A Tale of Two Gambling Cities – Las Vegas and Macau

In the waning days of 2015, Chinese police announced the arrest and confession of a corrupt official who had accepted $30 million in bribes. The story is not a gaming story, except that it illustrates the immense amount of money that was involved in graft, corruption and corporate crime in China before the government took action. It also points out that VIP gaming revenue in Macau was built on an illegal and unsustainable platform. Arrests like that one permanently altered the gambling landscape in Macau.

The two dominant gaming jurisdictions in the world are the Las Vegas Strip and Macau. The two cities are alike in the sense that each has an economy built around casino resorts. The differences are greater than the similarities, however. Macau has the best location by far. It is very close to China and its 1.8 billion citizens. By contrast, Las Vegas sits in the middle of a desert, not close to any major population center. The importance of location can be seen in the gaming revenue numbers. Between the year 2002 and 2013, Macau gaming revenue jumped dramatically from $2.7 billion to $45 billion. In that same period of time, the gaming revenue on the Strip grew modestly from $4.6 billion to $6.5 billion.

However, since 2013 the advantage has gone to Las Vegas due to its stable political and regulatory environment. Las Vegas did struggle through the Great Recession, but is back on track with revenues approaching an all time high– an estimated $6.8 billion in 2015. The story in Macau is very different. The Chinese government stepped on Macau’s air hose in mid-2014 and gaming revenues have fallen to $28.9 billion as a consequence.

One of the reasons that Las Vegas is doing well is diversification. Resorts in Las Vegas have successfully diversified and no longer depend solely on gambling revenue. Over 50 percent of the resorts’ revenues now comes from entertainment, lodging, restaurants and shopping. In 2015, over 42 million people visited Vegas to enjoy all of the things the city has to offer. The hotels, night clubs, restaurant, retail shopping and entertainers on the Strip are among the best in the world.

On the other hand, Macau is still trapped in a gambling-centric economy. In 2013, over 70 percent of $45 billion in gaming came from a small number of VIP gamblers from China. Even with the 36 percent decline in revenue in the last year and half, high-rollers still account for 50 percent of the gaming revenue. Before China began its crackdown on corruption, the volume of play in Macau was very confusing to Westerners. “What was the source of those billions and billions of dollars?” We got the answer when the Chinese government cracked down on graft and corruption in China. Almost immediately those well-healed Chinese gamblers disappeared.

Guo Guangchang – dubbed ‘China’s Warren Buffett’ – was last seen with police at an airport in Shanghai. Simon Tomlinson, London Daily Mail, 12-11-15

The chairman of one of China’s three main state-owned phone carriers resigned following an announcement he is the target of an anti-corruption investigation. Macau Daily Times, 12-31-15

A low-ranking Chinese energy official accused of hiding more than USD30 million in cash…admitted to taking $32.5 million in bribes. Macau Daily Times, 12-30-15

President Xi Jinping’s efforts to scrub China clean of the filth of graft and corruption have made a hero of him. He is celebrated in cartoons and songs that tell of all that Xi has done to save China. As the leader of a new group of party officials intent on delivering a bright new future to China, he is being heaped with praise. Xi even has his own app that gives users access to all of his wise sayings; a 21st century version of Chairman Mao’s “little red book.” One of his sayings is very telling for Chinese officials, top businessmen and by implication the casinos in Macau: “All corruption must be punished. Every corrupt official must be prosecuted.”

The cartoon extolled the long list of achievements, ranging from market-oriented reforms and the anti-graft campaign to the yuan’s acceptance as an International Monetary Fund special drawing rights currency and efforts to fight smog. South China Morning Post, 12-28-15

“The crackdown is two years old; it has done quite a lot. Tigers, flies, big foxes, Catch Catch Catch Catch!” the song goes. South China Morning Post, 12-28-15

In the midst of this, the governments of Macau and China are pressing the casinos in Macau to diversify and attract a broader array of tourists and gamblers. In his New Year speech, the CEO of Macau promised to make Macau an ideal place to live, visit and work through a diversified economy. In an attempt to comply (and insure their licenses get renewed), the casinos have invested billions in diversification. In time it may work. There are still 1.8 billion Chinese just over the horizon, but it will be a long time before the strategy begins to pay off. It is Macau’s only hope as Xi is not going to take his foot off the air hose.

Las Vegas has achieved success through diversification, but it took decades to create a financial model that was not dependent on a few big spenders. The popular dollar slot machines and video poker provided the first step toward generating much more revenue than table games. The slot revolution was followed by better hotel rooms, restaurants, swimming pools, night clubs and high-end retail. The city is no longer dependent on one revenue stream; nothing short of a national depression or a terrorist attack on airlines affects Las Vegas significantly. It has become much more than a gambling town, it is a resort. New Year’s Eve 2015, an estimated 332,000 people were in Vegas to celebrate. This week the Consumer Electronic Show is in Vegas. CES is the city’s largest convention, 165,000 people will fill the 125,000 hotel rooms and generate $139 million in total revenue. It is huge, but just as important is the news coverage. Stories of the latest and greatest in consumer electronics debuting in Las Vegas are making headlines all around the world. The year is off to a great start for Las Vegas resorts.

That cannot be said for Macau. It is still struggling with the loss of $13 billion in revenue as all of the casinos’ debt was predicated on the high-rollers. Those gamblers have either gone to jail or are hiding under their beds. They will not be coming back. Their replacement, the mass market gamblers and slot machine players are still small potatoes. It will take a great many casual tourists to replace the revenue stream that has gone dry. Macau is still just a gambling town. It aspires to be more, but it is not there yet. Las Vegas shows us what can be done, but there is a catch. Its success came from a stable and non-intrusive regulatory and political environment. To approximate the success of Las Vegas requires three things; a favorable regulatory system; a non-onerous tax rate; and a stable and predictable political environment. Few jurisdictions in the world can claim all three and Macau in not one of them.

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