End of an era for NetEnt?

The era of dominance by long-standing casino suppliers may well be coming to an end with smaller and less-established counterparts beginning to take bigger bites out of the market.

And NetEnt’s recent rocky period, resulting in the eventual departure of CEO Per Eriksson in March, is testament to the changing tide in the world of game development.

Q4 2017 was an overall mixed bag of revenues, with Playtech reporting flat GGR and NetEnt re-assessing its overall forecast for the 2017 financial year on the back of a 3% increase in GGR. This resulted in Q4 EBITDA slipping 3.9% to SEK150m (€12.5m).

Meanwhile, Yggdrasil saw revenues soar 61% during the period and reported an EBITDA margin of 42%, dispelling any notion that the casino vertical as a whole is in decline. So what series of events led to NetEnt so seriously reconsidering both its short- and long-term strategies and forcing out its chief executive?

Chairman of the board, Vigo Carlund, said the supplier was in need of a new driving force to reverse the trend of decline and increase the focus on growth. “The value creation potential in NetEnt remains significant,” he said in a statement announcing Eriksson’s departure.

“The company has a solid balance sheet and a strong brand name in its segment of the market.” And Carlund is not wrong. According to statistics produced by data research firm iGaming Tracker, NetEnt consistently maintains the highest visibility of slot games on UK casino pages.

The Nasdaq Stockholm-listed firm stated in its FY2017 report its slowed revenue growth of 11.7% – a 17% reduction on the previous year – could be attributed in part to the decision to pull out of a number of grey markets.

For example, NetEnt withdrew its services from Australia and Poland and, for a period of time, the Czech Republic as a result of regulatory uncertainty. But it is looking to freshly regulated markets in countries like Serbia to revive those lost revenues, as well as upcoming regulation in Sweden.

Further issues can be traced back to movements in NetEnt’s biggest market, the UK, where the supplier publicly reported that tighter regulatory restrictions for operators were having a knock-on effect on suppliers.

According to the 2017 annual report, its current market share across Europe is approximately 28%, which it claims to have achieved by adapting to upcoming regulation and developing an offering that appeals to both operators and players.

New kids on the block

Industry consultant Alun Bowden disputes the notion of fast adaption and questions whether the firm has really developed at the same trajectory as the wider casino industry. “What NetEnt did well it still does very well, but is it diversified enough for the modern egaming market and is it well positioned for the next few years?” Bowden asks.

Historically, NetEnt has produced high quality and consistent content, including its Starburst slot, which frequently ranks number one on iGaming Tracker’s top-20 list of games featured on the most frequented UK casino sites.

“What I know from working with operators and suppliers is there is a long-tail and NetEnt will be getting most of its revenue from established games it would’ve launched a couple of years ago, like Starburst and Gonzo’s Quest,” iGaming Tracker managing director Ken Muir tells EGR Intel. “In the UK, Starburst is always high up on any casino that features NetEnt content. Other games such as Twin Spin, Gonzo’s Quest and Jungle Spirit have also proved ‘sticky’.”

iGaming Tracker stats on slots games and suppliers as they feature on UK casino sites

However, iGaming Tracker data also reveals the number of NetEnt games featured in the main casinos’ top-20 lists in the UK dropped 5% between April 2017 and March 2018. And the number of UK sites featuring NetEnt titles in their top-20 also fell 5%.

During the period, products from competing games studio Red Tiger Gaming appeared in almost double the number of top-20 lists than the previous year. It is worth noting, however, that NetEnt still maintains at least double the number of featured titles over its competitors.

The stats are a clear indication that NetEnt’s market dominance has wavered in the face of smaller and more agile game developers cropping up on the scene in recent years. In an analyst note responding to the firm’s Q4 financials, Regulus Partners suggested operators were starting to eye up new games and suppliers, which is surely disadvantaging established online incumbents.

Elsewhere, Kristoffer Lindström of Swedish technology analyst firm Redeye says many of the up-and-coming slots providers are being headed by former NetEnt staff. Lindström believes the supplier should put more focus into retaining its top talent and look to M&A to keep content fresh.

“These new providers are eating NetEnt’s piece of the cake, which is one reason for the slowing growth rates,” he adds. “I believe the markets are starting to understand that it’s not possible for players as large as NetEnt to grow their annual net sales by 30%+ for all eternity.”

Bowden also says he does not think NetEnt has made enough investment in M&A “to keep the company at the top for the next five years”.

Per Eriksson stepped down from his position in March

And we’re live

In response, the supplier made a significant investment in its Malta operations last year, including a bigger office space and the development of a new and improved, mobile-focused live casino offering.

Since the rise of customer demand for live casino, NetEnt has stepped up to seize the number-one spot in product development. And the firm is certainly considered one of the top-two providers. But it admitted in its FY2017 report that its biggest competitor in the live casino arena was Evolution Gaming, a far smaller and newer provider that posted 2017 profits of €66.8m, and an EBITDA margin of 45.2%, representing a Q4 run-rate revenue higher than NetEnt’s.

Bowden claims that while the firm has made “huge efforts” to break into live casino, it “has yet to really make a dent in

Evolution’s share, and it’s far from clear its content resonates in all markets and with all players”. However, according to Muir’s figures, NetEnt has gained a significant amount of exposure in live casino, with a large share of its games spread across UK casino sites.

Last year, NetEnt entered into an exclusive agreement with Mr Green, forging a unique partnership with the operator to create its “Live Beyond Live” next-generation live casino product.

The offering uses digitally enhanced backgrounds and multiple layers of technology to offer players the ability to switch between tables in a 3D environment and play alongside fellow gamers.

“Our new live offering is built to deal with the technological demands from both players and operators, much in line with Mr Green’s vision,” Eriksson told throngs of spectators at February’s ICE conference. The Mr Green partnership underlines NetEnt’s desire to build closer links with its major clients and work with them to provide a more customer-focused product.

Having secured itself an entrance into the US with a New Jersey licence, the fi rm has hailed this as an opportunity to seize the live casino market share in a jurisdiction still in its infancy. Further, it has cemented its position as a leading provider in the US through a content deal with the Hard Rock Hotel & Casino Atlantic City’s upcoming online offering.

What many in the industry are deeming the end of an era of market dominance for NetEnt could also be seen as a brief period of stepping back and reconsidering its approach. In many ways NetEnt’s story echoes that of fellow Swedish gambling business Betsson Group, which is in the midst of its own operational restructuring.

Both companies also share board member Pontus Lindwall in common, the man behind Betsson’s attempt to return to growth. In all, the road ahead will undoubtedly be paved with further uncertainty, but NetEnt is making a conspicuous effort to fight back and regain its position at the top.

And once the supplier announces a permanent replacement for Eriksson, a much clearer picture for the future of NetEnt is likely to emerge.