Author’s Note: In this article, we’ll analyze the Macau and the Las Vegas markets, but with a twist in time. One of us authors has the privilege of working both in Macau and in Las Vegas. This cross-continent, cross-cultural experience reveals a sharp contrast between the two markets when comparing them in the present day. However, when comparing the Macau of today with Las Vegas in 1992, the similarities are remarkable. This article digs into these comparisons and then rolls forward 20 years to what Macau might look like if development of gaming in the East follows a similar pattern of growth as it has in the North American gaming market.
Roll back to 1989, before Steve Wynn opened the Mirage and Las Vegas was known to be a wild town; certainly, it was a town without Wall Street investors. The Mirage yielded a new era of gaming in North America: an era backed by Wall Street. In simple terms, gaming seemed like an amazing investment that could support tremendous capital investment, and this capital investment in gaming in Las Vegas culminated with more than $10 billion being invested into CityCenter.
Over the last 10 years, the major corporate gaming companies have largely been located in Las Vegas—even those that have no properties in the Las Vegas market, such as Ameristar and Pinnacle—building not only a center of gaming, but in many ways a center of gaming management. This management center today oversees hundreds of casinos across the world, ranging from clubs in London to a lion’s share of the casinos in Macau. It is hard to point to one factor for the mass centralization of gaming management, but the gaming-friendly environment, and enormous and seemingly unlimited revenue potential of the Las Vegas market itself, were certainly contributing factors.
Following this centralization of management, nearly all gaming vendors have either developed a significant presence in Las Vegas or, in fact, have relocated their corporate headquarters to this center of gaming.
Las Vegas has become the center of gaming in North America, and corporate organizations there are now spanning the U.S. and the world with their gaming activities.
As for revenues, in the initial years, it seemed like the Las Vegas market was limitless. You didn’t have to look past the amount of capital that was invested to appreciate the management and market potential of the gaming industry. Now, as we look deeper into the Las Vegas data, we will examine two key trends: the average gambling spend and the number of gamblers.
Walking around Las Vegas today, in 2012, one finds “steel in the ground”—unfinished projects like Echelon and Fountainbleu leaving large swaths of undeveloped land in prime locations on the Strip—as well as shuttered casinos like Sahara. However, the streets have never been more crowded with foot traffic.
Figure 1: Monthly Las Vegas Visitors1 – The Las Vegas Convention and Visitors Authority collects detailed data on visitors to Las Vegas. As Figure 1 shows, it is quite clear that the gaming market is at one of its highest points in number of visitors per month in 2012. This is validated by the August visitation figures, with 3.34 million visitors in 2012 compared to 3.29 million in August 2011.
However, even given this increased visitation, gaming revenue is down significantly (see Figure 2). Digging deeper into why there is significant growth in visitors and yet a decline in gambling revenue, we can examine the gaming dollars per visit. This critical metric peaked in 2007, but the story does not stop there. Why did it peak? And what can explain the phenomenon of a city showing signs of massive depression, with unfinished and closed casinos, while at the same time looking like the boomtown of Las Vegas in the 1990s? While we won’t pretend the answer is simple (or that we possess it), one possible explanation is the impact whales have on a casino’s bottom line and the wild volatility that comes with having large amounts of revenues coming from said whales.
But before we look deeper into this, let’s draw our comparison to Macau.
In 2004, Sands opened the first “corporate-style” gaming offering in the Macau market. The market has since grown to include six operators, each of which has multiple gaming operations; even the individual “casinos” would be called multi-property operators in the traditional sense. The remarkable thing for these operators is the incredible and seemingly unlimited revenue potential of the Macau market. What is even more incredible is that a relatively small group of casinos are generating $33.5 billion in revenue in 2011. This amount has grown in 2012, albeit at a slower rate, and hit $3 billion in September. These days of heavy growth can be compared to the early days of Las Vegas, and with the enormous population and gambling appetite of China, the market does seem limitless.
Figure 2: Gaming Dollars Per Visit – The management teams in this market must be developing highly specialized skills to handle the highly specialized business that exists in this market. It now looks like these management teams are the center of gaming expansion across Asia. In many ways, a presence in Macau is leading the expansion of corporate gaming across Asia. We argue that, like Las Vegas becoming the center of vendors for the U.S. markets, the highly specialized management skills and differences in the markets are likely to lead to a need for vendors to establish a significant presence in Macau as well if they want a strong presence in this growing marketplace.
In the casino industry, a “whale” is a player who gambles large amounts of money, but definitions of whales vary wildly. For example, certainly anyone with a million dollar or more credit line would qualify as a whale in any casino, but in Australia, a $50,000 bankroll is also said to classify a player as a whale. Whales typically represent less than 1 percent of a casino’s business but can, in some cases, produce 20, 30 or even 40 percent or more of a casino’s revenue.
In order to understand mathematically how whales can impact a casino’s prospects for future growth, one needs to understand the concept of standard deviation. In probability theory, the standard deviation measures the variation that an event can have from its expected value. In this article, we will present two simplified examples of a casino’s customer base, one with whales and one without whales, and use the concept of standard deviation to see just how much of an impact whales can have on a casino’s bottom line.
Standard Deviation 101
An important rule for standard deviations is called the 68-95-99 rule. This states that for a set of outcomes that have a normal distribution (meaning if you graph the outcomes you get a bell curve), 68 percent of all outcomes lie within one standard deviation of the average (or mean) outcome, 95 percent lie within two standard deviations and 99 percent lie within three standard deviations.
In our example, we will look at two casinos: Casino Grind and Casino Whale. We will assume each casino only has five patrons, and each casino generates $500 per month in gaming revenue. These absurdly low numbers allow us to dig very deeply into the data and truly understand how to measure a casino’s expected monthly revenues with the help of standard deviation. More importantly, we will see a stark contrast that is created with the presence of a whale.
Casino Grind’s five customers each generate $100 of play over the course of a month. Casino Whale has four customers who each generate $25 of play over the course of a month, plus one whale who generates $400 of play over the same time period. We assume that the likelihood of each customer returning next month is 50 percent, that if they do return they will play exactly the same, and that there is no impact from new gaming customers.
Figure 3: Casino Grind’s Number of Possible Outcomes – In Figure 3, we see all possible outcomes for Casino Grind. Since each customer has a 50/50 chance of returning, and there are five customers, that leaves a total of 32 = 2^5 outcomes. We then create a histogram of these outcomes, seeing something that fairly well looks like a bell curve. The mean outcome is $250 (since the customers total $500 of play, but each only has a 50 percent chance of returning). The standard deviation of these outcomes is $114. Using the 68-95-99 rule, we see that with 68 percent certainty, the results for the month will be between $136 ($250 – $114 = $136) and $364 ($250 + $114 = $364). In other words, there is a 16 percent chance that the outcome will be below $136 and a 16 percent chance that it will be above $364. In fact, for our example, the probability of being below $136 is 19 percent (6 / 36 = 19%), so the theoretical chance given to us via standard deviations is close to the actual chance found by calculating each possible outcome.
Figure 4: Casino Whale’s Number of Possible Outcomes – In Figure 4, we see a very different story for Casino Whale. Looking at the histogram, we see two distinct bell curves caused by the presence (or lack thereof) of the whale. Our standard deviation has increased significantly, from $114 for Casino Grind to $205 for Casino Whale. Instead of there being a 16 percent chance of the revenues being below $136, now we have a 16 percent chance of the revenues being below $45.
So we see how much impact the presence of casino whales can have. Now, we know that casinos don’t have five players. However, this type of analysis is repeatable using Monte Carlo simulations. Monte Carlo simulations perform analysis very similar to ours with similar results. But instead of looking at 32 possible outcomes, Monte Carlo simulations look at millions and millions of randomly determined possible outcomes. (The reason they don’t look at all possible outcomes is because there are simply too many—if a casino has 100,000 customers, the number of possible outcomes is 2^100,000 which is a number so large it exceeds a 1 with 30,000 zeros.)
Our illustrative example on the effects of whales and high rollers is underpinned by the concept of a bimodal distribution (see Figure 5). If a bimodal distribution exists, such as we think is the case with gamblers and their gambling dollars per visit, then it is, quite simply, mathematically dangerous to look at the average. Our example of Casino Grind and Casino Whale illustrate this danger, and when taken to a larger level, it shows how market analysis for Las Vegas and Macau needs to look both at the total number of visitors and the total high roller market.
Las Vegas, Macau and Total Marketplace
It sure is an exciting time in the Macau market, with what seems like unlimited growth opportunities and seemingly endless opportunities to deploy capital. As this marketplace grows, there are three strong follow-on effects for which one should watch. First, watch for management teams in this market becoming the leaders among companies expanding across Asia. Second, watch for vendors establishing strong leadership positions locally to support this center of management. And finally, watch the numbers, as a high volume of customer growth does not necessarily mean growth in revenue.
1 This data is calculated from the sum of Clark County, the Las Vegas Strip, Bounder Highway and downtown. The monthly figures for 2012 are not normalized for seasonality so should be taken as indicative only.
2 http://en.wikipedia.org/wiki/Bimodal_distribution, extracted on October 2012.