Losing its shine: Why egaming heavyweights are looking beyond the UK market

The UK remote gambling sector was worth a tick under £5bn in the 12 months to November 2017, making it around five times larger than the second largest market in the world. It’s a figure that seems to reinforce what we already know – Great Britain is the world’s most advanced and potentially lucrative egaming market. Dig a little deeper, though, and some cracks are starting to undermine this position of strength.

For starters, revenue growth looks to have slowed to the high single digits, according to official UK Gambling Commission (UKGC) data, which is a far cry from the circa 20% achieved between 2014 and 2016. The slowdown continued into Q1 2018, with UK online revenues up 9% year-on-year, according to Eilers & Krejcik Gaming, despite historically bookmaker-friendly results that helped inflate sports betting revenues. And it’s no temporary blip, with Eilers & Krejcik predicting a continued easing off of growth in the near term. Meanwhile, Regulus Partners’ Paul Leyland harbours a similarly bearish outlook, commenting: “Remote growth is not what it was, and we believe this is an emerging trend.”

The root of the problem

There are myriad issues facing the UK, starting with the proposed rise in Remote Gaming Duty (RGD), likely to jump from 15% to 20% as soon as next April. The sector has pledged to fight the increase, but the Treasury is adamant it needs to make up the shortfall from FOBT stake cuts, so the worst-case scenario looks all but assured.

Elsewhere, the UKGC is increasingly willing to dish out fines to uphold the standards it expects from operators on a range of issues, including AML, responsible gambling and age verification. “The sector is facing increased regulatory pressure and tax hikes at a time when there is very little structural growth to offset it,” says Regulus Partners. “This is likely to further polarise the performance of winners (a few) and losers (most) from an operator and supply perspective.”

The downturn is not just in the minds of analysts, several operators having already taken major strategic decisions to deprioritise the UK. William Hill has spoken about a “renewed focus on international expansion in 2018”, while Stride Gaming recently announced an international pivot attributed to “a fundamental increase in the cost of doing business in the UK”. 888 has also redirected its marketing from the UK towards Italy and Spain.

Things like the extension of the POC tax to bonuses and the clampdown on affiliates were also given as reasons behind the move away from the UK, while Gamstop is another looming concern – the programme is already behind schedule and operators are perturbed by the hefty fines dished out to Sky Betting & Gaming (SBG) and 888 for self-exclusion failings.

“The UK has to be careful. Online operators have already started shifting marketing dollars to other, more attractive markets” – Analyst

Yet it’s not just the regulatory environment that is scaring operators away. The market itself is incredibly competitive and potentially brutal for those without local expertise – as Tabcorp can attest to. The Australian firm recently announced it was negotiating its way out of the Sun Bets contract in a tacit admission the joint venture had simply become a money pit. Betsson Group, too, cut off the marketing hose in the UK, admitting it might never be a big player in the market. CEO Pontus Lindwall told EGR it was “not realistic” for the Swedish operator to try and take a big chunk of market share.

Indeed, with markets like Italy and Spain enjoying growth rates of 30% and upwards, and the greenfield opportunities of the US, some onlookers suggest the trickle of firms deprioritising the UK could become a flood. “The UK has to be careful,” said one analyst speaking on the condition of anonymity. “Online operators have already started shifting marketing dollars to other, more attractive markets, and if they [the government] squeeze harder on tax they will inevitably drive the online market offshore.

“I do not share the government’s optimism about the impact of its measures on tax revenues and the health of the horseracing industry; both will be hit hard, and further online taxes may not lose votes, but they will do further damage.” The situation also looks set to become worse before it gets better. One industry veteran, speaking off the record, says there was a wave of fines coming up, including potentially the biggest ever. EGR understands one household name is weighing up whether to simply exit the UK market altogether rather than cough up a seven-figure penalty.

“The bigger point here is that the UKGC are seemingly getting out of control,” remarks the industry exec. “The reality is that operators have not largely gone rogue or become inept in their compliance. The Sky Bet fine was a good example – they’re not out to break regulations. Apparently, the UKGC see the fines as a ‘profit centre’ towards raising funds for good causes. The situation has reached the point where the industry in the UK is going to suffer in that obtaining investment is going to get harder” the exec adds.

“I’ve already seen political and compliance risk cited as an issue with the UK.” The UKGC told EGR that it does not comment on unattributed quotes, yet the regulator did offer this statement: “All operators providing products in Britain should be focusing their attention on raising standards and protecting consumers. Every consumer should feel that when they gamble in Britain, they are doing so in a safe and fair environment.”

Uncertain future

But what does the ongoing shake-up mean for the industry? How should incumbents and newcomers react? And is sportsbook suffering more than casino? One of the most immediate consequences, according to Sandford Loudon, VP at Oakvale Capital, is that the appetite for M&A – long expected to explode after the FOBT decision – has been supressed again by the uncertainty over the RGD rise. “Without a doubt, the shine has come off the UK in the short term,” Loudon says. “It’s massively less attractive now because there’s so much uncertainty. You can’t feel comfortable about acquiring a business on a big multiple like we’ve seen in the past. If you’re the founder or shareholder of a UK business, you’re expecting an 8-10x multiple and now buyers won’t pay that because they don’t know where the tax rate will be in six months. That’s slowed M&A and investment in the UK right down.”

Loudon says ambitious, growing firms like LeoVegas, which acquired Royal Panda and IPS last year in a bid to add UK revenues, are suddenly looking elsewhere for opportunities. “Six to nine months ago, they wanted to double down on the UK because it was highly regulated and the biggest market in Europe,” Loudon says. “While that doesn’t disappear overnight, so much has changed recently and no one’s sure how the tax environment could change. Last year, when we [Oakvale Capital] set up the Royal Panda deal, we sang from the rooftops about its UK penetration, and that was a huge selling point – [but] has that changed? Instinctively, it now doesn’t feel like a good thing and people are looking elsewhere.”

Another obvious consequence of the regulatory environment is that scale has become more important than ever before, with the big beasts better able to weather tax hikes, as well as possessing the vast compliance teams needed to navigate the growing mountain of red tape. It means the market could be tougher to crack for the young upstarts looking to innovate their way to prominence, according to Loudon. “If you look at the high-growth operators that have been built up and sold in the recent past, they’ve done that in a much easier climate through affiliates that are now hamstrung, and with looser emphasis on AML and source of funds” he says.

Which could be good news for the established giants, particularly in sportsbook where the ‘Big 7’ bookmakers dominate the market. BetBright CEO Marcus Brennan penned an EGR opinion piece earlier this year asking the rhetorical question: how hard can it be to crack the UK sportsbook market? “It’s very hard,” was his blunt conclusion.

Pastures new

But what are the alternatives for the whales and the minnows alike? The US is the obvious place to start, particularly given the timing of the country’s Supreme Court decision on PASPA in the same week as the FOBT decision, but anyone unhappy with overbearing regulators in the UK might find their American counterparts to be a whole new level of suffocating. Instead, the best clue here might be to follow the money of the firms veering away from the UK. Stride Gaming plans to launch in Italy with sports and casino by the end of the year, and is in the process of obtaining licences in three other European countries – Spain, Denmark and Sweden – with the intention of launching during 2019.

Betsson, too, has shifted its marketing euros towards Spain, Italy and Sweden, while 888 has prioritised Spain and Italy. The common denominators, of course, are Italy and Spain, which arguably look like the UK did 10 years ago. They grew at 41% and 29% respectively in Q1 2018, with Italy overtaking Germany to become the second largest single-nation market in Europe, according to Eilers and Krejcik Gaming, although that was before a blanket ban on gambling advertising was announced –  something of a spanner in the works.

On Spain, Eilers noted: “The market is beginning to reach a scale that makes it an interesting investment case for international operators, although there are very few realistic M&A assets in the market.” Operators might be well served to move quickly on the Iberian Peninsula.

Of course, there will be firms which have invested so much already in the UK and are pot-committed, to borrow a poker term, or UK-based start-ups that can’t simply up sticks and have a crack at Spain. So how best can they protect and grow their businesses in the face of regulatory pressures? The answer, according to Loudon, perhaps predictably, is product and innovation. He points to BetNation and BetBull as two small firms building market share. “I really like BetNation’s approach to user acquisition, which is very media-driven rather than affiliate-based,” he says.

“They do a lot around creating relevant content to drive clicks. Then they’ve built themselves a unique front-end with lots of rewards and social hooks, which helps channel players to high-margin bets. It’s an excellent funnel.” Black Type is another operator anecdotally performing well from a low base by swimming against the tide with a focus on standout prices and laying large bets where possible. “There’s still room for innovation,” Loudon adds. He also forecasts a brighter future for the UK in six months as the wave of fines settle down and an RGD rate is decided upon. “There is still a huge amount of long-term value here because there’s a lot of gamblers, a lot of high-value players and we are dealing with things like problem gaming,” he adds.

Taking responsibility

That last point is key. Much of the industry’s pain has been self-inflicted, so a proactive approach to these regulatory issues will undoubtedly ease that pain. William Hill spokesman Ciaran O’Brien says: “It is all very well to complain about the tax and regulatory environment, but the wider gambling industry has not had a coherent approach across sectors because everyone has been too happy to let retail bookmakers and FOBTs take the flak – some even joining in the feeding frenzy at the end.

“Moving forward, the wider industry needs to demonstrate it is willing to work together to promote the industry’s economic, employment and social contribution, and we need to take big positive steps on responsible gambling and sustainability.” Robin Chhabra, chief corporate development officer for The Stars Group (TSG), is another exec who is “very bullish” on the UK – perhaps evidenced by the firm’s recent $4.7bn acquisition of SBG. “On a general basis, I think it’s important to note that we see a regulator actively looking for a safer environment, which we support,” Chhabra tells EGR.

“As a market matures, any business has to adapt to regulatory and compliance challenges. We are very bullish about the UK and believe that The Stars Group’s focus on sustainable play leaves us in a very strong position to prosper in this new environment.”

He points out that TSG is somewhat protected against UK risk by virtue of its global exposure, adding: “That not only naturally mitigates the challenges of any given market but also hardwires a level of experience, expertise and flexibility to capitalise on new opportunities. For instance, we’ve led the way in getting licences in newly regulated markets and opening up the southern-European shared liquidity market and are actively looking towards the US.”

The doom and gloom around the UK market is absolutely justified, in the short term at least. The cost of doing business has undoubtedly risen, and is unlikely to fall any time soon, especially with growth rates also slowing. However, given the pace of change in the sector, it’s reasonable to suspect this could be little more than a temporary blip. It’s also worth noting that more and more markets are starting to follow in the UK’s footsteps with regulatory controls – think of the upcoming Swedish regulations, for instance.

So while building a socially responsible business in Britain may come with some short-term pain, the long-term payoffs could be more than worth it. It seems as if reports of the UK’s demise may have been greatly exaggerated.