw as – surprise, surprise – gaming, as seen in the bottom right-hand quadrant. Both also unsurprisingly associate the image of the historical Ruins of St Paul’s with Macau.

Shifting PerceptionsNow the challenge ahead for Macau op-erators is to alter travellers’ perceptions and align them with their product offerings: sig-nature restaurants (Lisboa’s Joel Robuchon), glitzy nightlife (Wynn’s Tryst) and one-stop adult entertainment (Grand Waldo’s 5-storey “Entertainment Block”). That is, the operators have to create the perception that Macau is more than just a gambling haven in order to maximize the draw-cards they have put or are putting in place.

Apart from the perceptions, however, how can operators actually motivate travellers to come to Macau? It takes a two-pronged ap-proach.

The first, as explained, is to change the current perception to match what you have in terms of attractions. The second strategy should actually precede the first, and that is, to provide those attractions which the travellers actually want to experience. Is the glitzy thousand-dollar-entry and girl-

“ARestful and relaxing Friendly local people Clean and litter free

Common

Relaxing Happy and fun

Holisticimagery

Gaming activities – casinos, racing

Access to China Gambling opportunities

Ruins of St. Paul’s Macau Tower

Imageattributes

Unique

Hong Kong Travellers’ Perceptions of Macau

Good nightlife / adult oriented Restful and relaxing

Political stabilityFriendly local people

Common

Relaxing Stable and safe

Holisticimagery

Gaming activities – casinos, racingGambling opportunities

Unique architectureRuins of St. Paul’s

Imageattributes

Unique

Shanghai Travellers’ Perceptions of Macau

1716

around-the-pole something that will draw a punter from Beijing? Does Joel mean any-thing to the Shanghainese, or is the glam-our chef an attraction relevant only to Hong Kong elites?

Just to highlight some differences, the analysis of the survey results also established the individual messages that were deemed by the travellers as important to them and that might influence their decision to travel to Macau in the future. The “Y”s represent fac-tors that were deemed important, while the “N”s represent those that were not.

As mentioned earlier, the Taiwanese are rather concerned about safety in Macau and need to be reassured that the gang-wars pre-ceding the handover to Chinese sovereignty in December 1999 are not likely to resurface. Hong Kong visitors, on the other hand, prefer a clean and tidy environment – something that does not even appear on the radar of the mainlanders.

Looking at the differences among the mainlanders themselves, it is interesting to note that the northerners consider good quality hotels a must, while the Shanghai-nese do not give a hoot. Likewise, neighbour-ing Hong Kongers do not need hotels, yet owing to restrictions on advertising gam-bling in Hong Kong, hotels are the featured element of the majority of casino ads over in Hong Kong.

Obviously, a “one message fits all” ap-proach is not the most optimal in promoting travel to Macau. Focusing on casino-based tourism as the sole marketing and promo-tional strategy may also limit the appeal of Macau in the future to wider traveller mar-

kets.With the exception of the Americans,

just about all the other operators and casino owners in Macau come from Hong Kong, and their marketing promotions have a sameness about them. Although the Vegas newcomers offer different hardware and deploy subtler branding messages, they are also tending to-wards the same direction in terms of execu-tion and tools.

Word of MouthThe survey results also suggest that the value of each marketing method differs across markets. The Taiwanese traveller was being bombarded with TV and print adver-tisements and TV travel programmes – es-sentially your typical Hong Kong-style cam-paign. However, the Taiwanese surveyed indicated that they placed much greater importance on outdoor advertising, the in-ternet and work colleagues.

In an earlier column, “Those Annoying People Called Customers,” that appeared in the October 2005 issue of Inside Asian Gam-ing, I made mention of a marketing case where the informal word of mouth advertis-ing was the key element in the successful outcome. This appears to be the case here as well.

The sameness in execution I alluded to is clearly evident everywhere you go in Macau and Hong Kong. Print media galore, Canto popstars and movie celebrities, and the ubiq-uitous lucky draw are such common occur-rences that one has to wonder about the ROI and measurable effectiveness of such tools.

Throughout history, the Chinese have been avid gamblers, bet-ting on everything from cricket fights to archery contests. Gambling has been dubbed China’s ancient vice. In fact, the very first accounts of gambling, dating back some 3,000 years, were found in China. The history of Mahjong, one of the most popular Chinese gambling games, goes back to 960 AD – some even believe Confucius to be the inventor.

It is interesting to note that the Chinese love of gambling has per-sisted despite strict laws and bans imposed by imperial rulers and, more recently, the Communist Party. Not only were they considered morally bad (Confucius said that “a gentleman does not gamble”), gamblers were sentenced to death during the Song Dynasty and had their hands cut off during the Ming Dynasty.

Gambling is, by and large, a way of life for the Chinese. Back in the late 1800s, historians in China and Hong Kong observed that ev-eryone gambles for everything and that “the boys learned gambling as soon as they could talk, and pursued it through life.” Even buying bread from a street vendor can be a gambling game.

Recent anecdotal evidence suggests the same still holds true cen-turies later.

Why Chinese Like GamblingWhile mainland Chinese cannot be considered a homogenous entity, they are widely considered to be the world’s most hard-core gamblers. CLSA’s Aaron Fischer looks at the origins of the Chinese passion for courting lady luck

The weekly TV show about the lottery had one of the highest ratings in Shanghai in 2001, according to Xinmin Evening News. It is estimated that Chinese gambling losses abroad (including Macau) amounted to over US$75 billion annually in recent years – almost half of Thailand’s annual GDP. Indeed, where else but in this region could one find a whole genre of film dedicated to stories about gambling masters?

This leads one to wonder why the Chinese love to gamble. Although no single explanation seems to fully shed light on this “gambling gene”, a few probable reasons have been proffered. The first is economic: throughout its long history, most Chinese people have been impoverished, so they naturally hope for a windfall from gambling games. The second is the supposed lack of a national game, or in other words, they have nothing better to do. The third, and more plausible explanation, is the deep-rooted belief in luck and pursuing good luck – a fundamental component of Chinese culture.

It is this strong belief in luck that leads many to gamble their mea-ger savings in the hope of becoming rich. So a love of gambling can be said to follow naturally from this belief in luck.

Go to Shanghai or even Beijing, however, and you are struck by the lack of pop glamour in the media.

This clearly shows that there is scope in places to greater align the communication mix, leading to a better use of marketing and promotional resources. It will be in the inter-pretation, implementation and placement that challenges will arise for the many Vegas-driven/Hong Kong-centric casino marketing departments in Macau.

Ultimately, the product itself may have to be tailored more closely to individual market segments. How many times have you heard the credo that the mainland Chinese will spend all their money gambling, and will stay in the cheapest hotel or sometimes not stay in a hotel at all? Look at the Hong Kong (read Cantonese) lifestyle. Food is a brief respite from the normal schedule of making money, a stop to take in some fuel in order to keep going. Even wedding dinners in Hong Kong take only about 45 minutes (not including the mandatory 1-2 hour wait for everybody to turn up) from the cold platter to the Fried Rice.

On the other hand, residents of Beijing appear to have a much more sedentary life-style. The northerners will actually spend a couple of hours over dinner, talking and holding verbal discourse over whatever topic of the day may be current. Look at the speed of the pedestrians – in Hong Kong, any new-comer casually sauntering around the MTR risks being trampled by the passengers. In any of the other provinces north of Guang-dong, the pace of life is definitely slower in most respects. It is considered a truism that

mainlanders stay an average of only 1.2 days in Macau and spend all their money gam-bling at the expense of good food and enter-tainment. However, it could be that this ste-reotype only applies to the Hong Kong and Guangdong set (with Southern China having been heavily influenced by Hong Kong me-dia anyway), who make up the bulk of visitor numbers to Macau and hence skew the aver-age data.

On the micro level, this means that the operators will have to re-pitch their F&B outlets at different levels, and we are see-ing that. Wynn Macau is now re-tuning its food outlets, which suggests it may not have learnt from the experience of Sands Macau. Meanwhile, Sands still does not know what to do with its outlets. Galaxy’s Starworld has done a little better by offering various forms of Chinese cuisine to the point where even the local Macanese are frequenting them on the weekends (the old informal network in play here).

At the macro level, the operators will have to rethink their main hall in terms of lay-out, positioning and perhaps the customer gaming experience. They will also have to conduct much more marketing research

than has been done to date, in order to iden-tify the various segments and the means to reach them.

At the moment, the product offering in the main halls of the larger casinos are uni-form. This means that the smaller (individu-ally owned) casinos, if let loose by SJM and Galaxy, have a potential distinct advantage over their larger brethren if they can reposi-tion themselves to capture a specific niche market segment.

As table revenue becomes more diluted, the focus of future marketing efforts will tend towards identifying as many viable niche market segments as possible. In fact, we may even see small operations targeted at other parts of the region, such as a boutique Ko-rean or Japanese casino-hotel (feelers and concepts are already being discussed).

Or maybe a spicy Sichuan or a Fujian style property complete with native speakers and cuisine? Why not? The population base is cer-tainly there.

As the Northerners will tell you with a dis-dainful sniff – only the Southerners eat rice. Chinese are not all the same.

Octo Chang is the pseudonym of our Macau-

based casino marketing columnist, who has extensive qualifications in the gaming industry. Please feel free to forward any amusing anec-dotes or observations to ka.chng@gmail.com.

Ben Lee has an extensive background in casino marketing in Asia and Australia, particularly in profiling the Chinese market segment.

Glenn McCartney, PhD, is an Assistant Professor in Tourism at the Macau University of Science and Technology.

Notes1 This research was commissioned by Glenn McCartney and conducted in the departure areas of airports in Beijing, Shanghai, Hong Kong and Kaoshung, as these destinations represent over 90% of air travel to Macau. Random sam-pling was between 300 to 450 travel-lers at each airport, and tested as valid. The questionnaire and survey was de-signed based on destination image and branding research undertaken glob-ally in the last ten to fifteen years and data was tested using SPSS software and various multivariate techniques.

Image message

Safe places to visit

Many places of interest to visit

Political stability

Valuea for money

Good quality and easy to find hotels

Clean and litter free

Hong Kong traveller

N

Y

N

N

N

Y

Beijing traveller

N

N

Y

Y

Y

N

Taiwan traveller

Y

Y

N

N

Y

N

Shanghai traveller

N

N

Y

N

N

N

Cross section of some image messages important in making a travel decision to Macau

acau has clinched the lead in the race to become the world’s top-grossing ca-sino destination. The city’s casino revenues surged 22% year-on-year in 2006 to reach US$6.95, compared to the Las Vegas Strip’s estimated US$6.5-6.6 billion for the year (though adding the revenues of the other ca-sinos in Clark County to those from the Strip brings the tally to over US$10 billion).

While Macau’s casino revenues have out-stripped those of the legendary Strip, in mar-keting terms, Macau looks to be following the American lead.

Product branding has been, for better or worse, the United States’ great gift to world commerce. Its growth in the Macau casino sector indicates that the mass market is start-ing to drive the agenda of the city’s gaming business model.

Brand ChangeMacau casino operators are scrambling to differentiate themselves in the face of intensifying competition. Through branding, they will transform the hard-core gambling haven into a complete Vegas-style tourism destination

VIP room operators normally rely on a personalised approach to woo high-rollers, but in an increasingly busy mass market with surging visitor numbers, branding is a more appropriate lure for ordinary gamblers. This can be done in a number of ways, including encouraging repeat visits through loyalty schemes, offering loss leaders such as cour-tesy buses and complimentary snacks and drinks, or simply mesmerising customers with sheer glitz and glamour.

Macau’s former gaming monopolist Stanley Ho is the operator most dependent on the VIP trade, and his revenue share has been eroded by the march of mass market branding. When the first casinos from rival operators opened in 2004, analysts predicted Dr Ho’s Sociedade de Jogos de Macau (SJM) would retain over half the local market share

until 2008. Yet revenue figures released in January showed SJM’s share had already fall-en below 50% in 2006.

There are clear signs Dr Ho is reposition-ing his operation to meet the challenge. As well as opening new casinos, he announced a deal in late January to buy a HK$274 mil-lion (US$35 million) stake in Malaysia’s Star Cruises. The investment, done via Dr Ho’s private vehicle, Profit Boom Investment, benefits both sides. It gives Star access to Macau’s coveted gaming market, while pro-viding Dr Ho an inroad to the fledgling Sin-gapore market, where Star Cruises will soon build a gaming resort with its parent com-pany Genting Group.

Genting and Star are well known brands in Asia, and in December proved their inter-national competitiveness by clinching the license for the second of Singapore’s two planned casino-centred integrated resorts, to be located on the resort island of Sentosa. In winning the license, Genting and Star outbid Bahamas-based Kerzner International and a consortium headed by resort-builder Mark Advent (creator of the New York New York casino in Vegas) and including Mississippi-based Isle of Capri Casinos Inc and Australia’s Publishing and Broadcasting Ltd.

Brand AllyBy associating with Genting Group, Dr Ho gains a strong brand with which to take on the western competition. The new partners plan to construct a boutique hotel and ca-sino in Macau, slated to open in 2009. The hotel is likely to be named Resorts World, and the casino will be operated by SJM. The link with Star also opens up the possibility of cre-ating a new and lucrative revenue stream in Macau, through gambling cruises.

As the American and Australian new-comers to the Macau market start to open multiple venues targeting different market segments, the impulse to tie customers in to their brands is likely to grow stronger. Chinese consumers have responded enthu-siastically to western brands ranging from

1918

fashion to fast food. Western casino and hotel brands appearing in Macau will likely achieve a similar following.

Some observers believe novelty, rather than incipient brand loyalty, drew the crowds to the openings of Wynn Macau last Sep-tember and Sands Macau in May 2004. Ac-cording to that line of thinking, mass market customers will simply keep transferring their affections every time a new venue opens, like a big game of musical chairs. The true mass market test for the new properties is reten-tion rates. Sands Macau is certainly showing staying power, recording only a one percent fall in market share to 20% in 2006, despite the increased competition. SJM suffered the largest decline in market share.

Incentive to InnovateFor years, branding didn’t really matter in Ma-cau. There was little incentive to innovate, as all the city’s gambling halls fell under Stanley Ho’s monopoly license. The operators not di-rectly controlled by Dr Ho needed to main-tain goodwill by making sure they didn’t en-croach on his business interests.

Now Macau is making up for lost time, thanks to the influx of billions in overseas investment following the ending of the mo-nopoly in December 2002. The latest brand to enter the market is Hard Rock International, operator of the themed hotel and restaurant chain. It has signed an agreement with Melco Hotels and Resorts Ltd – part of Melco Inter-national, the Hong Kong-listed company run by Dr Ho’s son Lawrence – to run a Hard Rock Hotel and Casino at Melco’s City of Dreams complex being built along the nascent Cotai Strip (of reclaimed land between Macau’s Co-loane and Taipa islands). The Hard Rock ven-ue will feature a 380-room hotel and a 25,000 sq ft casino, and is likely to open in the last quarter of 2008.

Hard Rock International is based in Or-lando, Florida, the de facto world capital of theme parks. The company also has opera-tions in Las Vegas and in 44 other national territories, comprising 123 Hard Rock Cafes, seven hotel-casinos and one stand-alone casino.

Industry analysts say the expected arrival of Hard Rock in Macau is another example of the ‘Vegas-isation’ of the territory.

Betting on Non-GamingWhile over 90% of the revenues of Macau casino operators are derived from gaming, Vegas operators now earn roughly half their

revenue from dining, retail, entertainment and other non-gaming sources. As the Macau market matures and moves towards the Las Vegas model, its non-gaming revenue is ex-pected to increase in importance. Las Vegas Sands Corp (LVS) Chairman Sheldon Adelson is gambling on it.

In the third quarter of 2006, LVS, operator of the Sands Macau and The Venetian in Las Vegas, announced consolidated results for its American and Macau operations showing a 29% increase in food and beverage revenues to US$138.2 million, and a 29% increase in retail revenues to US$9.6 million. LVS’ non-gaming revenue growth will likely jump fur-ther following the July 2007 opening of the US$2.3 billion Venetian Macau, which will feature sprawling entertainment, retail, expo and dining facilities, in addition to its 3,000 suites.

LVS President and Chief Operating Of-ficer William Weidner commented on the company’s Macau strategy during a confer-ence call with financial analysts to discuss LVS’ third quarter results: “Our extensive coast side development plans are based on two fundamental concepts; that the market will expand as quality product is introduced; [and] that the highest quality products in the marketplace will not only win market share

from the inferior product, but will also ex-pand the market to a new set of customers, a set of customers that either doesn’t visit Macau at all today, or visits Macau only infre-quently.”

The desire of casino operators to move ever further into general entertainment means the distinction between theme parks and gambling palaces is becoming increas-ingly blurred to nearly everyone but the gam-ing regulators. No visit to Nevada’s ‘Sin City’ is complete, for example, without witnessing the pirate battle at Treasure Island Las Vegas – though nowadays the spectacle is more like Showgirls than Pirates of the Caribbean, with skimpily-attired male and female performers busily jigging in the rigging.

It seems a modern casino entrepreneur needs to be a combination of showman, property developer, hotelier and retailer as well as bookmaker. One of the industry’s natural showmen is Steve Wynn. He is now al-most as well known for buying famous paint-ings and displaying them in his hotels – and recently, for accidentally putting his elbow through one of them – as he is for running gambling venues.

In Macau, smaller casino operators with-out the deep pockets of Steve Wynn or LVS are finding other ways to differentiate them-

M

Genting Highlands Resort

1920

selves in an increasingly busy mass market. A current fad is for themed properties.

Worth its WeightThe Grand Emperor Hotel and its accompa-nying casino on the Macau peninsula went for a look of imperial opulence. It chose to wow visitors by literally paving the lobby with gold – 78 one-kilo bars of it, to be pre-cise. Emperor Entertainment Group has a strong entertainment brand in Asia, with film star Jackie Chan – a minority shareholder in the project – appearing at the opening of the property in January last year,

In Macau, even the shopping complexes are turning into theme parks. David Chow’s Fisherman’s Wharf retail and restaurant development is a pastiche of architectural styles from around the world, reminiscent of a section of Disney’s Epcot Center in Florida. LVS’ Venetian Macau resort will soon add Italy to the list of places you can visit on a

trip to Macau.Although initial visitor numbers at Fish-

erman’s Wharf have been disappointing, the owners hope to revive its fortunes with the new themed casino in the grounds operating under SJM’s licence.

The new casino’s exterior is loosely based on a temple from ancient Babylon – another civilisation noted in The Bible for its love of excess. In reality, the frontage looks more like an Art Deco cinema theatre parachuted on to the banks of the Pearl River Delta than a temple on the banks of the River Tigris.

Other local operators are busy building a corporate identity to pull in visitors, and it seems clear that when it comes to gaming, size and branding does matter. Hong Kong-listed Galaxy Entertainment Group, headed by Hong Kong construction tycoon Lui Che Woo, started 2006 with two casinos and a 9% revenue share. By the end of the fourth quarter, it had five casinos operating and fin-

ished the year with a 19% share. The Galaxy properties have taken advantage of the op-portunities for cross-promotion and group purchasing, as well as the novelty factor that new openings present.

The one recognisable casino brand that did develop during the monopoly era was Stanley Ho’s Casino Lisboa. The birdcage-shaped Lisboa was built in the late 1960s, and as Stanley Ho’s right-hand man Ambrose So pointed out in an earlier interview with Inside Asian Gaming, “the ceilings are low and it’s very cramped.” Still, the Lisboa has achieved iconic status, and SJM is cashing in on that with the adjoining Grand Lisboa, set to open this month. SJM also has the benefit of size, providing licences for 17 of the 24 ca-sinos currently operating in Macau.

Sign of MaturityGaming industry consultant Roger Egan says: “It’s a sign of the maturing of the Macau casi-no market that branding and themed venues are playing an increasing role. It’s a way of of-fering niche products to spread the appeal of Macau to non-gamblers as well as gamblers. The thinking is that you can drive up room occupancy rates, length of stay and general revenues if you can turn Macau into a gener-al sightseeing and entertainment resort rath-er than just a gambling town. With this new business model, gambling could become the icing on the cake, rather than making up the whole cake.”

The quest for branding in Macau can also be seen in the frantic rush of the different casino operators to sign up big name hotel chains to their new developments.

But what of Macau’s traditional casinos and their VIP operations, who lack an obvious brand identity, brand allies, or linkage to a big organisation? How many of the analysts cur-rently writing about Macau’s gaming indus-try have heard of the King Seiner Palace casi-no? Yet King Seiner is part-owned by Success Universe Group, one of the big three players in the Macau VIP market.

Given the sheer number of potential customers available in mainland China, the march of Macau’s mass market looks unstop-pable. Wynn Macau managed to corner a 16% share of the territory’s gaming revenues within three months of opening.

The Las Vegas experience has been that in the world of casino operations, the big get richer and the small get poorer. Unless Ma-cau’s small operators are able to hold on to the VIP trade and its big margins, the territory may end up imitating Vegas yet again.Grand Emperor Hotel

22 23

here is much excitement in the Asian gaming markets over Mahjong, with pundits asking: “Will Mahjong become the next P2P [peer-to-peer] giant?” With over 350 million mahjong players worldwide – several times more than poker players – there certainly is potential for Mahjong to surpass poker as the most successful land-based and online P2P game in the gaming industry.

The high player-base has been nurtured over hundreds if not thousands of years. Mahjong as we know it today was founded in Ningbo, China around 1850, but some sources trace its origins all the way back to Confucius – assertions that Confucius him-self developed the game are likely to be

Mahjong BuzzWith its widespread following among Chinese and other Asians, mahjong looks set to take the gaming world by storm. Still, considerable challenges must be overcome before both land-based and online operators can cash in on mahjong, as they have with poker

apocryphal. The unique blend of skill, luck and tile iconology of four winds, dragons and “fa” (wealth) symbols appeals to the Asian sense of strategy and success. Throughout time mahjong has kept friends and families huddled around square tables rattling tiles for hours, sometimes days.

Where Mahjong Stands NowThe internet has taken Mahjong out of the living room into the commercial arena. As P2P game platforms have taken root in Chi-na, Mahjong is seeing a surge of online ac-tivity. Total “play for fun” mahjong usage is clocking in around 250,000 to 300,000 con-current players at any given time during the

day. This number will continue to rise as it is still early days for online mahjong – around 3 years since the major players were estab-lished.

The play-for-fun sites each have their own identity; some attract high school and college kids that like to dress up their mah-jong avatars in baggy jeans, sneakers and other hip virtual gear. Other P2P sites are less fashion conscious and aim to provide a semi-professional mahjong environment focused more on serious mahjong competition.

When Will They “Play for Real?”On the whole there has been minimal if any translation of “play for fun” players to “play

for real,” but serious contenders are gath-ering their online and land-based wares in preparation to stake a claim in wide open terrain.

As these contenders approach the mar-ket they will enjoy the following inherent qualities of Mahjong that will help build on-line and land-based player liquidity.

1. Easy: Basic Mahjong is easy to learn. You can buy a mahjong set for roughly the same price you can buy cards and chips. Friends and family play mahjong at home, in backrooms, basements – wherever you can fit a 2x2 table2. Sport: China has officially declared mahjong a national sport, but anyone, of any physical build can compete in this sport. Remind you of poker? 3. Variable price points: Online mahjong rooms can be built with multiple price points. Are you a beginner and want to try your luck? Go to the “el cheapo” room. Are you confident in your tile building skills? Go large on the high-roller table. 4. Anyone can win? There are several hands in a Mahjong game. To win a game you have to be skilled, but it is more than likely you will win at least one hand. This is what keeps players hooked. 5. Tournament play: As tournaments evolve so will the “play for real” player base. Beginners like the fact that for a small entry fee they could be a big win-ner. More skilled players like the big prizes, which they are more favored to win. 6. Stars will be born: As tournaments grow in stature and television enters the picture, Mahjong will spawn its own group of celebrities and TV personalities.

Even with the above advantages, it is still too early to call Mahjong a guaranteed suc-cess. There are still considerable challenges for software developers and land-based op-erators.

1. Where is The Texas Hold ‘em?: Mah-jong will need to acquire a standard rule set that can easily cross boundaries. There are about as many mahjong rules as there are Chinese dialects, almost one for each locality, including rules for Japan, Taiwan and Hong Kong. A major factor in popu-larizing online and land based poker tour-naments was the rapid adoption of Texas Hold ‘em as the de facto rule set. 2. Collusion: Of all the play for fun games we tested, we have yet to find one that adequately prevents collusion. This is not

a major issue in “play for fun,” where the business model is to build online com-munities and sell virtual product. In the “play for real” environment it goes with-out saying that anti-collusion will be criti-cal to maintaining credibility among play-ers. Gaming software provider Playtech is working in cooperation with Tanksoft on groundbreaking AI technology that looks promising in overcoming the collusion is-sues.3. Fashionable: Mahjong is often associ-ated with backroom activities and usually kept hush-hush in regular public banter, much the same as poker was before it exploded on to the television screen. The goal will be to raise the stature of Mahjong among young adults in Asia to the point they talk excitedly about the upcoming

Friday night Mahjong party.

Where is Mahjong Headed? Once the operators capitalize on the

pluses and overcome the challenges, we will see a potentially explosive market for mahjong that will be heavily driven by high profile tournaments in Macau. Players from across Asia will compete in online satellite tournaments to win a seat at multi-million dollar tournaments hosted in Macau’s up-coming mega-resorts.

With huge player numbers, Las Vegas-style glitz, worldwide TV distribution and star power all tied together with the ubiquity of online gaming, mahjong is looking more and more like the next big gaming juggernaut. The question is “who will get there first?”

T

Drophead Gorgeous

High-Roller Accessories

If the Inside Asian Gaming crew were fond of puns, we’d delight in stressing the need for any self-respecting high-stakes gambler to have at least one Roller in the garage. Instead, we’ll just get straight to giving you the lowdown on the new Rolls-Royce Phantom Drophead Coupé

In 2004, Rolls-Royce unveiled 100EX, a striking experimental drophead built to celebrate 100 years of arguably the most famous automotive brand in the world. Built without compromise, it encapsulated a century of el-egance and engineering, and, in an instant, defined the future direction of the brand.

In its two world tours, 100EX garnered positive comments from customers and the media alike. Such was the strength of the reaction that, in the au-tumn of 2005, Rolls-Royce announced that a production version would be available by 2007. In the interim years, the team at Goodwood have worked tirelessly to turn the experimental car into a reality.

Launched at the Detroit Motor Show 2006, the Phantom Drophead Coupé is the second new model from Rolls-Royce since BMW Group became cus-todian of the marque in 1998. The two-door, four-seat convertible is a less formal interpretation of classic Rolls-Royce design. Using the lightweight rigidity of an all-aluminium spaceframe, it marries modern technology to a sleek, streamlined convertible body.

Its exterior lines echo the timeless styling of the great Rolls-Royce cars: a long bonnet, large-diameter wheels, short front and long rear overhangs and the quintessential dynamic line descending along its flanks. Inside, the design emphasises the airy openness of top-down motoring, embracing

the elements and creating a stunning, social environment.

The Drophead Coupé has been carefully crafted to be aesthetically pleas-ing, yet practical. Wood, leather, chrome and brushed steel have been used where most appropriate. Form and function have equal billing. The simplic-ity of the design belies a car built to provide years of effortless service.

The Phantom Drophead Coupé offers owners an unparalleled convertible experience, combining compelling driveability with exceptional engineering, technology and design – hand-crafted from the finest materials to an ex-ceptional level of quality.

ACE07 203 x 267ad.fh10 1/31/07 2:23 PM Page 1

www.terrapinn.com/2007/ace_SG

Key speakers

Endorsed by

Ambrose SoExecutive DirectorSociedade de Jogos deMacau (SJM)

Ciaran CarruthersSenior Vice PresidentGalaxy EntertainmentS.A, Macau

The 12th annual

Asian Casinos Executive Summit 2007

You bet!

16 - 19 April 2007,Raffles City Convention Centre, Singapore

Key topic highlightsCasino design

Learn how to maximise player experienceand profits through innovative architecture

and interior design

Las Vegas vs MacauFind out which is the best model for Asia

US Prohibition billGet all the latest information on how it isaffecting the iGaming world and what it

means for Asia and you!

Technology updateHear it from the experts in land based

casinos and iGaming

2 separately bookablepost-conference masterclasses!

19 April 2007, Thursday

Masterclass A: Addressing corporatesocial responsibil ity in gamingLearn about the importance of reaching ahealthy balance between revenuegeneration and customer protection forcompetitive interests- Led by Singapore Pools and SingaporeNational Council on Problem Gambling

Masterclass B: Marketing in a new eraof total entertainment destinationsFind out how you can better promote yourcasino business in a changing gaminglandscape- Led by Tulane University, USA

Andre WilsenachCEOAlderney GamblingControl Commission,Channel Islands

Andrew BeveridgeCEOeCOGRA, UK

The benchmark gaming event for Asia• Full coverage of the very latest issues affecting both land based casino destinations and

iGaming today• A global gathering with an Asian focus - Key industry players from around the world will come

together to share their expertise, network and form lasting relationships• Find out how you can capitalise on the phenomenal growth of the gaming industry in Asia

Lead Platinum sponsor

Peter KjaerCEOHo Gaming, Macau

Ben LeeDirector – Casino ProjectsDiamond CasinosGroup, Macau

Rick SmithExecutive DirectorInteractive GamingCouncil, Australia

Darrell MetzgerPresidentSentosa Leisure Group,Singapore

Get your team going to Asian Casinos Executive Summit 2007! Enjoy huge savings with corporate groupdiscounts if you sign up 3 or more from your organisation. Simply call us now on +65 6322 2700, completethe form below and fax to us at +65 6271 8057, or register online at www.terrapinn.com/2007/ace_SG

Yes! Register me for the conference.

Yes! I am interested in sponsorship or exhibition opportunities.Call me for further discussion.

Name: Designation:

Organisation:

Address:

Tel: Fax:

Email:

Response form Fax: (65) 6271 8057

Media partner

Bronze sponsors

Organised by

High-Roller Accessories

A Toast toRichard HennessyPuns aside, what better way is there to celebrate a big win at the baccarat table than with a sip of the nectar of the cognac gods from a hand-etched baccarat crystal decanter? Inside Asian Gaming was privileged to attend a recent banquet host-ed by the good folk at Hennessy, where we learned that co-gnac was the perfect accompaniment to fine Chinese cuisine – if we’d gone for wine, we’d have needed to switch our selec-tion several times during the varied and unending courses (we lost count thanks to the endless supply of Hennessy).The banquet was topped off with a toast of the pride of the Hennessy collection – Richard Hennessy, named for the com-pany’s founder, a gallant Irish military officer serving under Louis XV in France, where he settled and started his now leg-endary cognac company.Richard Hennessy Cognac is a blend of more than a hundred exceptional eaux-de-vie, partially coming from the Founder’s Cellar created in 1774 by Richard Hennessy, matured and sur-rounded by a great luxury of attention. These eaux-de-vie for the most part are from the best vineyards and parcels of La Grande Champagne, while a small part comes from La Petite Champagne, and from Les Borderies and Les Fins Bois.Richard Hennessy Cognac reveals all the complexity, depth, balance and finesse of very old eaux-de-vie, some having at-tained 200 years.

Hot Mocha

Tour of the Properties

Mocha Slot founder Lawrence Ho – son of Macau casino mogul Stanley Ho – once described the company’s café-style gaming machine outlets as “Starbucks with slot ma-chines.”When the first Mocha Slot outlet opened in 2003, Macau was distinctly lacking in trendy gaming venues – the only other slot machines to be found in the city were in the dark, grimy corners of the elder Mr Ho’s monopoly-era casinos, including the flagship Casino Lisboa. The Mocha concept proved an instant hit, with the bright, cosy surroundings complimented by a new focus on customer service. Mocha now runs six outlets and a loyalty programme with 76,000 members.The latest addition to the Mocha network is the 20,000 sq ft Mocha Marina Plaza Slot Lounge, which opened on December 23 with 300 machines – twice as many as the other Mocha outlets. The first floor of Mocha Marina Plaza is open to the public, while the second floor is reserved for both a premium area restricted to 1,000 members and an ultra-exclusive Royal Members’ Lounge, currently restrict-ed to 50 invited members.Inside Asian Gaming visited Mocha Marina Plaza, armed with a suitably trendy selection of attire designed and cre-ated by our stylist Alex Lam.

Photography: Ike

Stylist: Alex Lam

Coordination: Ricardo Carvalho

Model: Nara F.

Hair & make-up: Billie and Niki

Jewellery courtesy of Emphasis Jewellery

Mocha Marina Plaza

Royal Members’ Lounge

Mocha Marina Plaza

Staircase to Second Floor

Mocha Marina Plaza

First Floor General Area

Mocha Marina Plaza

Second Floor Premium Area

Mocha Marina Plaza

Second Floor Premium Area

hether they’re in a tavern with five games or a racino with thousands, players who sit down at video lottery terminals are playing games with familiar sights, sounds and feel.

“Players will come to us and say, ‘We saw this machine in Atlantic City or Las Vegas. Do you have it?’ We have it,” said Steve Keener, director of operations at Dover Downs, one of three Delaware racetracks permitted 2,000 VLTs each.

Added Todd Elsasser, technical compli-ance director for Cyberview Technology, which is focused both on bringing server-based and downloadable technology to vid-eo lottery jurisdictions as well as up-to-date game content from independent designers, “The differences between a Las Vegas casino slot machine and a video lottery terminal are razor thin. A couple of protocol commands are the only difference.”

But what’s meant by a video lottery ter-minal isn’t necessarily the same in every ju-risdiction. Games can have spinning reels, video displays, even electronic versions of table games. Each player interface, though, is a representation of the lottery game played within.

“From a hardware perspective it’s es-sentially a slot machine that may require a variety of options depending on the juris-diction,” said Jim Borden, director for lot-tery accounts at WMS Gaming. “Generally sales are made directly to or through a state agency such as a lottery commission where the regulator and the customer are one and the same.

“From a regulatory point of view it be-comes less clear-cut, since pretty much any type of gaming product can be called a VLT,” Borden continued. “A VLT, therefore, is essen-tially whatever the enabling legislation de-fines it to be.”

As the video lottery industry nears its second decade—South Dakota led the way with legalization of video lottery gaming in 1989—it’s an industry facing changing con-ditions and challenges from within and with-out, and meeting those challenges with up-todate technology.

Growth from a $160 million industry in

Terminal VelocityRevenue rockets as VLT vendors integrate the latest slot advances into their platforms

its 1990 infancy to a $5.6 billion industry in the United States alone in fiscal 2006 has brought challenges to video lottery jurisdic-tions. Keeping apace with player preference in casino slot machines is just one of the challenges. Monitoring systems and keep-ing lottery games secure is another concern. And for operators in established VLT states such as Delaware, facing new competition is another.

“Each state has its own unique issues, but the biggest concern for most is the impact of new machines in a contiguous state,” said Mark Zetzmann, manager of business devel-opment for IGT. For instance, Delaware and West Virginia will be impacted by new loca-tions in Pennsylvania.”

The Delaware State Lottery anticipates a $10 million decline in revenue for the fiscal

year ending June 1 due to the effect of the expected addition of VLT gaming in Chester, Pa., early in 2007, video lottery deputy direc-tor Don Johnson said. Part of Delaware’s chal-lenge is offering a competitive product.

“We’ve done a number of things in the last few years,” he said. “We’ve gone to 24/7 operations, except Sunday mornings 6:00 a.m. to noon. We have ticket-in/ticketout, and that was customer driven. We have automat-ed table games. Those things hopefully will keep people wanting to play here.”

Hazy definitionWhat video lottery gaming means is as varied as the jurisdictions. Some, such as Delaware, include games with spinning reel displays as well as those with video displays. Delaware

3542

W

also has recently introduced electronic black-jack and poker games from Shuffle Master, with video representations of a dealer.

Video lottery terminal games outside North America, however, can be much dif-ferent. In Israel, using monitoring technol-ogy from Austin, Texasbased Multimedia Games Inc., the display is more basic. “There’s no sound,” said Gary L. Loebig, executive vice president for sales at Multimedia. “The animation is simple. You see a display like a scratch ticket, and when you press the but-ton, you just see a jagged scratch.” In the United States, players want something more than an onscreen scratch. “There are almost two distinct VLT markets,” said Elsasser, who spent 15 years as executive director of engi-neering at GLI and has been working with video lottery terminals since South Dakota first legalized them. “There’s the U.S., and then there’s the rest of the world. The mar-kets are evolving at two different rates, two different paces. The international market tends to be a traditional VLT market, though they’re starting to do some interesting things in the United Kingdom. The video lot-tery games are true to the traditional sense of the lottery.”

And even in the United States, differ-ent jurisdictions mean different kinds of outlets. VLT installations can be huge, as in racetracks with 2,000 machines as in Dela-ware, 750-unit sites in New Mexico, unlim-ited numbers in New York or at Louisiana tracks, or numbers set by the commissions in Delaware and West Virginia. Or the outlets can be smaller venues such as bars and tav-erns with five games in Oregon, 10 in South Dakota, truck stops with 50 in Louisiana or fraternal and veterans organizations with 10 in West Virginia.

Slot lessonsWhatever a facility’s size, it expects top, cur-rent product. “VLT markets now get top games, the newest, latest greatest products,” said Craig Bullis, vice president public gam-ing and VLT operations for Bally Technolo-gies. “We’re rolling out CineVision, our 26-inch wide screen slant top, and Delaware is one of our first markets. We introduced CineVision early on the East Coast, in Delaware, and the acceptance has been outstanding.

“They’re trying our new product in Dela-ware and New York. At Yonkers Raceway in New York, they have our widescreen upright, and the Bally brand is the highest earning brand per device at more tracks than IGT or Spielo. At Yonkers, all their stuff is cutting

edge. The Bally games are all CineVision and widescreen upright.”

Bally is not the only company infusing slot-type innovation into VLT product. “WMS video lottery terminals today share a com-mon platform with our casino slots,” Borden said. “This benefits our lottery customers in many ways: It eliminates the risk of obsoles-cence, allows our lottery products to evolve with our casino products, and opens the VLT markets to our vast library of highly success-ful game themes. In fact, many of our hottest games are getting solid play in VLT venues—hit video themes such as ‘Kaboom,’ ‘Jackpot Party Progressive,’ and ‘Men In Black,’ as well as five-reel mechanical games from our inno-vative new series of ‘Hot Hot Super Jackpot’ games and also coming soon to WMS VLT is ‘Monopoly Big Event.’”

That includes WMS’ most up-to-date technology. Games in the video lottery mar-kets are housed in the ergonomic Bluebird slot cabinet, and driven by the CPU-NXT game platform, just as are WMS’ newest ca-sino slots.

“As successful as it has been, the Bluebird continues to evolve as gaming changes,” Borden said. “Now sporting a belly LCD in the upright mechanical reel version, the Bluebird has brought interactive help and pay table display and multi-coin functionality to tra-ditional mechanical reel games. This touch-screen display utilizes the same logical infor-mation sequencing as the larger LCDs found on the video Bluebird cabinets. In order to maximize its customers’ investment in this product, WMS has ensured that the Bluebird cabinets can be easily upgraded to support server based gaming.”

The crossover from slots to VLTs ap-plies to International Game Technology, too, along with themes specially developed for VLT markets. “IGT establishes a strong brand identity and uses the same cabinet and game theme styles as found in other traditional gaming markets,” said Jim Cole-man, IGT marketing manager, Class II and Lottery. “That brand identity includes game aesthetics, game play features and propri-etary game play features that set us apart from the competition. We have also intro-duced unique game concepts tailored to each venue.

“IGT is proactive in offering as many products as possible to the lottery market.” Coleman added. “We have engineering teams and product marketing support groups that focus solely on that market. We work with the state lotteries to educate them on develop-

36

The new Viva Macau isn't just an airline, it's one big gig in the sky. Where no one's just a passenger and everyone feels like a superstar. Like vibrant Macau itself, our new airline boasts plenty of onboard fun, exotic destinations, wide bodied jetliner luxury, a premium 'Superstar' class with more legroom than ever, and all this without any compromise on your safety and comfort. So come fly Viva Macau, fly simply different!

Visit flyvivamacau.com

Whatever a facility’s

size, it expects top,

current product. “VLT

markets now get top

games, the newest, lat-

est greatest products,”

said Craig Bullis, vice

president public gaming

and VLT operations for

Bally Technologies“

38

While the casino industry ponders the future of downloadable technology, a number of VLT jurisdic-tions have already embraced the tenants of central system control and are putting it to good use.

In New York State, where video lottery gaming is in its infancy, race-tracks with VLTs are monitored cen-trally by a system designed by Multimedia Games Inc.

“All sites are connected to the same system,” said Gary L. Loebig, executive vice president for sales at Multimedia.

“They’re connected via land lines and satellite, so the system is redundant and double redundant. Down time is almost negligible. We monitor every transaction. With central determination, it’s all about control.”

And, said Loebig, VLT markets are on their way to downloadability. “VLT markets will probably beat the casinos in downloadability,” he said, pointing out that in New York downloadable capability was built into the original product.

Downloadable gaming is also where Todd Elsasser, technical compliance director for Cyberview Technol-ogy, sees the VLT market going.

“Downloadable is tailor made for the video lottery,” said Elsasser, pointing to Cyberview’s server-based and downloadable products. “Look at Oregon, with five VLTs in a bar or a tavern. In Oregon it would cost a fortune to individually monitor all those remote sites.

“The biggest thing is security. The games have to be bulletproof.

Control of the lottery has to be secure. That’s where we get into a lot of new stuff, with remote diagnos-tics.”

John Grochowski

VLTs may lead downloadable revolution

ments in other gaming venues around the globe, and we create plans to bring popular themes and game types to their markets. We recently introduced the first widearea pro-gressive ‘Wheel of Gold’ game to Delaware. We are constantly looking at ways to increase revenue to lottery operations by offering ex-citing multi-game products in bar and tavern markets as well.”

VLT markets have picked up tricks from Indian gaming markets, too, with multi-state linked progressive jackpots such as those common in Native American casinos. In 2006, Spielo introduced its multi-state progressive system, Cashola.

“We have 28 of those here,” said Dover Downs’ Keener. “We’re part of a link of 240 games, here in Delaware, West Virginia, and Rhode Island. They do well. The size of the

jackpot runs up because of the quantity fac-tor. There’s a buzz about that.”

Keeping currentMeanwhile, content providers are doing

their best to drive play with up-to-date games. That’s a challenge manufacturers must meet to keep floor space. In Delaware, Johnson said the lottery replaces games with below-aver-age performance with games from manufac-turers with above average performance.

With the pressure to perform, it’s no won-der WMS is turning to Bluebird and CPU-NXT, IGT is rolling out Wheel of Gold progressives, Bally is placing CineVision and Spielo has Cashola in lottery markets.

“VLT markets are growing in quality and variety of product,” said Bally’s Bullis. “We were just awarded 20 percent of games in

Oregon for 2007, and 100 percent of the Bally units will be CineVision. That comes to 2,300 units. We’re going from zero percent of the market to 20 percent, and we’re very proud to offer them the combination of our multi-ple game library coupled with the CineVision technology.”

The latest and greatest games and the latest and greatest technology—that’s the key to competitiveness in VLT markets, for manufacturers and the lotteries themselves alike.

By John Grochowski. Reprinted with permission from International Gaming & Wagering Busi-ness magazine

John Grochowski is an Illinois-based reporter and freelance writer.

Multimedia Games’ MGAMe is one component of a system designed to help VLT operators in New York and elsewhere manage and monitor games

from a centralized location.

4140

anchester’s designation as the site of the UK’s first super casino is not necessar-ily a compliment. The city, located 195 miles northwest of London, is known for its world-renowned soccer club Manchester United and a rich industrial heritage. In making its selection, however, the UK’s independent Casino Advisory Panel pointed to the super casino as a way to foster badly needed eco-nomic development in the city.

The selection of Manchester did come as a surprise, however, with Blackpool con-sidered the front-runner and the Greenwich Dome in London viewed as a highly contro-versial second choice. Manchester was a 16 to one outsider amongst bookmakers, who may wish to appeal the decision too.

The news perhaps came as the biggest surprise to Manchester city itself. The Man-chester Evening News had its lunchtime first edition set up with a banner headline pro-claiming Blackpool the winner. Printing was held up while the front page was changed

Super Casino ControversyManchester beat out London and the seaside community of Blackpool to be selected as the site of the UK’s first Las Vegas-style super casino. The decision is likely to face a legal challenge from Blackpool at least

and a new story written.The UK had originally planned to al-

low the construction of 20-40 super casinos around the country, but a heated debate on the possible social impacts led the govern-ment to cut the number to first eight, then finally one. The selection of Manchester is still subject to approval by British lawmakers and Culture Secretary Tessa Jowell. Prime Minister Tony Blair’s office said Jowell and lawmakers would likely agree with the panel’s findings, which had been “an honest assessment of the various criteria.”

International InterestThe new casino, which would be the country’s largest, will have a minimum of 54,000 sq ft of floor space. Several large casino operators are likely to make bids for the location. Baha-mas-based gaming group Kerzner Interna-tional – operator of the Atlantis on Paradise Island – had previously won a US$509 million

contract to build a small casino at the site in Manchester. The process was reopened, however, following reforms to British gaming laws in 2005.

Malaysia’s Genting International, MGM Mirage and Harrah’s had bid against Kerzner for the Manchester site, and could bid again for the super casino site. Still, analysts believe international interest in bidding for the super casino site may be limited by government re-strictions. “US operators were once eager to participate in the United Kingdom oppor-tunity, however we believe enthusiasm has tempered somewhat as the size and scale of the projects has been diluted,” Deutsche Bank gaming analyst Bill Lerner said in a note to investors

Las Vegas Sands Corp (LVS) has already announced its intention to bid for the Man-chester site, with its chances boosted by its recent success in Macau. LVS had previously reached a development agreement with the Manchester United soccer club in 2005,

but the deal ended when the Florida-based Glazer family, owners of the National Football League’s Tampa Bay Buccaneers, purchased the soccer team.

The super casino would be based in the Beswick area of Manchester, close to the City of Manchester Stadium, now used by soccer club Manchester City and built for the Com-monwealth Games. Sir Howard Bernstein, chief executive of Manchester City Council, said bids would be requested for a contract to build and operate the casino. Operators would likely sign a 250-year lease agreement with the City Council, which owns the land, he said.

The Culture Secretary, Tessa Jowell, said members of parliament would have the final say in designating Manchester as England’s equivalent of Las Vegas. Manchester’s pro-posal is to make the super casino part of SportCity, a massive sport and entertainment complex. The site will also have an arena, swimming pool, restaurants, a nightclub and a hotel.

Seeking a Casino BoostIn a bid to use casinos to boost regional economies with high unemployment, Britain eased its gaming laws in 2005. Britain already has around 140 small- and medium-size casi-nos, mainly based in major towns and cities. The super casino is allowed to have 1,250 slot machines –compared to the 4,300 at LVS’ up-coming Venetian Macau casino resort – and an unlimited number of table games.

Eight large casinos with unlimited table games and a maximum of 150 slot machines and eight small casinos with 80 slot machines were also approved. Winners of the large casino licenses include the holiday resort of Great Yarmouth, Hull, Newham, Middles-brough, Solihull, Milton Keynes, and the port city of Southampton. Small casino licenses were granted to Bath and North East Som-erset, Dumfries and Galloway, East Lindsey, Luton, Scarborough, Swansea, Torbay and Wolverhampton.

Stephen Crow, the advisory panel’s chair-man, said that although Manchester has one of the country’s fastest-growing economies, it was “the third-most deprived local author-ity area in England.” Lawmakers claimed the casino would bring around 2,500 jobs and that hotels and other leisure businesses would boost the total to around 10,000.

According to the Casino Panel’s report: “All the proposals shortlisted for the regional casino presented their own particular and compelling strengths. We were, however, par-

ticularly impressed by Manchester’s proposal, which in our view offers great promise. Man-chester represents a good place to test social impact, and the council’s consultations with other local authorities and relevant bodies gave us confidence on that.” The panel add-ed that “Manchester has a catchment area for a casino second only to that of London, and it is an area in need of regeneration at least as much as any of the others we observed.”

In the Other CornerMembers of Parliament, led by the Blackpool contingent, are demanding the reopening of the decision-making process, and appear to be gaining some support. A Commons mo-tion expressing “surprise and regret” that the Casino Advisory Panel rejected Blackpool’s application has been signed by 18 MPs.

Cambridgeshire’s Tory MP and gambling spokesman Malcolm Moss, said: “How can one defend choosing the most deprived and vulnerable area of Manchester to test wheth-er a super-casino that is open 24 hours a day, with free admission, will generate an increase in problem gambling?” The Casino Panel, for its part, says one of the factors behind Man-chester’s selection was “the way it dealt with questions of problem gambling.”

Blackpool supporters argue the super ca-sino is vital to restoring the fortunes of the ail-ing seaside community, which has seen visitor numbers drop by seven million over the past 15 years to an annual figure of 10 million.

Mayor of Blackpool Allan Matthews re-sponded: “I’m very angry that Manchester has been chosen. It can look elsewhere for re-generation, but we cannot – tourism is all we have. Does Manchester want our sea, and our Tower as well? They might as well have it all. It’s like nailing the coffin lid down on Black-pool. The decision to put it in Manchester is the worst of all scenarios.”

“People talk about a plan B. Well, what have we been doing for the past 100 years but feeding people and entertaining people and giving them a good time? Plan B is going on all the time,” Mr Matthews added.

The Greenwich Dome in London is mov-ing on. AEG Europe, which owns the former Millennium Dome, has said it will not dispute the super casino decision. The dome, now re-named The O2, sits in Greenwich, southeast London. Once completed the O2 will house a 20,000-seater music arena, entertainment and sport events. It will also boast an 11-screen cinema, bars and restaurants and a smaller 2,200 capacity music venue.

London mayor Ken Livingstone, how-ever, said he would continue to lobby the government to allow a casino at the site. After all, having cut the number of planned super casinos from 20-40 to just one, now that it has seen the eagerness of regional authorities to host a super casino, the UK government could be swayed to allow a few more. The odds of Manchester remaining the country’s only super casino site for long can only get higher.

Manchester is set for a revival

Still bleak for Blackpool

M

4342

Regional Briefs

Branson Seeks New Virgin MarketRichard Branson’s Virgin Group and Australia’s largest gaming group, Tabcorp, are in discussions to build a US$3 billion casino in Macau. Mr Branson visited Macau in January along with Tabcorp’s Matthew Slatter in order to seek potential sites and partners for its develop-ment.

During his Macau visit, Mr Branson held talks with Macau Chief Executive Edmund Ho, setting out details of a proposed entertain-ment complex, including three hotels and a casino. If approved, the complex could be completed by 2010 , and Virgin hopes to recoup its investment within 18 months.

The Financial Times reports Mr Branson is close to acquiring a prime 20-hectare site on which to build its development.

Border Casinos DecimatedThe number of foreign casinos operating near China’s border fell from 149 in 2005 to 28 in 2006 as China stepped up efforts to prevent peo-ple going abroad to gamble, as part of its anti-gambling campaign.

According to the Ministry of Public Security, the measures imple-mented by China include harsher penalties, the closing of represen-tative offices of foreign casinos in China, and the closure of under-ground institutions used to transfer money overseas for gambling.

The ministry worked in conjunction with local police in border areas in Yunnan, Guangxi, Heilongjiang and Jilin to carry out surveil-lance of nearby casinos and their customers. Chinese officials claim to have carried out 347,000 actions involving 1.1 million people in its anti-gambling drive in 2006. China says it also retrieved Rmb3.56 bil-lion (US$445 million) of illegal betting money last year.

Earlier reports estimated a total of Rmb600 billion (US$75 billion) was gambled away annually by Chinese overseas – 15 times greater than the amount spent each year on China’s state-run lottery.

Hard Rock Coming to MacauMelco PBL Entertainment, a developer and owner of casino gaming and entertainment resort facilities focused exclusively on Macau, announced

it had agreed with Hard Rock International to build a Hard Rock Hotel Casino in the City of Dreams, which is currently being built in Macau. According to a statement from the companies, the City of Dreams complex, which is to open in two phases starting in 2008, in-cludes four hotels (the Hard Rock Hotel, Grand Hyatt, Hyatt Re-gency and Crown Towers). Hard Rock will have 380 rooms and other facilities that are common to the group as well as a casino in the first complex of its kind for Hard Rock in Asia. Hard Rock International operates hotels/casinos in London, Las Vegas, Hollywood and Tampa in Florida, with one in Biloxi, Mississippi due to open this summer.

Meanwhile, Melco PBL announced that Garry Saunders, 55, has been appointed as its Executive Vice President and Chief Operating Officer.

Prior to joining Melco PBL Entertainment, Mr Saunders served as Vice President of International Operations at Las Vegas Sands Corp, with principal responsibility for its Macau operations. This role in-cluded overseeing the operations of Sands Macau and the pre-de-velopment activities of certain properties on the Cotai Strip in Ma-cau. Previously, Mr. Saunders served ITT Corporation as Executive Vice President for the gaming activities in both its Sheraton and Caesars World Divisions, and Playboy Enterprises as the President of its Gam-ing Division. In these roles, he was responsible for the development and operations of properties throughout the US and Canada and var-ious international locations in Europe, South America, Australia, Asia and Africa. His responsibilities included the development and open-ing of numerous hotel casino properties.

Nepal’s Casino King Asked to QuitRakesh Wadhwa, a charatered accountant from New Delhi who be-came known as Nepal’s casino king, has been asked to relinquish his post, according to a report in Nepal’s Ghatana R Bichar weekly.

US expatriate Rirchard D. Tuttle has a monopoly on casino opera-tion in Nepal, with a network of seven casinos run under his Nepal Recreation Centre. The casinos rely on tourists from India for the bulk of their revenue. Three of the casinos are operated by Mr Wadhwa under an agreement with Mr Tuttle, including the Shangri-La Casino, which opened recently with a lavish ceremony hosted by Bollywood starlet Urmila Matondkar. Mr Wadhwa also has gaming interests in Sri Lanka and Kazakhstan.

Accordingly to the report, Mr Wadhwa is the victim of a power struggle between the royal family and Maoists. A big chunk of Nepal’s casino revenues are paid to the Narayanhity royal palace, but the pay-ments have dipped lately after King Gyanendra lost his place as head of government due to a mass uprising.

The Maoist insurgents reached an agreement with the new mul-tiparty government, and joined the parliament on January 15 with a mandate to abolish the monarchy and transform Nepal into a re-public.

When the Maoists examined the profits and expenses of Nepal’s casinos, they discovered the sizeable payments to the royal palace every month. Pressure from the rebel union has led to the casino de-creasing those payments.

The King, in turn, put pressure on Mr Tuttle – who has close links

to the royal family – to raise payments, and according to the report, in an effort to find a scapegoat, Mr Tuttle attempted to relieve Wadhwa of his responsibilities and take over one of his casinos. Mr Wadhwa is now mulling legal action against Mr Tuttle.

Hengqin Approval Still PendingLas Vegas Sands Corp (LVS) announced it had not yet received Chi-nese government approval for its proposed project on mainland China’s Hengqin Island, which lies just off Macau’s Cotai Strip, where LVS is spearheading the development of “Asia’s Las Vegas.” Rumours that LVS had already received final approval for the project had sent its stock price surging.

LVS clarified that it has merely received a letter saying that the Zhuhai government established a project coordination committee for the proposed resort. The committee acts as the government liai-son empowered to work directly with the developer to advance the development of a project. LVS said that while the formation of the committee was a positive step, “the project remains subject to gov-ernmental approvals customary for projects of this scale in China.”

LVS’ planned Hengqin Island Resort development will occupy over 1,300 acres of land and feature a diversified mix of leisure, tour-ism and convention amenities including top-rate hotels and villas, convention facilities, a marina and yacht club, outdoor amphitheatre, and golf, tennis, fishing, and other leisure and recreational activities.

Funds Sought for Ponte 16Hong Kong-listed cruise and travel services operator Macau Success is seeking to raise HK$1.6 billion (US$205 million) to fund develop-ment of its flagship Ponte 16 integrated resort in Macau. Macau Suc-cess operates the cruise ship MV Macau Success and is also involved in gaming and entertainment.

Ponte 16, a joint venture on the bank of the inner harbour in Ma-cau, will include, subject to government approval, the five-star hotel

Sofitel Macau@Ponte 16 offering 404 rooms and 19 VIP mansions; a 50,000 sq m shopping arcade and a casino.

Macau Success will own 49% of the project once it completes the acquisition of a 12.25% stake from Joy Idea, while Stanley Ho’s Socie-dade de Jogos de Macau will hold 51%. “Ponte 16 should be earnings accretive in 2007,” according to Macau Success. Total investment is HK$2.43 billion, with Macau Success committing HK$1.2 billion.

The 27,000 sq m casino at Ponte 16, scheduled for completion in June 2006, will provide 150 ordinary tables, 24 VIP tables and 300 slot machines. The ordinary tables will be operated and managed by the joint-venture company, while Macau Success is responsible for the 24 VIP tables, executive director Marco Lee Siu-cheung said.

Macau Casinos Risk Credit Rating CutsLas Vegas Sands Corp (LVS), Galaxy Entertainment Group and other Macau casino operators risk cuts to their credit ratings because of their “aggressive” investment in the city, according to credit rating agency Standard & Poor’s Ratings Services.

While casino companies’ “heavy gamble on Macau may be paying off,” an S&P report said, ratings volatility is likely over the next few years.” Increased competition in the Asian gambling industry also poses risks, it said.

Las Vegas Sands’ credit ratings may be reduced after the company was awarded a casino license in Singapore and Galaxy’s may be cut following a US$240 million convertible bond sale in December, the report said. Both companies “have been stretched by their heavy in-vestments in Macau,” S&P said. The company rates Las Vegas Sands’ long-term debt at BB- and Galaxy’s bonds at B+.

Competition Brings Seoul Casino BoomSeoul’s second casino targeted at foreigners, Seven Luck, opened for business last year, ending the domination of Paradise Walkerhill Ca-sino, which had dominated the market in Seoul for the past 38 years.

The compeition is credited with having led to a boom in Seoul’s casino market, with the number of foreign visitors to Seoul’s casino in 2006 exceeding 700,000, from around 330,000 in 2005.

The Seven Luck casino is operated by Grand Korea Leisure, which recorded W120 billion (US$128 million) in revenue from the operation in its first year, compared to initial expectations of half that figure.

Han Seung-ho, an analyst with Shinyoung Securities, said “The growth rate of Seoul’s casino market for foreigners hovered at 4.2% between 2002 and 2005. But since the market opened to competi-tion, the figure is expected to soar to 16.8% on average for the next three years.”

According to research by Lee Chung-ki, a professor at Korea’s Kyunghui University, the per capita revenue derived from foreigners visiting casinos is equivalent to exporting 76 semiconductors or four colour TVs. He points out that if 11 foreigners visit a casino, they will bring revenue equivalent to one exported car.

All but one of Korea’s casinos are restricted to foreigners and draw business from China and Japan. Last year, Chinese visitors to Paradise Walkerhill equalled those from Japan, with each group making up 33% of the total. This year, the Chinese figure is expected to grow to 40%.

45

International Briefs

AC Opts for Limited Smoking BanThe City Council of Atlantic City, New Jersey, passed a compromise law restricting – not banning – smoking in casinos. The measure bars smoking on 75% of a casino floor, and requires gambling halls to set aside 25% of the floor space as smoking areas by April 15.

The council had been poised to enact a law that would have made New Jersey the largest gambling area in the nation to totally ban smoking, but it backed down under extreme pressure from the casino industry, which claimed the law would result in the loss of 20% of its revenue and 3,400 jobs.

Meanwhile, Atlantic City’s casino revenue grew 4% year-on-year to US$5.2 billion in 2006. The city’s newest casino, The Borgata, which opened in 2003, remained the biggest winner. It brought in US$739.2 million in gaming revenue, ahead of Bally’s Atlantic City, which was second with US$677.3 million.

Ladbrokes Expands in EuropeWorld renowned British-based gambling group, Ladbrokes, has made a bid to buy Scandinavian online casino, Sponsio, which has made a huge presence in Norway, Sweden, Finland, and Denmark – which have amongst the highest spending per capita in Europe. Ladbrokes previously made a partnership deal with the company, but said the £36 million purchase would assist its position in the region.

Ladbrokes is also starting an alliance with Spanish slot machine firm, Cirsa Slot, whose machines are found in most arcades and bars. Ladbrokes has also confirmed its licenses for operating betting out-lets in Italy.

Since the Unlawful Internet Gambling Enforcement Act was signed into law in the US last year, online gambling companies have been looking for business in other betting markets, including Eu-rope.

HSBC Increases Credit Card Gambling ChargesAccording to a report by the BBC, HSBC customers will be charged the cash advance rate rather than the normal purchase rate for all

telephone and internet gambling, effective February 1, 2007.The report says that although HSBC customers will now immedi-

ately pay interest of between 21.9% and 27.8% instead of the previ-ous charge of between 15.9% and 22.9%, they will not be charged the one-off fee applied to other cash transactions such as the purchase of foreign currency.

HSBC says the move is not a result of fears that customers who use their credit cards to gamble are more likely to amass debt that they cannot pay, but rather, to bring it in line with the practices of other banks.

There is, however, a loophole in HSBC’s strategy as payments that are channelled via the online payment service Paypal will still be charged as a retail purchase and therefore continue to attract a lower rate of interest.

Non-Gaming Ahead in NevadaIn 2006, Nevada’s casino resorts and hotels reported revenue of just over US$24 billion, according to the state’s gaming board. The revenue was up 17% year-on-year and translated to a profit of US$2 billion for the industry. The figures show that for the first time, dining, entertain-ment and retail made up over 50% of the revenues of Nevada’s casino resort hotels. Hotel room revenues of just under US$5 billion repre-sent about 20% of total revenue, with year-round room occupancy on the Strip rising to a record 94% and average year-round rates reach-ing a record US$137 a night.

Bids for PeermontAn Anglo-Austrian consortium – consisting of London & Regional Properties and Austria’s Century Casinos – is looking to take over South Africa’s largest casino operator, Peermont Global. Peermont is also being bid for by South Africa’s Mineworkers Investment Com-pany. The South African investor made an initial 4.26 billion rand offer (US$585 million), but the rival bid should result in a higher offer.

Peermont owns Emperors Palace casino in Johannesburg and the Grand Palm in Gaborone, Botswana, among others.

44

London & Regional Properties, one of Europe’s biggest private property firms, recently clubbed together with Dubai-based Istithmar Group to buy up Cape Town’s Victoria & Alfred Waterfront for 7 billion rand. The waterfront is the epicentre of Cape Town’s tourist activity. Century Casinos, for its part, already operates gaming houses in South Africa.

Guyana Passes Gambling BillGuyana’s Parliament has approved limited casino gambling – restrict-ed to foreigners – in some hotels that are scheduled to open ahead of this year’s cricket World Cup. The proposal had earlier prompted street marches by the political opposition and religious groups who argue it will encourage vice and provide new opportunities for orga-nized crime.

The ruling party said the bill, backed by President Bharrat Jagdeo, was necessary to help hoteliers recoup investments made ahead of the World Cup. As many as 100,000 visitors are expected in the re-gion for the tournament, which runs from March 13 to April 28, with matches in Guyana and eight other Caribbean countries.

The legislation provides for up to 30 gambling licenses in the South American country. No hotels currently in Guyana would meet the conditions for a license – which include having a minimum 250 rooms – but two high-end hotels under construction in the capital of Georgetown near a new cricket stadium would be eligible.

Tropicana to be Demolished and RemodeledKentucky-based Columbia Sussex Corp has submitted plans to de-molish and remodel the Tropicana following Columbia’s acquisition of the property through its US$2.75 billion buyout of Aztar. The plans call for US$2 billion to be spent on building towers comprising 10,224 guest rooms, 85,000 sq ft of casino area, over 644,000 sq ft of meet-ings and convention space, and 270,000 sq ft of retail shopping. The new owners will maintain the Tropicana’s Paradise and Island Towers and the Showroom, and with the new construction, the Tropicana will beat out MGM’s upcoming US$7 billion City Center project and Boyd Gaming’s US$4 billion Echelon Place on the old Stardust site to be-come the world’s largest resort.

WTO Rules for AntiguaThe World Trade Organisation (WTO) has ruled against the US in a long-running dispute with the tiny Caribbean island of Antigua, which accuses the US of protectionism against international online gambling companies. Antigua claims US laws that allow Americans to place online bets on racing within the US, but forbid them to bet on gaming sites outside the US, are unfair.

The WTO has provided both sides with an initial report on its find-ings. Both parties will have the opportunity to submit additional com-ments before a final report is published in March, 2007.

After the final report, Antigua will be able to introduce retaliatory trade measures, such as introducing import tariffs on US goods. Such a route is thought unlikely to sway US lawmakers, however, given the small size of the Antiguan economy, which is substantially dependent on the US for trade.

A greater threat is that success at the WTO for Antigua could pave the way for the European Union to pursue a fair trade case against the US over online gambling, which the US might have to take more seriously. Several leading European online gambling companies have been hit by prosecutions from the US in recent months.

Meanwhile, the billionaire founders of online payment solu-tions provider Neteller were arrested by US authorities in January on charges of conspiring to transfer funds with the intent to promote illegal gambling. They face a maximum sentence of 20 years in prison if convicted.

Neteller began processing internet gambling transactions in July 2000. According to Neteller’s 2005 annual report, the company pro-vided payment services to more than 80% of worldwide online gam-ing companies. In 2005, Neteller processed over US$7.3 billion in fi-nancial transactions, and 95% of the company’s revenue was derived from money transfers involving internet gambling companies.

Videobet Moves Into Land-Based GamingVideobet, a subsidiary of online gaming software developer Play-tech, has signed what is described as a “significant step” into the land-based gambling sector. Playtech announced Videobet has secured a long-term licensing contract with leading Mexican ca-sino operator, Entretenimiento De Mexico (EMex). Under the terms of the three-year contract, EMex will add Videobet’s server based gaming product to its existing and future gaming estates. Playtech chief executive Avigur Zmora said “This deal is the first sig-nificant step for our land-based offering, opening up a whole new market whilst complimenting and further strengthening our existing portfolio.”

Meanwhile, Playtech scored another hit when Tila Tequila, the American glamour model and singer made famous by Playboy and MySpace.com, launched her own official online casino, TilaCasino.com, which runs on a Playtech platform. Ms Tequila’s MySpace page has garnered over 54 million page views, and she was featured as a Time magazine “Person of the Year” in 2006

4746

he word from official and unofficial circles is the sale of Harrah’s Entertainment will not halt the casino giant’s plans to invest upwards of US$1.9 billion in expansion out-side the United States.

“I think it’s safe to say the company will continue to pursue growth,” said one source close to the $17 billion deal that took Harrah’s off the New York Stock Exchange in Decem-ber and into the hands of U.S.-based private-equity powerhouses Texas Pacific Group and Apollo Management. “It’s full speed ahead.”

Harrah’s management has been quoted in several news reports essentially affirm-ing this assessment. CFO Jonathan Halkyard told the Las Vegas Sun, “Internationally we don’t expect [the purchase] to influence any plans.”

In Spain, Harrah’s holds a 60 percent stake in a $670 million development planned for a new resort enclave in Cuidad Real province a couple of hours by auto or train between

A Private AffairThe $17B buyout of Harrah’s unleashes new force in casino industry investment

Madrid and Seville. The 40 percent partner is a Spanish company called El Reino de Don Quixote de La Mancha, which is the name of the master-planned community the two are developing. The resort will market to a Eu-rope-wide clientele with an array of hotels, golf courses, spas, shops, convention and conference facilities and a 50,000-square-foot Caesars casino with an 850-room hotel and a 3,000-seat theater.

In Slovenia Harrah’s has entered a 50-50 partnership with HIT Group, the country’s largest casino operator, on a $700 million development in Nova Gorica near the Italian border, where HIT already operates two casi-no hotels. Plans call for a 48,000-square-foot casino, a hotel with between 800 and 1,200 rooms, convention and conference facilities and a range of resort-style amenities. There are a couple of sticking points to this deal, however. One is a law that limits foreigners to ownership of no more than 20 percent of any

Slovenian gambling venture. The other is the country’s 30 percent tax rate, which Harrah’s reportedly wants reduced by half.

In Britain there is Harrah’s purchase of London Clubs International, a transaction valued at $570 million, or about 290 million sterling. “This is an entrée into Europe for a company that can leverage that into a lot of other things. With deregulation it’s a smart move,” said Matt Sodl, managing director of Innovation Capital, an investment banking firm active in mid-market casino industry M&A.

LCI is Harrah’s second stab at the UK. The first, a partnership with Gala Group, foundered when opposition in Parliament blocked Government plans for dozens of Las Vegas-style casinos. With LCI Harrah’s gets seven operating casinos in England, four of them in London, and three casinos in Egypt and South Africa that more likely than not will be sold. LCI is especially attractive for the five new casino licenses it has secured in England and Scotland, one of these for a 40,000-square-foot venue scheduled to open next month at Leicester Square in London’s West End.

“A good international diversification play,” said a knowledgeable source. And so it would seem, looking ahead to the reforms enacted in 2005 that are opening Britain’s traditionally staid casino industry to the mass market.

In the Bahamas Harrah’s has a 33 percent stake in a $1.6 billion development near Nas-sau that investors say will be the largest des-tination resort in the Caribbean. It is called Baha Mar and is scheduled for completion in 2010 with six hotels, a 20-acre beach, a golf course, a water park, convention and meet-ing space, 50,000 square feet of retail, restau-rants and entertainment venues and other attractions. Harrah’s end is a 95,000-square-foot Caesars casino with a 1,000-room hotel. The majority stakeholder is a Bahamas-based developer called Baha Mar Resorts. Starwood Hotels & Resorts Worldwide has a 10 percent share.

The transaction economyNeedless to say, a lot can happen over the

course of the next several months as Harrah’s and its new owners work to complete the largest leveraged buyout in gambling in-dustry history (and the seventh-largest of all time), with all that implies. Regulators have never encountered a transaction with this many pieces before. Harrah’s is the largest ca-sino operator in the world with$21 billion in assets comprised principally of 39 resorts in 12 U.S. states and in Canada and Uruguay. All these entities have to register their approval, and figuring how many people affiliated with Texas Pacific and Apollo are required to undergo licensing will of course be a critical part of this process.

“If you’re a regulator it’s going to change your world,” said Sodl.

Harrah’s also has a massive amount of investment on its U.S. drawing board. This in-cludes more than $1 billion in projects still in development in Atlantic City and Indiana. But the most important piece of the U.S. puzzle is what to do with some 125 prime undevel-oped acres the company owns around its seven casinos on the Las Vegas Strip. This is the casino industry’s ground zero, Harrah’s values this land at $13 million an acre, and it’s surrounded by deep-pocket competitors like MGM Mirage, Las Vegas Sands, Wynn Resorts and Boyd Gaming who are investing billions on the Strip. Harrah’s has yet to announce its plans on the Strip, due in no small part to the fact that it’s still digesting the far-flung holdings of Caesars Entertainment, which it bought not 20 months ago for more than $9 billion.

What is certain is that Apollo and Texas Pacific will take a keen interest in what hap-pens there.

“The attraction for them is the amount of real estate Harrah’s controls,” said Brian Gor-don of Applied Analysis, an economics ad-visory firm based in Las Vegas. “The acreage on the Strip is significant, and pricing points demonstrate there are premiums being ap-plied to it. They see an opportunity to lever-age the value of that real estate.”

It was “the real estate value of the as-sets” that inspired private equity’s move on Harrah’s, said Sodl.

“These are deal-driven guys who are all about delivering returns for their investors.”

The other big issue is debt. As expected with an LBO of this magnitude, Harrah’s debt ballooned overnight, growing from $10.7 bil-lion to $21 billion — from about four times estimated 2007 EBITDA to eight times. The ratio of debt to equity (which in Harrah’s case correspondingly has shrunk by half ) is

now about 75:25, which is not so good for the bondholders. In essence the company is funding its own acquisition by putting up its assets as collateral. This is, however, the way LBOs work, and Harrah’s new capital struc-ture is not out of line with the average for transactions of this sort.

“Actually, it is similar to what we see in the public markets, and in terms of the merg-er transactions that have taken

place with some of the biggest compa-nies, the MGM Mirages of the world, and the multinationals,” said Mark Harms, CEO of in-vestment bankers Global Leisure Partners, speaking last October to the annual con-ference of the International Association of Gaming Regulators. “Most of the public com-panies in the U.S. were built on the back of high-yield debt, so the industry is very used to seeing leverage. It’s probably one of the best industries in the world in terms of lever-aged financing.”

Debt is the basis of the very impressive returns private equity has generated for its institutional investors over the last several years — 20 percent and more on a compound annualized basis, according to some sources, 33 percent, according to Harms, which is al-most double that of the hedge funds, almost three times greater than the public markets — and the source of the hefty dividends and fees fund managers routinely extract from their portfolios.

Because it is largely free of the restric-tions and scrutiny that dog the public mar-kets, private equity is able to fully exploit the logic which holds that capital structure has little affect on return on assets. Given that re-turns above and beyond the cost of capital, which in the case of LBOs is relatively fixed, flow through to the equity, and that income flowing to equity is taxed while interest pay-ments are not, debt actually increases the value of target companies, thus enabling you to pay higher prices for acquisitions. This happy state of affairs is driving creative minds to develop ever more sophisticated and complex credit engines in the form of mortgage-backed securities and things like “collateralized loan obligations” in which separate pieces of mostly speculative-grade bank loans are bought, pooled and repack-aged as high-grade paper and widely dis-persed to spread risk.

It’s like having a license to print money, when you think about it, and it’s a big part of the reason the world is awash in capital right now and the stuff is cheaper than it’s ever been. So even as the collective debt level

soars demand continues to outrun supply, with the result that risk is looking about as good as it ever has. And why shouldn’t it. The

default rate for speculative-grade invest-ments hit a 24-year low in the United States in 2006, according to Standard & Poor’s. While the previous year saw only 23 defaults on more than $36 billion of fresh borrowing. In Europe default rates stabilized last year at an amazing 1.08 percent. All the demand is driving down yields, of course; but who cares when even debt rated CCC+ or lower is returning averages exceeding 11 percent. Not surprisingly, U.S. companies rated CCC or lower were able to float well more than $30 billion of bonds last year, more than double all of 2005.

Private equity, for its part, accomplished something like $300 billion in deals last year. LBOs accounted for about 27 percent of all U.S. mergers and acquisitions. Citing Standard & Poor’s, BusinessWeek reckoned that in the last three years, banks have funneled some $71 billion in loans through U.S. companies to pay dividends to private-equity owners, up from $10 billion for the preceding six years.

How much leverage the corporate world can ultimately bear is another question. Crit-ics say a reckoning is inevitable. For now, though, there are fortunes to be made in the transaction economy. The London Stock Ex-change opened for business in 2007 with £40 billion in deals waiting to close. According to a recent BBC report, almost 80 percent of the FTSE 100 is talked about publicly in terms of mergers, acquisitions and buyouts.

Given its prodigious cash flows, no one is concerned about Harrah’s ability to service the added debt load. But it will of necessity siphon off cash that would have gone to cap-ital expenditures, and management could face pressure down the road to identify assets and markets that may be deemed less strate-gic and therefore disposable. Halkyard has said there are no plans to sell any casinos. But the signals from corporate have been mixed. Chairman Gary Loveman has called the buy-out a “change in ownership, not a change in direction,” but he has also acknowledged that “With high initial debt levels, capital al-location priorities likely will change.”

For the rest of the industry, particularly some of the smaller players, this could be a good thing.

“Debt reduction will be one of the un-derlying themes of this company for the next couple of years,” said Gordon, who believes Harrah’s ambitions will suffer “modest” de-lays. But then Loveman has implied as much.

T

48

Said Gordon, “until the transaction closes it’s difficult to see how they can move forward with their [investment] plans unless these are signed off by the new owners.”

By the same token, Harrah’s management is too smart not to seize this opportunity to pursue a thoroughgoing reorganization, a process the Caesars acquisition, given its size, had demanded anyway, and no doubt it’s been ongoing.

So a lot can happen. And perhaps it al-ready is. Chief Operating Officer Tim Wilmott resigned after Apollo and Texas Pacific en-tered the picture. He was a 15-year veteran of the company and was considered the No. 3 man behind Loveman and Vice Chairman Charles Atwood. Also gone, as of this writing, are Senior Vice President of Operations Tony Santo and Central Division President Antho-ny Sanfilippo.

They will not be the only three of Harrah’s 85,000 employees to go.

‘Really building businesses’Among workers in Europe the transaction

economy is setting off alarms. In a statement released by Swissbased IUF, which represents millions of food, hotel and agricultural work-ers, General Secretary Ron Oswald blasted the buyout culture as “a serious threat to workers, their trade unions and their communities.”

“When company cash flows become merely a source of plunder for investors seeking inflated, short-term windfall gains we are feeding financial markets rather than

creating the kinds of enterprises which can provide decent jobs and future perspectives for a Europe which has been living far too long with unacceptable levels of unemploy-ment.”

The alarm has spread to Britain, where the Trade Union Congress issued a report last year titled “Investment Chains” attacking not private equity specifically but the culture of “short-termism,” which it claims is threaten-ing jobs and has investment by British com-panies lagging their counterparts on the continent and in the United States.

Yet for all this, when the dust settles over Harrah’s what will be clear is that private eq-uity and the casino industry are perfect for each other. Certainly the deal electrified the public markets. “We believe [it] provides for easier entry into the gaming sector by other private equity firms, which should ultimately lead to higher valuations for the group over-all,” CIBC analyst David Katz said in a recent note to investors.

As Las Vegas amply shows, the industry’s appetite for capital is insatiable. Globalization is an expensive proposition, and the compet-itive bar continues to rise. In markets every-where, projects that used to run in the tens of millions now cost hundreds of millions to complete, projects formerly in the hundreds of millions now cost billions. The investment-cycle is growing in length and complexity as a result, and this is problematic for many in-vestors in the public markets, where opinion tends to run in 13-week spurts. Private equity may have more than its share of fast-buck

artists, but they are far from the rule. As own-ers, fund managers are free to think longer-term and generally they do.

“Gaming is a very long lead-time busi-ness, a long growth cycle,” Harms explained, “typically five to seven years. With private eq-uity that sits well.”

The gambling world certainly is rich with examples of companies that have grown larger, stronger and more profitable under its stewardship. In Europe, private equity has been a preferred source of funding for the industry for years. “Almost every major UK company has been in private-equity hands at one time or another,” said Harms, whose firm advised Permira on its £200 million in-vestment in casino and bingo operator Gala, which paved the way in 2005 for Gala’s £2.18 billion merger with bookmaking giant Coral Eurobet, a deal in which Global Leisure Part-ners was an advisor and co-investor.

Harms holds up Gala Coral as the “poster child, for not only the gaming industry in the UK, but also for the private equity industry in the UK. … This business was taken from $200 million in value eight years ago to $8 billion in value today.” And it was accomplished through investment and capital formation, “really building businesses,” he said.

At the IAGR conference he offered other examples: “Morgan Stanley has announced that they’re building a billion-and-a-half-dollar casino resort in Atlantic City. Colony Capital are rebuilding the Hilton in Las Vegas, they rebuilt Resorts in Atlantic City, reinvest-ing into the properties that they acquire and creating more profitable properties, creating jobs and therefore creating higher tax bases in the communities in which they’re operat-ing, as well as profit for themselves.”

Fund managers worldwide raised more than $300 billion last year, more than enough money to lavish on a “very attractive asset class,” as Harms describes gaming, an industry known for stable cash flows, good long-term growth prospects, a business model gener-ally impervious to economic downturns, and one commanding a significant amount of real estate which the public markets are not fully valuing, or so many say. The Harrah’s ac-quisition proves that if the issue is price no casino company is beyond their reach.

Said Gordon, “Any time the largest gam-ing company in the world goes private it changes the landscape a little bit.”

By James Rutherford, International Editor of IGWB. Reprinted with permission from Interna-tional Gaming & Wagering Business magazineHarrah’s Entertainment’s Rio All-Suite Hotel and Casino