GAMING THE SYSTEM? THE CASE OF SATELLITE CASINOS IN MACAU

Defining satellite casinos

The term “satellite casino” is generally used in the context of the Macau gaming industry to refer to any specific gaming establishments that are technically operated by sub/concessionaires but owned and promoted by third parties who are also involved in the day-to-day casino management. These satellite casino owners are by no means passive investors; on the contrary, they provide gaming management services and exercise full authority over the operation of satellite casinos. While gaming operations are administered by sub/concessionaires, satellite casino owners are responsible for the “provision, renovation and fitting out of the premises, purchase and installation of gaming equipment, cleaning services, utilities, food and beverage services, promotion, publicity, marketing, customer development and other ancillary services.” ⁴

Satellite casinos are not wholly owned, developed, and managed by sub/concessionaires. These third-party managed casinos vary in size and service, and most of them are small commercial casinos featuring mass gaming halls and VIP rooms. Most satellite casino owners are local and Hong Kong-based entrepreneurs, but their casino management experience and credentials have largely been unknown to the public. SJM, Galaxy, and Melco are among the six sub/concessionaires in partnership with these third parties who are presumed to possess the necessary financial capacity and customer base. In addition to “satellite casino” or “satellite,” there are other terms for this sui generis type of casino partnership, including “third-party promoted casino,” “third-party managed casino,” “service provider,” “city club casino,” and “legacy casino,” etc. These terms are used interchangeably throughout the article.

Historical overview of satellite casinos

Macau has a rich history of gambling and commercial gaming. ⁵ After gaming was officially legalized in 1847, this former Portuguese colony has gradually developed into a gaming-based economy targeting visitors from the nearby regions. In particular, the Sociedade de Turismo e Diversões de Macau (STDM) was granted in 1962 the monopoly concession to operate casinos. STDM has since been credited with founding the enclave's modern gaming industry, initiating the early rise of casino tourism in Asia.

In light of the gaming tax reform in 1976, ⁶ all-expense-paid junket trips were organized to bring premium players to STDM's in-house VIP salons. Starting from the mid-1980s, STDM began to “contract out” certain gaming tables to trusted third parties, usually large-scale junket operators, in the designated VIP gaming areas (“VIP rooms”). These junket operators were allowed to partake in the VIP room business featuring high-stakes baccarat games. ⁷

Third-party involvement in casinos has long been in place, predating the enactment of Law No. 16/2001 that regulates the Macau gaming industry. The success of VIP room operations has given rise to greater involvement of third parties in STDM casinos. The casino monopolist commenced co-operating with some local hotel owners to develop gaming establishments. Specifically, the year 1997 saw the currently suspended, junket-controlled New Century Hotel being renovated and equipped with a STDM-operated casino. The late-1990s organized crime associated with VIP gaming further led to the introduction of a new “management model” in STDM casinos. ⁸ In May 1999, STDM opened its first members-only “Legend Club,” a joint venture between STDM and a local junket operator. ⁹ The now-defunct Casino Marina at Pousada Marina Infante was subsequently opened on December 13, 1999, one week before Macau's return to Chinese sovereignty. ¹⁰

STDM only operated a few satellites out of its 11 gaming establishments (i.e., ten casinos and one gaming club) in 1999, as opposed to a deluge of third-party managed casinos nowadays. Among the city's 39 casinos in operation, ¹¹ a total of 18 gaming establishments are classified as satellite casinos: SJM has 14 satellites operating on its concession; Galaxy and Melco operate three and one satellite casino, respectively. Table 1 presents the number of both self-managed and satellite casinos in Macau.

Legal environment for satellite casinos

Macau administers and oversees the gaming industry on a two-tier basis. Law No. 16/2001 is the city's legal framework for the gaming industry with a focus on sub/concessionaires and their casino operations, whereas Administrative Regulation No. 6/2002 seeks to supervise gaming promoters and their junket activities. ¹² Macau adopts the system of concession (concessão) for the regulation and supervision of the gaming industry. A casino concession contract is a specific administrative agreement made between the Macau government and a private entity that has the exclusive right to operate casinos in the city. The Macau government is the ultimate source of authority to formulate gaming policy and award casino concessions. The Gaming Inspection and Coordination Bureau (Direcção de Inspecção e Coordenação de Jogos, DICJ) acts as the regulator to administer casino sub/concessionaires and license gaming promoters (i.e., junket operators). Under this regulatory structure, satellite casinos and their associates are categorically excluded from this two-tier control system.

The presence of satellite casinos can nevertheless be traced to the casino concession system in Macau. Law No. 16/2001 limits the number of concessions to three, ¹³ but the gaming law does not expressly place any limit on the number of gaming establishments in the city. This concession system enables the six sub/concessionaire to develop as many casino properties as economically and operationally feasible, thus in a way setting the stage for the proliferation of satellite casinos. Given the number of satellites in operation, the Macau authorities have apparently been tolerant of some sub/concessionaires collaborating with certain third parties for the development of such casinos.

Notwithstanding the foregoing, sub/concessionaires are not at liberty to invite any parties to develop and co-operate casinos. The casino sub/concession contracts require sub/concessionaires not to assign or transfer the gaming operation rights to any third parties, unless otherwise approved by the government. ¹⁴ Article 5 of Law No. 16/2001 also specifies that gaming establishments must be authorized by the Macau government. The establishment of satellite casinos, together with the concerned parties, must obtain prior government approval. Furthermore, Macau gaming officials have stressed on several public occasions that satellite casinos are regulated by the same standards as other casinos developed by sub/concessionaires, and both self-managed and third-party managed casinos are constantly monitored and supervised by the DICJ. ¹⁵

The casino sub/concession contracts stipulate that sub/concessionaires must exercise general supervision over their casinos. Specifically, Article 2 of these contracts states that sub/concessionaires must ensure the proper management, operation, and running of casino games. ¹⁶ Unlike sub/concessionaires, satellite casino owners are not de jure supervised by the gaming authorities, which appear to distance themselves and delegate the regulatory obligations to the concerned sub/concessionaires. The duty of superintending these third parties is undertaken by sub/concessionaires, which act as a de facto “frontline” supervisor to their satellites in practice. Similar to managing their own casinos, sub/concessionaires technically administer the gaming operations at satellites, liaise with the government and stakeholders, and prepare the tax payments, financial reports, and other regulatory requirements. In addition, internal controls and security of satellite casinos are handled by sub/concessionaires. Sub/concessionaires must ensure their casinos (i.e., both self-managed and satellite casinos) are in full compliance with the applicable gaming regulations and remain free from criminal influence. Any violations can result in revocation of their gaming rights under Law. No 16/2001.

Service agreement: The “franchise” system to operate casinos

The Macau gaming industry has been practicing a de facto “franchise” system to operate satellite casinos. ¹⁷ To circumvent the legal restrictions that prevent any unsuitable persons from operating casinos, some sub/concessionaires “franchise” their sub/concessions to third parties whose suitability and background remain unknown. Satellite casinos are established by a set of commercial agreements between sub/concessionaires and their preferred parties. In particular, service agreements are made to enable these trusted third parties to act as a “service provider” to satellite casinos.

Moreover, sub/concessionaires operate satellite casinos under the right-to-use agreements with the property owners, who are mostly the service providers and allow the sub/concessionaires to occupy and use their properties for gaming purposes. ¹⁸ Such “tenancy arrangements” must be approved by the Macau government under the casino sub/concession contracts, which state that “casinos shall not be housed within any real estate, the use and proceeds of which rely on a lease contract … except as permitted by the Government.” ¹⁹ Note that these service agreements and other relevant arrangements only take effect upon obtaining the necessary regulatory approval. ²⁰

Sub/concessionaires generally “franchise” or “sublicense” their exclusive gaming rights to trusted third parties who develop and co-operate satellite casinos for a term equal to the duration of their sub/concession. ²¹ Under the service agreements, sub/concessionaires as the authorized operators assume full responsibility for the running of all gaming operations, and satellite casino owners as the service providers agree to render services of integrated marketing and player development for the satellites. Service providers also have to absorb the operational expenses of satellite casinos, and the amounts are “reimbursed on an actual cost basis.” ²² Furthermore, service providers are required to indemnify their associated sub/concessionaires “against substantially all risks arising under the leases of the premises used by these casinos.” ²³

Moratorium on satellite casinos

The Macau government announced in April 2008 a major policy limiting the expansion of the gaming industry. Specifically, several arrangements were made to ensure the appropriate control of the city's casino developments, including a moratorium on the granting of additional casino concessions and sub-concessions, no new land allocation for gaming purposes, and the restrictions to limit the growth of gaming tables, etc. ²⁴ Except for the 2017 opening of a second casino at the Macau Fisherman's Wharf, which is the only large-scale tourist complex developed by non-sub/concessionaires, ²⁵ the Macau government has not authorized any new gaming operators nor allocated any public land for satellite casino developments. It should be noted that while no new-to-market gaming tables have been assigned to any other new satellites from the Macau authorities, some new or refurbished satellites were able to relocate gaming tables from other casinos managed by the same service providers. ²⁶

Gaming service model

Sub/concessionaires and satellite casino owners have instituted a self-styled “gaming service model” under the service agreements. While satellite properties are managed by these trusted third parties, gaming operations must be administered by sub/concessionaires, which are in charge of gaming tables, slot machines, casino cage, security and surveillance, gaming assets and supplies, etc. Acting as service providers, satellite casino owners are primarily responsible for leading the marketing activities at their satellites, particularly “for the provision of a steady flow of customers to the City Club Casinos and for procuring and/or introducing customers to these casinos.” ²⁷

A Hong Kong-based hotel operator describes its principal activities from gaming operations to the “provision of gaming-related marketing and public relation services.” ²⁸ Similarly, a local satellite casino group discloses its specific roles as a service provider in its listing document filed with the Hong Kong Stock Exchange:

We provide Gaming Services to SJM in respect of the Casinos, which include marketing, promotion, publicity, customer development and introduction, coordination of activities and other services. … For example, we market and advertise the Casinos extensively on billboards, the internet and various other media platforms. We also organize and host various promotional activities for our patrons, such as golf tournaments … and annual spring dinners held over Chinese New Year in Beijing. ²⁹

Furthermore, SJM as a casino concessionaire underlines that it “relies on the services of service providers, including Gaming Promoters and Mass Market Service Providers, to market its business and attract gaming patrons.” ³⁰ In addition, no relevant operating and administrative expenses of satellite casinos are recorded in the financial statements of the concerned sub/concessionaires. ³¹

Appointment of key employees

A service provider is entitled to appoint a property president to manage the satellite casino under the service agreement. Subject to the approval of the concerned sub/concessionaire, the president is considered a key employee and answers to both sub/concessionaire and satellite casino owner. Acting as the deputy to the satellite casino owner, the president is granted authority to oversee the day-to-day management and operation of the casino property in question. This key employee is particularly empowered to develop management strategies, make executive decisions, and supervise all activities at the satellite. The president can also, upon consultation with the sub/concessionaire, “directly hire, promote and terminate” any gaming employees. ³² Satellite casino owners generally assume the position of president to have overall responsibilities for their satellites.

Senior casino personnel are also nominated by service providers and employed by sub/concessionaires. These operational executives undertake managerial roles at the casinos and have direct responsibilities for the gaming operations, including the administration and discipline of the gaming employees. To protect the interests of sub/concessionaires, the service agreements allow sub/concessionaires to appoint supervisors at their own cost to monitor the overall operations at satellite casinos.

Compensation of gaming employees

Gaming positions are often advertised in the name of satellite casinos. Gaming employees from croupiers and floor supervisors to casino managers are generally recruited and trained by satellite casinos. Though gaming employees of all ranks are technically employed and remunerated by sub/concessionaires, the amount of compensation and benefits must be reimbursed by service providers. ³³ Take Macau Legend Development for example, this service provider operated three satellite casinos and retained 1,193 gaming employees in 2020. These casino personnel “were employed and paid by SJM but over whom the Group exercised oversight,” and SJM must be compensated “in full for the salaries and other benefits of these gaming operation employees.” ³⁴

Mass and VIP market operations at satellite casinos

Macau satellite casinos generally cater to both mass and VIP market segments. Different from the large-scale integrated resorts, these third-party managed casinos are smaller and more gaming-centric. Satellite casinos frequently work with inbound tour operators to market the casino hotel premises, and group tourists are organized to visit and gamble in the mass gaming halls. Since most satellite casinos are located in the city center, the customer base of these casinos is also characterized by the repeat visits of the local residents. As for VIP gaming, satellite casinos leverage their own networks to reach high-betting players. These third-party managed casinos, like most local casinos, also rely on gaming promoters to source players to their VIP rooms. Before the COVID-19 pandemic, SJM's 15 satellite casinos comprised a total of 130 VIP gaming tables, 808 mass-market gaming tables, and 1,031 slot machines in 2019. ³⁵

Service providers are considered functional coordinators between sub/concessionaires and a group of gaming promoters at satellite casinos. Though Macau casinos generally work with junket operators to organize players to gamble in VIP rooms, service providers are not a party to the gaming promotion agreements made between sub/concessionaires and gaming promoters. The above notwithstanding however, satellite casinos collaborate with gaming promoters under the “Cooperation Agreements,” which allow service providers to benefit from the VIP room operations. ³⁶ “Tri-party agreements” are also entered into among the concerned sub/concessionaires, service providers, and gaming promoters. ³⁷ Figure 1 illustrates the regulatory and contractual relationship of the parties involved at a satellite casino.

OPEN IN VIEWER

FIG. 1.

The structural relationship among the gaming authorities, sub/concessionaire, service provider, and gaming promoter at a satellite casino.

Remuneration model for satellite casinos

There has been an established remuneration arrangement for Macau satellite casinos. The service agreements provide satellite casino owners with an entitlement to “service fees.” ³⁸ Service providers are generally compensated with a part of the net gaming win for their services rendered at satellite casinos. Since these casino properties are administered by the authorized gaming operators, all the revenues of satellite casinos are first possessed by sub/concessionaires. Having paid the gaming taxes, which are approximately 40% of the gross gaming revenue, ³⁹ sub/concessionaires then retain their “gaming operation fees” and then allocate the remaining balance to service providers, as well as gaming promoters (if any) for their VIP room operations.

Net gaming win is apportioned among concerned parties according to an agreed-upon percentage. Specifically, sub/concessionaires charge satellite casinos 5% and 3% of the gross gaming revenue generated from the mass and VIP gaming operations, respectively. Service providers can receive 40% of the gross gaming revenue generated from the mass gaming halls (i.e., table games and slot machines). There is also a reimbursement scheme for expenses incurred in the operation of satellite casinos. Sub/concessionaires additionally compensate service providers no more than 15% of the mass-market table receipts for any operating costs and expenses, which also include the compensation package for the gaming employees at satellites.

While service providers are entitled to 2% of the gross gaming revenue in VIP rooms, gaming promoters collect approximately 40% of VIP room receipts and can be reimbursed up to 15%, through service providers, by sub/concessionaire for any necessary costs incurred. Service providers are also allowed to retain funds from such reimbursement for any utility expenses, as well as the fees for any hotel facilities used or consumed. ⁴⁰ Likewise, one satellite casino which targets mass-market patrons and does not provide any accommodation facilities has a similar remuneration structure. The service provider is entitled to “55% of the net win generated from the table games and 40% of the net win generated from the electronic slot machines.” ⁴¹

No loss-sharing arrangements are expressly stated in the service agreements concluded between sub/concessionaires and service providers. Nonetheless, both parties have been operating under the assumption that any gaming loss at satellites is to be borne in line with the profit-sharing ratio. ⁴² In the event of a gross gaming loss, sub/concessionaires are responsible for 45% of the gross loss arising in the mass gaming halls and 43% of such loss in VIP rooms. Service providers have to bear 55% of the loss from the mass market and 2% from the VIP room operations, whereas gaming promoters must cover 55% of the loss incurred in VIP play. The profit distribution and loss coverage of Macau satellite casinos are presented in Tables 2 and 3.

Examining the status quo of satellite casinos

There has been a noticeable trend of industry consolidation among satellite casinos over the past decade. Several satellites have been undergoing the acquisition and divestiture process in response to the aforementioned moratorium policy and the forthcoming expiry of the casino concessions (and their sub-concessions) in June 2022. ⁴³ Galaxy completed in 2013 the acquisition of Grand Waldo. This casino hotel, adjacent to Galaxy's flagship resort, was previously operated on Galaxy's concession and controlled by a Hong Kong-listed company. The Macau-based Golden Dragon Group also purchased the satellite casino, Lan Kwai Fong, from another Hong Kong-listed company in 2018. This private hotel group then rebranded all of its four satellites, controlling around 200 gaming tables under its service agreements with two sub/concessionaires.

Similarly, Macau Legend Development sold the Landmark Macau in 2017 but has continued to act as the service provider for this satellite casino. A junket operator obtained this company's equity interest from its founder in September 2020 and has since become the single largest shareholder of this service provider, which is managing a total of three satellites with 194 gaming tables. ⁴⁴ In addition, there was a change of ownership in L'Arc Macau, a part-owner of this satellite casino and the managing director (administradora-delegada) of SJM acquired the remaining shares of this satellite in May 2021. It is believed that certain large-scale service providers have been enhancing their competitiveness through industry consolidation; however, these transactions involving the transfer of casino property exhibit the irregularities of this third-party involvement in casinos and the deficiencies of transparency and public scrutiny of this gaming service model.

Satellite casinos also face internal pressures from the employees engaged in gaming operations. There have been complaints and labor disputes about the legitimate rights of these gaming employees, particularly during the COVID-19 pandemic. ⁴⁵ Despite being compensated and managed by service providers, gaming employees working at satellites are technically on the payroll of the respective sub/concessionaires and are not considered staff members of the service providers. The Macau government has indicated that the rights and interests of the gaming employees at satellite casinos are protected as those employees working at other casinos, but has remarked that there are no applicable laws to require service providers to hire the gaming employees. ⁴⁶ In case of casino closure or revocation, sub/concessionaires have to retain and pay the concerned employees, ⁴⁷ and that is the implied assumption of risk for sub/concessionaires adopting this gaming service model. A satellite casino operated on SJM's concession has suspended its operations since 2016, and the gaming employees were then relocated and assigned to other SJM casinos.

The current COVID-19 pandemic and the resulting collapse in travel have plagued the Macau gaming industry. ⁴⁸ Local casinos are already struggling to keep patrons visiting while operating with limited capacity and strict safety precautions. A service provider surrendered its right to provide gaming services at Casino Waldo after its service agreement with Galaxy lapsed in February 2020. The reasons for the non-renewal decision were cited as follows: the pandemic and its impacts, high operating costs, and the recent regulatory requirements for additional casino surveillance system and equipment, which the company considered such investment could not be “recovered before [the] end of the existing gaming concession.” ⁴⁹ A Macau-based travel group has recently signed a hotel management service agreement with Waldo, and this casino hotel is still widely considered a satellite property. ⁵⁰ In addition, weak gaming demand and the ongoing pandemic restrictions have also led to one SJM satellite casino being temporarily closed at the time of writing. ⁵¹

Assessing the outlook of satellite casinos

A sound regulatory framework is a central prerequisite for the supervision of the gaming industry. ⁵² Satellite casinos have been established in response to the casino concession restrictions in Macau. Sub/concessionaires, as the authorized gaming operators, have to meet, inter alia, the regulatory requirements for their exclusive rights to operate casinos, including suitability, financial capability, and the obligation to execute an investment plan under Law No. 16/2001 and their respective sub/concession contracts. Since any casino development plans must be assessed and approved by the Macau government, it is assumed that such requirements have also been placed upon any parties who intend to develop and co-operate satellite casinos. However, satellite casinos have made the casino regulatory structure more complex and opaque. The mass gaming halls and VIP rooms at satellites involving multiple and interrelated parties are obfuscated by the participation of service providers, and the existence of satellite casinos effectively undermines the two-tier control system for sub/concessionaires and gaming promoters in the local gaming industry.

Satellite casinos are not under DICJ's direct oversight from a legal perspective. No clear legal framework exists to regulate these “casino franchises” under the current gaming control system. Similar to their supervision over gaming promoters, sub/concessionaires are charged with the duty of maintaining the “law and order” at satellites operated under their names. There have been no specific regulations governing their suitability, financial capability, casino experience, and other regulatory standards. Satellite casino owners are rather bound by the service agreements concluded with their respective sub/concessionaires. The acquiescence of this gaming service model could provide opportunities to those who might not be eligible as a sub/concessionaire to participate in and benefit from the gaming operations. The involvement of these ill-defined service providers has therefore undermined the regulatory regime for casino gaming in Macau.

Domestic gaming policy and industry-wide competition are also the major challenges facing satellite casinos. While the gaming service model dates back to STDM's monopoly period and continues to exist nowadays, the “franchise” opportunity to incorporate a casino into a hotel premise might have already closed for any prospective entrants who intend to engage in the provision of gaming services. The Macau government has not approved any new-to-market satellite casino developments, particularly after the introduction of the moratorium on casino expansion in 2008. It is argued that such a gaming policy aims to limit the number of casinos and put an end to any additional third-party involvement in the local gaming industry. ⁵³

Just as importantly, it is an undeniable fact that the primary attraction of most satellite casinos is gaming itself. These casino hotels are relatively small in scale with few amenities for patrons and guests; on the contrary, the multibillion-dollar integrated resorts in Macau are beyond the casinos and offer visitors a rich combination of leisure and business facilities along with their high standards of hospitality. It has been a growing trend that satellite casinos have gradually been marginalized by the integrated resorts owned, developed, and operated by most sub/concessionaires.

Law changes looming over the satellite casino system

It has been more than two decades since Law No. 16/2001 was enacted to regulate and supervise the Macau gaming industry. Two possible scenarios for the future of satellite casinos were originally foreseen after the end of the current casino sub/concessions in June 2022: 1.

The issue of satellite casinos remains unresolved and continues to leave considerable uncertainty as to the oversight of the Macau gaming industry;

While most considered that these third-party managed casinos were likely to remain in operation after the 2022 expiry, industry stakeholders, legal experts, and scholars once recommended revising the gaming law and clarifying the legal status of satellite casinos. ⁵⁴ After considering the views received during the public consultation, ⁵⁵ the Macau government has recently proposed a new amendment to the city's gaming law. The draft bill is currently being discussed by the local legislature at the time of writing. ⁵⁶ Among other changes, the proposed amendment provides that casino gaming must be operated in the properties owned by the concessionaires.

Since most satellite properties are owned by independent investors, the new gaming law is expected to outlaw casinos operated on third-party properties. A grace period of three years will be in place for the existing cohort of satellite casinos, allowing the industry stakeholders to regularize their legal status. In addition, this draft provision might also affect some self-managed casino properties not wholly owned by the incumbent sub/concessionaires. The new gaming law under consideration came as a surprise to the satellite community, ⁵⁷ and it will very probably have a negative effect on the long-established satellite casino system in the Macau gaming industry.