Playboy Makes its Move in Macao

The company bares plans for a new Playboy Mansion, complete with hotel and casino, in the booming, permissive gambling enclave near Hong Kong

by Bruce Einhorn

Playboy Enterprises (PLA) is hoping that its luck is about to change in China. The media company has struggled for years to get a foothold in the country while at the same time combating trademark pirates who rip off the image of the Playboy bunny. But the House of Hefner until now has had little to show for its efforts in the world's largest country. That's not surprising, given the Chinese government's frequent anti-porn campaigns and its censorship of sex sites such as Playboy.com.

On June 27, Playboy unveiled a new strategy. The company is teaming up with several partners to open a casino, retail, and hotel complex in Macao, the former Portuguese colony near Hong Kong that is the only Chinese city to have legalized gambling.

Playboy's Kind of Place

The project, dubbed the Playboy Mansion Macao, is part of a $2 billion resort scheduled to open next year. Playboy's partners include U.S. hedge funds Silver Point Capital and Oaktree Capital Management as well as David Friedman, former senior executive at casino operator Las Vegas Sands (LVS). Other partners include Hong Kong-listed entertainment and media company eSun, Singapore-listed property developer CapitaLand, and developer Taubman Centers (TCO).

Playboy Chairman and Chief Executive Officer Christie Hefner no doubt expects that her bunnies will receive a warmer welcome in Macao than they did during her previous attempt to bring them to China. In 2004, the Shanghai government nixed joint-venture plans hatched by Playboy and a local company to launch a Playboy Club in the city. Meanwhile the famous "rabbit head" logo has been appropriated for unlicensed use by local companies, prompting Playboy to launch lawsuits against three Chinese companies last year.

Macao is more Playboy's kind of place, though. As a former colony, the city is a "special administrative region" of China and operates under the same "One Country, Two Systems" model as Hong Kong. But while Macao is certainly not a democracy, its four-decade-long history as a gambling enclave has given way to a permissive environment not found in other Chinese cities. Though prostitution is not strictly legal, the sex industry in Macao is thriving in saunas and massage parlors adjacent to many casinos.

Bigger than Vegas

Macao's gambling industry is also booming. Among the other newcomers with big plans to build or expand their operations in the city are Las Vegas heavyweights such as Wynn Resorts (WYNN) Chairman Steve Wynn and Las Vegas Sands' Chairman Sheldon Adelson. According to a June 15 report by analysts at Macquarie Research, the gambling industry in Macao will enjoy 20% compounded annual growth for the next six years, with visitor arrivals increasing from 22 million last year to 65 million by 2012. The city had $6.9 billion in gaming revenue last year, up from just $3.5 billion in 2003 and this year is expected to overtake the Las Vegas strip in gaming revenues. "By 2012, the market could be as large as $30 billion, up from $7 billion in 2006," Macquarie analysts Edward Ong and Gary Pinge write.

While the long-term trends are encouraging, one concern for Playboy and the other Americans is whether demand can keep up with the rapid expansion of the supply of hotel rooms and gambling tables. "Announced supply additions are very large—100% to table capacity in 2007 and 25% in 2008," write the Macquarie analysts.

Another challenge comes from an unlikely place: Singapore. The city-state has a buttoned-down reputation but the country's leaders are trying to turn Singapore into a bigger tourist destination. As part of that plan, the government has legalized casino gambling. To make the city competitive against Macao, Singapore has a gaming tax of 12%, versus 39% for Macao.

Still, Singapore is a long way to travel for most Chinese gamblers. But for tens of millions of Chinese tourists interested in getting a taste of the Playboy lifestyle, Macao is just a short trip away.

Einhorn is a correspondent in BusinessWeek's Hong Kong bureau .