Let us entertain you: Entain ventures off-piste to secure future growth

You would be forgiven for getting a little bored of Entain. Another quarter, another double-digit growth story. The same for over five years in a row. No matter how the market shifts, Entain somehow moves with it and ends up ahead of the chasing pack with tales of outlandish growth in at least one market. The temptation is to just tick the boxes, say good work all round and move on to the next on the list. But Entain is really a multi-layered story of rise and fall in Europe, and increasingly globally, and this quarter is no different.

This time around, the outlandish growth was in Brazil where revenue rose by 153% in H1, but Italy wasn’t far behind, up 76%. The UK also continues to grow at a rapid lick with only Germany a black mark in the period – overall online growth was 28% for the first half, or 38% excluding Germany. The story there is fairly clear, with Latin America proving a tantalising opportunity for near-term growth for all operators, while markets with major lockdowns and large existing gambling markets continued to put in big numbers.

The UK remains the most important of these for Entain, at just over a third of all online revenue. And while they remain cagey about UK growth rates, management guided to a strong performance in the first half with “sports brands” doing well in Q2. Bingo brands also apparently put in single-digit revenue growth in Q2 with gaming a little softer against tough comparatives. But this is a continuation of a story that has been told for three years now, where Entain continues to gain share in the UK market.

At the heart of Entain growth in the UK is the Ladbrokes brand, which was something of a struggling asset when GVC acquired the Ladbrokes Coral business in 2018. Despite years of market share decline, the brand remained strong and the potential for catch-up growth was huge when Entain took the business over. Improvements to product and marketing seem to have made a significant difference. It’s hard to point to any grand leap forward Ladbrokes has made – it’s been more of a gradual process, but it is now becoming the focal point of UK sports marketing and where new product launches happen first.

The 5-A-Side product, a slimmed-down bet builder trying to tap into the fantasy football mentality, was a big recent launch and management noted how it was helping to drive margin benefits at the business. And this will likely continue to be the direction of trend for Ladbrokes with more and more recreationally focused products and marketing offers designed to take on Sky Bet less directly than some of its peer group. And it would be no surprise to see more products aimed at this mass-market audience for the new Premier League season.

A big world beyond the UK…

But Entain’s UK business is a lot more than Ladbrokes, and while Coral appears to be playing a bit more of a supporting role at present, the gaming brands are still at the front of the stage with Gala, partypoker and Foxy all key to the business. A crucial part of their success is the ability to tap into Entain’s large exclusive content library, and Entain said it would be doubling its headcount to around 300 total staff across its UK, Italy and India content studios within a year. Management also highlighted some new content that is being worked on, including free-to-play slots tournaments, which launched on Coral in June in the UK, as well as more themed slots content.

A potentially bigger launch is its first steps into VR, which, while unlikely to generate much immediate revenue uplift, is an indicator of a wider direction in the firm. But much of the focus will be around creating stand-out and exclusive content for key markets, with the US apparently benefiting from Entain’s in-house library already and 71% of BetMGM igaming customers playing in-house games. This is a huge advantage in a market that is still fairly lightly served by content suppliers and provides clear margin benefits, particularly around table content where players are less supplier affiliated. But beyond the US, the group is also tailoring content for each international market, with Baltic states content flagged up alongside games specific to the UK, Italy and the US.

The US remains the most attractive near-term market, and early performance in some new states offering online casino suggests this may be a market that becomes even more important than sports betting in due course. There are a fair few legislative hurdles to jump over first, but money does tend to do a lot of the talking. If the US opens up yet further to online casino, then being a major content house alongside all BetMGM’s other advantages is going to be a sizeable bonus.

That said, the role of exclusive in-house content should always be understood to have a cap on its benefits to the business, with players usually converging on a fairly narrow menu of core games. No matter how many exclusive games you have, your players will always want to have Starburst, or Book of Ra (or one of its half-dozen copycats). But being able to tailor your content for each market, picking up some loving imitations of land-based classics along the way, is going to be ever more important in a world where gains will become harder once more. Because revenue growth is no longer rocketing away as it was this time last year.

There was a slowdown in Q2, with online revenue dipping to 22% growth (32% excluding Germany) with lockdowns mostly ending towards the latter half of the quarter. Gaming held steady against a very strong comparative quarter in 2020, and signs continue to look positive for the rest of the year even with management often keen to underplay how H2 might go. Because underlying all of this is a huge question mark hanging over not just Entain, but the whole online gambling sector. What happens next?

The billion-pound question

Lockdowns mostly came to an end in Europe during May and June, and the large majority of nations are now back open, with retail betting up and running and the wider leisure and hospitality sector crying out for consumers to come back and spend.

Australian revenue declined in Q2 and reports from operators suggest this has seen a sudden and stark impact on online gambling spend levels, with 888 reporting a 20% drop in daily average revenue in the UK following the end of lockdown and anecdotal reports from other operators suggesting less steep, but noticeable, drop-offs.

The weirdly crowded sports calendar in 2020 makes comparatives harder to make, but the sense from operators is the appetite for online gambling spend, particularly around sports betting, has dropped back following the end of lockdowns and Entain echoed this, if adding it didn’t see a decline anything like as big as 20%. There is clearly supressed demand for a number of sectors, and we may see the opposite impact of lockdown to some degree with sectors that benefitted from lockdown seeing a drop in demand over the summer.

But what is more interesting is where the new normal settles, and this is likely to present a very different picture in the various markets Entain operates in. Mature markets such as the UK and the Nordics are already arguably close to a ceiling level of spend for online, while the likes of Italy and Spain still have substantial headroom to grow. The UK also has one of the smaller land-based gambling markets in Western Europe and, as such, the longer-term shift of spend will be less meaningful than say Italy, where land-based gaming is 10 times the size of the online gambling sector.

But what operators will be watching closely is how much of the online spend during lockdown was purely substitutional and how much was transformational. Have customers become so accustomed to online gambling they won’t need or want to move back to retail when it becomes a viable option once more, or will they sustain both and up their share of leisure wallet as a result? The most likely scenario is a middle ground where we see a temporary acceleration of the existing slow channel shift that is mostly driven by younger age groups to-date.

Entain, while not saying this explicitly, seems to be guiding to something along these lines. Overall growth rates for 2021 are expected to be 10% for the full year, returning to high single digits in 2022. And this will be against a backdrop of high double-digit growth in some markets. There is no doubt some of the retail activity that has moved to online will stick, and Entain and others are no slouches at CRM, but there is far less certainty over if this was a quantum leap forward. Most operators speaking off the record suggest it was more a temporary boost than a permanent one, and once we settle back into the new (or old) normal, the grind of finding growth in the mature European market will return.

Tripling revenue?

Against this backdrop, it was interesting then to hear Entain CEO Jette Nygaard-Andersen talk once more of doubling, or even tripling, revenue growth for Entain in the future. Yes, there are some obvious geographical gains to be made, with the US and Latam the obvious areas of focus, but Entain is looking beyond the historic dependency on expanding geographically and through M&A into a brave new world of gaming, esports and new demographics.

More details on this are going to be given in the August investor presentation, but it’s going to be a product-led strategy with new games, content and apps built to try and tap into what Entain describes as the convergence of gambling and entertainment.

Nygaard-Andersen noted that she wanted to grow into “new and larger” markets, with customers demanding more from their entertainment options and looking ahead to a future where gaming, gambling, streaming, media and more converge into single entertainment verticals. The first port-of-call here is esports, and Entain is clearly focused on how it can expand and alter its product range to capture the imagination of this audience. This is also likely to lead to new acquisitions, with Entain noting one of the areas of focus in its M&A pipeline was business that can drive “new content verticals”.

It does feel a fairly seismic shift for some of its brands to lurch giddily into this brave new world with the grand old man of Ladbrokes feeling particularly ill-suited, for example. So, it would be no surprise to see this entire project being new brands offering new products, although probably still on the in-house platforms. We have seen this approach already from Betway, which, along with Microgaming, have developed slots content exclusively for an esports audience and use a micro-site for esports betting with a different look and feel from the standard sports site.

But you sense that minor incremental shifts are not going to capture 100% revenue share gains, so look for something more radical from Entain and probably its rivals over the next couple of years. Because the underlying truth is that, outside of the US market, everyone is acutely aware that 2020 and 2021 provided a distraction from the wider trend of growing pains and regulatory strains in the core European online gambling market. The industry has been given time to reset, reposition itself and bank some profits to go again in 2022.