Our desk | Breaking the monopoly

Daniel Beitler

Monopolies, or sole providers of specific goods or services, are generally regarded as undesirable because they reduce the incentive for innovation and price competition.

Few would dispute that competition under a free-market system tends to produce the best result for consumers. The theory goes that the more competition a business has, the more incentive or pressure there is for it to develop better products, lower prices and be accountable to its customers.

Though the six casino operators and their many affiliate properties exhibit a degree of internal competition within Macau, the special administrative region as a whole could be considered a monopoly within the context of the greater China region.

The tiny enclave of just 30 square kilometers is the only place in the greater China region in which casinos are legal and has hitherto been the most accessible jurisdiction for the serious punters among China’s 1.38 billion people, representing 18 percent of the planet.

Gaming analysts in Macau are justifiably concerned about the rise of casino gaming in Japan and possibly even in tropical Hainan, sometimes described as China’s Hawaii. Though both jurisdictions are years away from opening a casino, they may eventually threaten Macau’s tourism and gambling lifeblood.

Part of the People’s Republic of China, Hainan does not have the same visitor visa requirements as Macau. And while chance-based games are still not technically allowed on Hainan, this year the island was allowed to operate so-called “entertainment bars” where winnings can be redeemed in local shops, restaurants or hotels. Many analysts believe it is just a matter of time before traditional casino-resorts start to make an appearance.

When that day comes, the analysts say, Macau had better be more than just baccarat.

Enter the government’s economic diversification plan and with it a heap of pressure on casino operators to develop non-gaming attractions under threat of not receiving a new casino license after 2020 or 2022.

Contrary to the prevailing opinion, rival casino centers in Hainan and Japan might not spell the end of Macau’s gambling dominance, but could be the answer to its relative decline.

As the theory of competition goes, the more choice for consumers, the harder producers must work to be better. Companies that fail to innovate eventually disappear. It is survival of the fittest; adapt or die.

Enjoying a de facto monopoly, Macau’s casino operators have previously had no incentive to innovate or substantially differentiate their services and products – aside from picking between easing off or doubling down on the VIP segment.

And yet, local operators are best-positioned to draw on their more than a decade-long experience on what works for the Chinese customer and what doesn’t. They may have the edge in the near-term, until their Japanese and Hainanese rivals catch up.

Innovation in the private sector works best when participants can respond to free-market conditions. Ahead of the casino license negotiations, now might be a good time to signal a deregulation of the casino market and provide an incentive for the “producers” to react to changing times.

The government could start by stripping away the arbitrary table cap policy.

Introduced in 2013 to stymie the annual growth in the number of new casino tables, the policy was supposed to encourage operators to invest in non-gaming attractions. But that isn’t working, and the number of new-to-market tables awarded in the latest round of Cotai expansion successively diminished with each property opening, seemingly irrespective of the owners’ contribution to diversification.

Another possibility – already floated by influential people in Macau who would love to get their hands on their own casino license – would be to open up the concessionaire process to allow for a greater number of smaller operators.

The theory of competition suggests that innovation, if it is to come at all, will follow.