Strategy

Seven lessons the industry won't learn from 2017

It has been a year of big change in the online gambling world and there have been some key trends that look set to shape the winners and losers in 2018

1. Mergers aren’t a guarantee of success

If the industry has been taught one lesson the hard way it is this: mergers are never as compelling in practice as they are on paper. The early warning flare sent up on this was the enormously value destructive bwin and partygaming merger from almost a decade ago. But we’ve also seen some cause for concern from the recent high-profile deals.

Ladbrokes Coral’s latest results showed the Ladbrokes brand in decline and painted a picture of a firm finding the realities of merging two operational structures and technology platforms challenging, despite many similarities in the tech stack. The GVC “merger” with bwin.party has been less troubled but partly this is due to it playing out more like a takeover from GVC and growth has certainly not been “lights out” during the period.

The most significant deal, however, for the online world was Paddy Power Betfair, which has limped through the year beset with technology integration issues and reports of something of a brain drain from Power Tower in Dublin. Growth has been in the single digits all year, but mostly driven by its Australian business that was relatively unaffected by the merger, and online has struggled with 3% decline in Q3 with gaming and non-UK Europe still weak.

That said, there is a sense the grunt work has been completed at PPB and it has a chance now to exercise its marketing firepower on the sector. Its share price is roughly back where it was at the beginning of the year and if it can power on after a year of restructuring in 2018 it might yet rewrite history on this point. But it’s far from an odds-on shot at this point.

Nonetheless it’s unlikely any of this will deter a number of big mergers taking place in 2018. And in some ways, neither should it.

2. International expansion rarely works

One of the bigger myths in the sector is how easy it is to roll out a successful brand in another territory. While there are some success stories of brands operating at scale internationally, most of those who have done so achieved this via acquisition and the sector is littered with the charred ashes of burned money from high-profile attempts to break into regulated markets.

Despite no shortage of effort, Italy and the UK in particular have proved very tough nuts to crack for some of the largest operators in the sector, and Australia has been something of a bloodbath for many. Local brands continue to resonate with customers and operators with a land-based presence are proving tough to shift. What this year has added to the mix is increasing local protectionism in some markets, notably Eastern Europe, and this is a worrying trend to note for 2018.

One of the trickiest problems to solve for operators looking at the medium-term opportunities is what do about Africa and Latin America. Both regions look hugely enticing, and some suppliers have already made good strides into both markets with local operators, but the regulatory picture is fraught with complications and each market presents wildly differing operational considerations.

Expanding into pre-regulated markets is perhaps the toughest problem of all to solve. In the interim we will continue to see operators active across both continents through the grey markets, while others wait it out and attempt to build partnerships in advance of opening. But there is no definitively “correct” answer.

Where regulations permit we’ve seen operators begin to move into Latin America with Ladbrokes existing joint-ventures giving it a head start in Colombia and Mexico. But the big prize will be Brazil, which has teetered on the brink of opening up for several years now and will cause as many problems for the big players as it does create opportunities.

3. The US market looks after its own

After countless false dawns, the US is beginning to look like some significant progress could be made in 2018. An upcoming ruling on repealing the law that inhibits states from offering sports betting (PASPA) could lead to a major rollout of sports betting at the state level, and the addition of regulated online gambling in Pennsylvania is a very important step towards egaming expansion.

But those on this side of the pond rubbing their hands together in glee at the impending jackpot win should take a breath and a step back. The celebratory cry of “America first” from President Trump in February was not meant for the US gambling industry, but it is oddly appropriate. This is a market where the primary concern is protecting local jobs, taxes and businesses, and one where opportunities for non-US operators and suppliers will be hard to come by.

Sports betting is also very likely to be land-based only in its initial rollout with licences restricted to land-based casinos, racetracks and other already established bodies. Just as we’ve seen in New Jersey, partnerships will be key to taking advantage of any emerging market and it’s likely the incumbents will play a major role in its near-term future.

The US will present a huge new market in the mid-term, but it will be one where European operators will need to be extremely strategic in order to cash in on. This is a gambling market that looks after its own.

4. It’s better to be on the front foot with regulation

One lesson the industry has been taught quite clearly this year is when you’ve overstepped the mark it is better to take a half step back than get clobbered with a regulatory stick. A spate of fines for operators acting both outside the letter and the spirit of the law with their marketing communications has made headlines this year, with 888’s £7.8m financial penalty the biggest of all.

As a result we’ve seen several operators close their affiliate programmes to attempt to wrestle back some control in terms of how their brand is marketed to consumers, and far more focus on responsible gambling tools and practices. But there has been relatively little internal soul searching, with this variously seen as “someone else’s problem”. And yet there is a sense this is not an issue that has been dealt with nor one where the regulatory stick is yet to be put away.

More fines and maybe licence suspensions are likely in the new year and it’s clear from just a casual glance at the market not a great deal has changed. The wider operating conditions appear much the same, with bonus offers dominating, rollover requirements locked in place, customer restrictions commonplace and most responsible gambling tools still tucked away from view.

Operators are increasingly talking a good game when it comes to responsible gambling, but the products and marketing are often speaking a different language. It could be another busy year ahead for lawyers.

5. Grey markets legal status isn’t decided by a lawyer

One of the more subtle changes we’ve seen this year is a shift in the way grey markets are viewed by the online gambling industry. The financial sector’s tolerance of revenues from grey markets has definitely emboldened many and listed operators are active in Japan, Canada, Brazil, Russia among others.

Germany has been the main market highlighted for casino expansion by a number of high-profile firms, and yet it is a market where recent court rulings seem to suggest it’s more akin to Australia than the UK. Beyond Germany we’ve seen GVC sell off its Turkish-facing operations, with an apparent assessment that there is such a thing as “too grey” from the operator who was the leading proponent of a more risk-tolerant approach to non-regulated markets. But history, and this year is no exception, has taught this comes with no little risk.

Time and again in egaming we’ve seen operators forcibly argue their legal merits for operating in a market only to be unceremoniously booted out by the local authorities, who take a different view. This feels unlikely to occur in Germany, although as with everything relating to online gambling in Germany it’s not at all clear what the outcome will be. The same, however, can’t necessarily be said for other markets.

And the wider point of the fragility and impermanence of grey market operations is one to note, not least in light of the recent EC decision to drop its gambling infringement cases against member nations. History suggests there is no great comfort in a legal opinion once a local government decides to bear its teeth towards the online gambling sector. Hopefully nobody will need to re-learn this lesson the hard way in 2018.

6. Consumers aren’t happy with the status quo

The core gambling products are relatively unchanged from those offered a century ago so it’s easy to understand why operators are usually resistant to change. But this year we’ve seen rising evidence that consumers are hungry for new products, and that the current way of doing things may not be the best approach.

From a new generation of online casino firms changing what an online casino experience needs to be to Sky Bet changing the very nature of the consumer sports betting offering to PokerStars attempting to reinvent online poker this year has seen no shortage of indicators of what comes next. Sky Bet’s sports betting offering is now led by the RequestABet product it helped bring to market, with more traditional betting markets often side-lined and placed below the scroll.

Mobile is, of course, a major part of this change and products designed not just for the smaller screen and touch navigation but for the new consumer mind-set that comes with it will continue to provide growth opportunities for the bold. While the old way of doing things will continue to dominate, and continue to be profitable in the short-term, there is a sense that even more radical approaches may prove a breakthrough in the coming 2-3 years.

7. Things will change very quickly

Finally, this is probably the biggest lesson of all, and it’s one that seems to be relearned every year. Nothing is as predictable as change in online gambling, and the received wisdom on best practice and the “winners and losers” of the sector will look very different in 12 month’s time. The only thing you can depend on is that things will change, and quickly.

888 Holdings | Gambling Commission | GVC Holdings | Ladbrokes Coral | M&A | Regulation | Strategy | US

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