Strategy

Dreaming in Macau

There's a lot riding on building a new Las Vegas.

Cyclists glide through the air upside down. Dancers in oriental attire clap their heels in an Irish-style jig. Polar bears levitate. A gigantic globe rises out of the stage, and a hot-air balloon (licensed for use in Quebec, judging by its plates) flies around the cavernous theatre. Acrobats casually defy the existence of gravity, without even breathing hard. This is Zaia, Cirque du Soleil’s new show in Macau, the casino capital of China. And it’s a hugely entertaining 90 minutes. But when it’s over, an audience member (particularly one from China, who might not get the polar-bear thing) can be forgiven for feeling compelled to ask: What the heck did I just see?

“You saw the story of a young girl who leaves her world to venture into the cosmos,” explains Joël Bergeron,

Winnipeg-born artistic director for the show. “We hope that through her journey people can appreciate the message of coming-back-home and appreciate what we have here on our planet.”

Bergeron graciously allows that it’s “a loose storyline.” But it’s tempting to read into Zaia some deeper meaning — not just for the world-renowned Montreal entertainment company, but also for other western adventurers who are gambling on Macau. The heavy bettors include Wynn Resorts (Nasdaq: WYNN), MGM Mirage (NYSE: MGM) and Sheldon Adelson’s Las Vegas Sands Corp. (NYSE: LVS), which provided a home for Zaia in the expansive Venetian Macao resort-hotel complex. Another Canadian player (though hardly a Macau newbie) is Lawrence Ho, 31-year-old co-chairman and CEO of Melco Crown Entertainment Ltd. (NASDAQ: MPEL), a joint venture with Australian magnate James Packer that is set to open a multibillion-dollar casino-resort complex, City of Dreams, right across the street from the Venetian next year.

Yet, fairly suddenly, tough times have descended on Macau’s gaming market. Blame any number of factors: Chinese government restrictions on travel, the economic slowdown, the global credit crunch. Shares in Melco Crown are down nearly 74% in the past 12 months. And nobody has taken a harder hit than Las Vegas Sands. Struggling under its debt load and teetering on bankruptcy, LVS on Nov. 10 halted construction on two new projects. As a result, Cirque du Soleil has suspended plans for a new show that was set to open next year.

In Macau these days, more than a few businesspeople, like the audience for Zaia, might be developing a new appreciation for the merits of home.

A former Portuguese colony, the Macau special administrative region is a small place, comprising a peninsula on the western side of the Pearl River Delta and two islands, Taipa and Coloane. Gambling has long been the city’s lifeblood, and for decades Stanley Ho and his Sociedade de Turismo e Diversoes de Macau (STDM) held a monopoly on it. Under their rule, Macau was a place where high-stakes punters (called VIPs) brought in by junket operators gambled all day and night on baccarat, usually going home to Hong Kong or the mainland within 24 hours. But in 2002, in a clear effort to transform Macau into a leisure-and-entertainment spot, its government opened the market to other gaming companies. In 2004, the STDM monopoly effectively ended with the opening of Adelson’s Sands Macau, heralding the entrance of Las Vegas style: big hotels, big casinos, big entertainment.

Since then, gaming revenue in Macau has more than doubled, to 8.2 billion patacas (about $1.2 billion) a month this year. The Wynn Macau opened in 2006; the MGM Grand in 2007. And last year Stanley Ho — Lawrence’s father — opened the Grand Lisboa casino, arguably the gaudiest modern building in Asia, if not the world. But the big daddy of them all is the Venetian Macao Resort Hotel, which opened in August 2007 on a huge land reclamation area between Taipa and Coloane — the so-called Cotai Strip.

Planned as part of an even larger US$12-billion resort complex, the US$2.4-billion Venetian boasts a 550,000-square-foot gaming floor, a convention centre, an arena, more than 3,000 guest rooms, 30 restaurants, 30,000 staff and 350 shops. At more than 10.6 million square feet, including an adjacent Four Seasons Hotel that opened in August, it claims to be the world’s third-largest building, after the Aalsmeer Flower Market in the Netherlands and Beijing’s newly expanded international airport.

The thinking behind such landscape-transforming edifices is simple: China is home to a growing middle class; the Chinese love to gamble; Macau is the only place in China where casinos are legal. With a huge potential market just across the border, the business model merely requires that you build places for those hundreds of millions of middle-classers to kick back, relax and spend a few bucks. Just like Vegas.

Sort of. The trouble is, the huge potential middle-class Chinese market has yet to materialize. The hard-core VIPs, who typically have little interest in seeing the sights and taking in a show, still account for most gaming revenue by far. Why haven’t more mid-market tourists come, wallets and strollers in tow?

One reason is they haven’t been allowed to. Since early 2007, China has repeatedly placed visa restrictions on travel from the mainland to Macau — without explanation, of course. But there is wide speculation the restrictions are punitive measures against the local government. It takes 40% of gaming revenue but has done little, some critics say, to foster the physical and governance infrastructure needed to develop Macau as a tourism destination. (For instance, roads and traffic are chronic problems.) Many speculate the restrictions will be lifted early next year, coincidental with a change of local government. But even if that happens, it might be too late for some.

Macau’s chief executive, Edmund Ho (no relation to Stanley), on Nov. 11 forecast that gaming revenue in 2009 will decline by 15% over 2008. He has refused to lower the tax bite, but has pledged that the government will take over any casino that goes bankrupt. He stopped short of saying it would take a stake in Las Vegas Sands. “We are already taking in 40% of their revenue in taxes,” he told reporters. “Why would we want to take a share of ownership?”

I walked around the Venetian on an early November afternoon, and it was hard to see signs of a severe slowdown. The casino was busy and so was the convention centre. A big element in Las Vegas Sands’ strategy for the Venetian is to lure so-called MICE (meetings, incentives, conferences and exhibitions) away from Hong Kong and other Asian centres. The convention centre has been booked every week through 2008. When I was there, it was playing host, in a weirdly fitting way, to 7,000 conventioneers attending Wine & Gourmet Asia, and to another 5,000 attending the World Toilet Summit & Expo.

What better place for a Cirque du Soleil show? The Montreal troupe has become a fixture in Las Vegas, its six shows as much a part of modern Sin City as Frank and Dino were back in the day. Certainly, marquee potential was on the minds of Las Vegas Sands’ executives when they started wooing Cirque three years ago. “They wanted us to be their main content provider” for all the Cotai Strip developments, says Daniel Lamarre, CEO of Cirque du Soleil. “And they are taking all the risks. So it was a very appealing situation for us.” The opportunity also fitted in with Cirque’s strategy to diversify geographically. “We’re aiming at developing our brand in China, in particular, and in other Asian countries,” Lamarre adds.

Lamarre believes the convention market in Macau has “huge” potential. “When we opened Mystère 15 years ago, gambling revenue represented 90% of the revenue stream in Las Vegas. Today, it’s less than 50%,” he continues. “I know a lot of people who go to Vegas once or twice a year and they don’t gamble — they just go there because Vegas has the best restaurants, the best retail outlets and the best shows in the world. That’s the challenge Macau has to go through.”

LVS footed the entire US$150-million bill for the Zaia theatre, and Cirque staff were heavily involved in its design and construction. But the venture was not without risks for Cirque. For one thing, Zaia is its first permanent Asia show, in a particularly untested market. (Its second permanent Asia show, Zed, opened in October in Tokyo, which is a more mature market for Cirque.) Mounting a new production also involves a significant investment of time and resources. Bergeron, Zaia’s artistic director, says the creative process started two years before the Aug. 28 première, and there were 18 months of recruitment, rehearsals and pre-production in Montreal before moving to Macau three months before showtime. That involved the relocation of 200 cast and crew — 75 performers and 125 support staff. So far, both Lamarre and Bergeron say the show has been a success at about 70% occupancy.

If, however, Zaia seems to be on a firm footing, the fate of further Cirque expansion in Macau is in question. Part of its deal with Las Vegas Sands was to mount a new show — a revue that Lamarre calls “Moulin Rouge reinvented by Cirque du Soleil” — next year in still-to-be-completed hotel-and-casino complexes on the Cotai Strip. But LVS’s financial troubles have put the show on hold. The company’s stock price has plummeted by 95% in a year; it has avoided bankruptcy so far only by a last-minute US$1.6-billion equity offering and a cash infusion by its garrulous founder, Sheldon Adelson, of a half-billion dollars plus. By halting development of sites 5 and 6 on the Strip “until conditions in the capital markets improve,” Las Vegas Sands has put more than 9,000 construction workers out of a job and left Cirque without a home for its new revue.

Lamarre says “work on this second show is well under way and the creative material is of very high quality. It should come as no surprise that other partners are showing interest for the production outside Asia.” Meanwhile, he adds, Cirque’s long-term plans for Macau and Asia remain unchanged.

Sam Lo, senior project manager for Melco Crown Entertainment, is nothing if not cautious as he gives a guided tour of the other big construction site on the Cotai Strip, City of Dreams. He waves me away from any impending threat (approaching wheelbarrow, worker carrying sheet metal, nail sticking out of a floor, loose wires) long before I even notice it. His most frequent detours result from dodging the innumerable motorized cherry pickers zooming around. No ladders in the City of Dreams, he explains — too dangerous.

By comparison to the big plans Las Vegas Sands has, Melco Crowns’s ambitions might seem cautious, too. Located right across the street from the Venetian, City of Dreams will occupy a mere 4.64-million square feet and boast just four hotels, an outdoor waterfall, two ballrooms, a huge retail strip and two theatres. One of those will be a planetarium-style projection room, in which the audience will stand on a central podium and watch wonders of the undersea world unfold around them. The other will be home to an aqueous stadium-style theatre, where Franco Dragone — formerly an artistic force with Cirque du Soleil — has been contracted to stage a new show.

Melco Crown has been steadfast in its assurances that City of Dreams will open, on time, in the first half of 2009. Between the start of October and opening, it will spend US$1.1 billion more on the project, bringing the total cost to well over US$2 billion, which the company says is fully funded from cash and credit facilities.

But such assurances haven’t made MPEL immune from the market’s disenchantment with Macau: its stock, which trades around US$3.80 a share, is down nearly 74% in a year. That’s nearly a 30% discount to book value, considering the company has cash-producing operations in the Crown Macau, a VIP-oriented casino-hotel, and Mocha Clubs, a chain of gaming-machine joints geared to the locals. In its recently reported third quarter, Melco Crown doubled net revenue over last year (to US$295 million) and narrowed its net loss to US$21 million from US$45 million. The company has also adopted austerity measures, cutting overhead costs by US$22.5 million with voluntary time-off for staff and a 35% pay cut for Lawrence Ho. “We’re constantly looking at more operational efficiency measures,” he said on an investors conference call on Nov. 13.

Adelson’s problems also bring an upside for Ho’s company: the cost of labour and materials, which had been skyrocketing during the construction boom, just went down. “City of Dreams is the only construction site that is still operating within all of Macau,” Ho said. “We are the apple in the eye of all construction workers now.” That’s a nice sentiment, and saving money will help in the short term, but it won’t be enough to make City of Dreams pay off in the long run.

In the end, what everyone needs for the big Macau bet to come in is simply this: more people. Winning here will not be a zero-sum game.