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Rod Smith

Analysts Disagree on Macau's Long-Term Consequences for Las Vegas

18 May 2004

Sheldon Adelson, owner of The Venetian, launched a new era of U.S. gaming with the opening today of his $240 million, 1-million-square-foot Sands Macau casino and entertainment complex.

The new resort is just the first phase of a $5 billion to $10 billion project Adelson is planning that will turn a strip of reclaimed land in the seaside Chinese enclave into a huge resort complex of several hotels and casinos that will be patterned after the Las Vegas Strip.

In a recent conference call with Wall Street analysts, Adelson called the former Portuguese colony's planned Cotai Strip the most exciting development under way anywhere in the world today.

"We are literally creating a new city," he said.

Adelson said other developers, who will build and own the hotels, are standing in line for the chance to construct hotels in partnership with his holding company, Las Vegas Sands, which will own and operate the accompanying casinos and showrooms.

The 700-acre Cotai Strip development is so large it will have to be built in stages over about 10 years, with the first phase scheduled to open with eight hotels, each with about 1,500 rooms, including one modeled after The Venetian, in late 2006.

Despite the lure of a $400 million South China casino market that will draw on 1.3 billion Chinese and Taiwanese, the entry of Adelson and other Americans into the Asian gaming market is setting off some alarms among industry insiders and analysts who agree Macau's impact is likely to be profound, but who disagree on the long-term consequences for Las Vegas.

Although some say the Cotai Strip development will breed added visitors for the Strip, others caution it will create an Asian gaming mecca that will lure high-roller and other Asian players, many of whom have gambled in Las Vegas in the past.

There are also political arguments against "outsourcing" up to $10 billion in overseas investments that will create an estimated 150,000 jobs in Macau, rather than in U.S. gaming markets, over the next decade.

Finally, analysts and insiders say that while there are substantial business and political risks for such a massive undertaking in China, Adelson's step-by-step incremental approach should minimize any chances of the development turning into a turkey.

Las Vegas Sands President Bill Weidner said the key to the development, and its real value, lies in the allure it will create for Las Vegas and the added visitors it will bring here.

Already, Asian players, especially many Chinese high rollers, account for a lucrative segment of the Las Vegas market, especially during Oriental holidays such as Chinese New Year.

Las Vegas Sands is already positioning The Venetian in Las Vegas to take advantage of the new opportunities the Macau development will create here, Weidner said.

It has doubled the size of its baccarat pit and created an Asian ambience; it's developing five so-called megasuites and a Chinese Paiza Club; and it's renovating its presidential suites and 18 penthouse units, all in anticipation of a large increase in business from China by this fall, he said.

The driving force behind both the developments in Macau and the breeder effect on Las Vegas is the economic power of China, which has the world's second-largest -- and fastest growing -- middle class, Weidner said.

But while Weidner said the best way to lure Chinese visitors here is to give them a taste of Las Vegas in China, not all casino executives share his enthusiasm.

Terry Lanni, chairman of MGM Mirage, which tried for one of the three Macau licenses and lost out, doubts the new developments there will have any effect on Las Vegas.

"I don't expect any effect whatsoever, negative or positive, on our business here in Las Vegas," he said.

Still other gaming experts warn of a possible loss for Las Vegas from the development in Macau.

Hal Rothman, chairman of the history department at the University of Nevada, Las Vegas, for example, cautioned there are two sides to the coin.

"On the positive side, it opens up Las Vegas-style entertainment to the largest population in the world and will act as a training ground for Las Vegas," he said.

The other side, Rothman warned, is that it could draw away an international market that many local casinos count on.

On balance, the ultimate impact is not "a simple picture," he said.

Wall Street is more enthusiastic about the prospects for Adelson's Macau adventure and the benefits it holds for Las Vegas.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, believes the Macau market is so deep that Adelson and his investors can almost be assured of a substantial return on their investment.

Bear, Stearns & Co. analyst John Mulkey said the Macau market's potential makes the development a wise investment.

"It's an opportunistic move, and the scale, one step at a time, is the best way to approach it. Get (a temporary casino) open, get your foot in the door and evaluate your investment," he said.

UNLV professor and casino industry expert Bill Thompson underscored the political risks involved, saying that if Stanley Ho, who had enjoyed a 40-year monopoly on gaming in Macau, was not getting old, the U.S. projects would not be unfolding.

"He's letting it happen. And it's not the Chinese government (that creates the risk). It's the competitor who'll let things succeed -- or not," Thompson said.

Thompson said as long as Adelson and Las Vegas developer Steve Wynn, who is planning on opening his own $500 million casino project, play ball with Ho their political risks should be minimized.

Ho also will be opening two new casinos under the new licensing agreements that opened the door to Adelson's and Wynn's Macau projects.

However, Rothman cautioned that Americans do not understand China's old boy networking, which is closer to gangland politics than modern-day Western politics.

"Things can happen there that we just don't understand and that don't reflect the mores of post-industrial capitalism in the U.S. and Western Europe," he said.

Other analysts said that outsourcing Las Vegas casino operations could become politically touchy.

Keith Schwer, director of the Center for Business and Economic Research at UNLV, said outsourcing could become a "hotly contested issue."

"There's the breeder argument (that it will bring more business than it keeps away). We've seen that argument before, but it hasn't been proved," he said.

Since Atlantic City broke up Nevada's monopoly on legal gambling 26 years ago, Las Vegas' market share of the U.S. gaming market has dropped from 100 percent to less than 25 percent.

"The question becomes do you want to wait until you've eaten your young to raise the issue," Schwer said.

He said Adelson's Macau venture uses his Las Vegas experience to expand elsewhere so it exposes Nevada to the potential for losses.

"But that may not be the end of the story. (Because of the competition), we may build a better mouse trap," Schwer said.