Ryan Hong-Wai Ho takes a closer look at the issue of Macaus satellite casinos and how amendments to the citys gaming law promise to change the landscape for satellite operators.
It has been more than 20 years since Law No. 16/2001 was enacted as a legal framework for the Macau gaming industry. With the gaming concessions (and sub-concessions) set to expire in June 2022, the Macau government has been beefing up its gaming regulation and enforcement over the past years, and the latest amendments to the citys gaming law are currently being considered by the Legislative Assembly. Among other changes, third-party promoted casinos will be outlawed under the new gaming law. This draft provision may also affect some self-managed casinos not wholly owned by the incumbent gaming operators.
Third-party promoted casinos, commonly known as satellite casinos, are gaming establishments technically administered by authorized operators but owned and managed by independent investors. Nevertheless, the proposed amendments provide that casino gaming must be operated in the properties owned by concessionaires (i.e. authorized gaming operators). The new gaming law will probably have a negative effect on the long-established satellite properties scattered around the city. While this type of casino partnership can trace its origins to the former casino monopolist in the 1990s, the number of satellite casinos has proliferated since the citys gaming industry was liberalized in 2001. A majority of the existing satellite properties emerged between 2004 and 2006. At present, Macau has a total of 18 satellite casinos operating in the name of three authorized gaming operators.
The Macau gaming industry has a de facto franchise system to operate satellite casinos. Some gaming operators have been partnering up with certain third parties in the development of these casinos. There is a strong rationale for establishing satellite casinos: gaming operators can expand their market reach without making any significant capital investments. Acting as the self-styled service providers, satellite casino owners are by no means passive investors; on the contrary, they assume the day-to-day management of the casinos with the entitlement to a share of the gaming profits. Take the mass market segment as a simple illustration gaming operators generally pay about 40% gaming taxes and keep 5% of the net win generated from the table games, and the remaining 55% will go to the service providers for the gaming service rendered in satellite casinos.
Local satellite casinos are fraught with informal industry practices. There is little argument that the Macau government and the public want a healthy and sustainable gaming industry. With most considering these third-party promoted casinos likely to remain unresolved after the expiry of the current concessions, the draft under consideration came as a surprise to the satellite community. In retrospect, this policy direction does make sense and seems almost inevitable, given the restructuring and expansion of the DICJ last summer and the ongoing regulatory actions on the junket operators. These measures demonstrate the commitment of the government to address this legacy issue head-on. The new gaming law is likely to dissolve the deep-seated casino partnership and mark a turning point for any third-party involvement in gaming operations.
The Macau government has proposed introducing a grace period of three years for the existing cohort of satellite casinos. Still, it behooves the authorities and the public to examine other related issues arising from the complexity of this casino partnership. Most of the outstanding questions are legal and technical in nature. Future casino properties must be owned by gaming operators. And yet, it is advised to explicate this draft provision as to whether the premises on which a casino is operated must be a wholly-owned (100%) or majority-owned (over 50%) subsidiary of the concessionaire, or whether it is possible to have a 50/50 joint ownership or equity investment (less than 50%) on those properties. The variation in ownership structure, together with the voting rights, can make all the difference to satellite casino owners chances of survival.
Another often-overlooked issue with satellite casinos is their potential resurgence. Subject to obtaining government approval, a management company can operate casinos on behalf of the concessionaires under Law No. 16/2001, and this provision is retained in the draft bill. However, the concept of a management company is not merely a gaming service provider but an authorized operator having the power to run casinos in its own right. It is fairly understandable that such a provision has never been invoked because this casino management arrangement can elevate an outside investor to the status of a gaming operator, thus shattering the citys system of gaming concessions. The forthcoming demise of the satellite casino system might motivate the industry stakeholders to seek alternative solutions like this to stay in business under the new gaming law. It is, however, very much in doubt whether the government or the concessionaires would be amenable to the idea of splitting the exclusive rights to operate casinos in Macau.
It has been a trend that satellite casinos have been marginalized by the integrated resorts owned and developed by most gaming operators. Though challenges abound, these small-scale casinos also possess a high degree of operational resilience and responsiveness. With the current COVID-19 pandemic, most casinos have been struggling with a lack of business in this challenging environment. According to industry sources, one satellite property bucked the trend and recorded decent profits in the second half of last year. This result hinges largely on their dedication to quality service alongside various play incentives. All these, taken together, lead to deeper engagement with the patrons. Integrated resorts may have an advantage in terms of their recreational options; when everything is taken into consideration, customer service still plays a pivotal role in attracting loyal customers and repeated patronage.
After the three-year transition period, those casinos owned by independent investors would be either closed or sold for a dime on the dollar. The six prospective concessionaires permitted to operate casinos in Macau would be on a bargain shopping spree. Like the board game Monopoly, a possible scenario for the six operators-designate would be to accumulate the satellite properties preferably in the vicinity of their other casinos, ultimately consolidating the property holdings to collect the economic rents. Satellite casino owners may also seek ways to inject their properties into the concessionaires and become minority shareholders, possibly acting as executives charged with supervising the concerned casino properties. On the other hand, a local satellite casino group has expressed its interest in bidding for one of the six forthcoming concessions, and more are anticipated from the satellite community. After all, Macaus proximity to mainland China makes its gaming concessions a golden lottery ticket for any operators to hit the mega jackpot, not to mention satellite casinos bid for survival and revival.
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