Online gambling: up for the Cup

WHILE eGR nailed its crystal-ball-gazing colours firmly to the mast last year by predicting 2009 to be the year of the product, the range of potentially critical factors at play for the sector as it enters 2010 means we’re hedging our bets more widely this time around.

It’s probably a fair assumption that if a straw poll of the industry was taken on the factors likely to play the most transformational role for the sector in 2010, regulation would top most people’s lists

But as reflected by the current hesitancy of private equity to invest in the sector until the US market opening becomes a reality, this is not something the sector can invest in and prepare for with any degree of certainty. Hence we can expect to see the B2B strategies pursued as a hedge against protectionsim by 888’s Dragonfish, PartyGaming and now Paddy Power and Bwin to be stepped up in 2010.

By contrast, this summer’s football World Cup in South Africa not only represents by far the single most concrete commercial opportunity for the egaming industry this year, but also a focal point for the most significant period of development for Europe-facing sports betting platforms since the birth of the online gaming industry.

By way of example, Gala Coral is known to be in the midst of a complete rebuild of its sports book platform by ex-Orbis staff at Geneity ahead of this summer’s tournament, while Ladbrokes has just re-launched its online sports book, declaring plans to live stream more than 30,000 sporting events on its site during 2010.

The overall boost to betting activity reaped by the industry from the month-long event kicking off in Johannesburg on 11 June will inevitably hinge on results, with gross win potentially hit hard by too many predictable results in the group stages, and in the case of UK-facing sports books, an England win, which could cost the bookies millions.

However, the industry’s exponential growth since the last World Cup in 2006, along with the convergence of the increasingly dominant live-betting offerings with match timings means operators are confident this World Cup will “break records in terms of turnover and new clients”, according to Sportingbet’s head of sportsbook, Marc Thomas.

He explained: “The vast majority of our customers are based in Europe so the times of the matches are exactly when they would expect to be betting. As we found when the World Cup was held in Japan and Korea in 2002, betting at 6am is not a natural thing for most of our punters.”

However, while the World Cup is set to boost active bettor numbers by more than 20% above normal levels during the quarter in which the tournament falls, according to H2 Gambling Capital (see box out opposite), a measure of how far operators’ retention and loyalty programmes have advanced since the last World Cup in Germany in 2006 will be how many of these active customers they manage to keep live and betting with them once the tournament is over.

“There is a highly attritional nature to online sports betting, and the choice to a punter sitting in whichever country is now massive. Our platform is geared to offer as many bets as possible around as many different games as possible. Then the challenge for us and the rest of the industry once the World Cup is over is to get these people betting on the major European leagues as these come back on-line in August,” says Thomas.

However, the explosion in markets, products and technologies underway in the online sports betting space is not restricted to the sports books turning over the largest volumes of in-play transactions in the European market, which include Bet365, Sportingbet and Bwin.

The availability of fully managed white label sports books from providers such as OddsMatrix, Global Betting Exchange and more recently Playtech is driving the take up of betting platforms among standalone poker rooms and casinos aimed at increasing revenues, stickiness and cross-selling capabilities during the World Cup and beyond.

Operators launching in recent months include Chili Gaming, 32Red and Titan Poker, with a strong pipeline of more sites scheduled to go live before the tournament. This product diversification into sports betting, particularly by poker rooms, is reflective of the competitive pressures non-US poker and multi-channel operators are finding themselves under from PokerStars and Full Tilt’s US-liquidity fuelled marketing onslaught in Europe, with the two expanding their share of global poker traffic from 50% to 60% over the last 12 months, according to December data from monitoring site PokerScout.

On the marketing front, Stephanus Tekle, senior consultant for leading European sports marketing consultancy Sport+Markt highlights that the betting bans which will still be in place in key European markets such as Germany and France when the tournament takes place will present operators with challenges. “This has already caused a few problems in terms of sponsorship and probably will force the betting companies not to use the classical advertising tools,” said Tekle, with the affiliate channel set to retain its importance in these markets.

Indeed, while it’s a little early for Europe’s operators to show their marketing hand for fear their ideas could be replicated by the competition, early indications are that the marketing arms race among online operators which occurred around the last World Cup will be less all encompassing this time around.

Unibet, for instance, which holds high-profile football team and league sponsorship deals in Spain and Poland, revealed last August it was to keep marketing spend stable at 35% of gross win in the second quarter of 2010 ahead of the tournament. Chief executive Petter Nylander explained: “We will be doing what worked well for us for the European Championships last year; building up the client base and brand credibility, and then reactivating the client base when the event comes around. It’s much more cost efficient.”

So the World Cup looks set to provide a welcome boost to gross win for the industry, which suffered in the second half of 2009 from an unfavourable run of Premier League football results and UK horse racing cancellations.

However, it should also be seen as part of a broader expansion of sports betting into new verticals, constituencies and geographies, as operators prepare to do battle in what is set to be a critical year for both protecting and building market share.

One door closes”¦

Of the factors eGR sees as playing a defining role for the sector in 2010, regulation certainly has the potential to be the most transformative, but also by far the most difficult to predict.

In the US, for instance, an opening at intrastate level under the Unlawful Internet Gambling Enforcement Act during 2010 currently looks on course to occur ahead of any legislation arising from Barney Frank’s and Robert Menendez’s proposed federal bills to authorise gaming interstate.

This has prompted leading California internet gaming lawyer Martin Owens to set odds 2/1 in favour of California passing a bill to authorise poker within its borders during 2010. A spur to the California legislature considering this proposal has been provided by the state being “near desperate for revenue”, as it fights to extricate itself from a looming US$24bn hole in its budget by the end of the current financial year in April.

Consequently, Bwin, William Hill, Playtech and Ladbrokes are known to be among the egaming businesses which have met with lobbyists, legislators and potential licensees regarding operational opportunities in the US state. Greek lottery provider Intralot’s investment in California-based software provider CyberArts is also seen as aimed at positioning itself for a run at the California intrastate poker operating contract, should this be put out to competitive tender in 2010.

However, California-based Owens injects a cautionary note, warning this could all be knocked off course by factors unforeseen at this present time, warning that “politics at the state level can be incredibly convoluted”, and that “2010 is an election year, which means that many incumbents will want to hit the “˜reset’ button on their respective virginities.”

Similarly, over in Europe, while private operators’ push for access to markets under Article 49 of the EU Treaty looks set to yield significant openings over the year ahead for private operators in France, Italy for bingo, poker cash games and casino, and possibly Spain, three developments just this month re-emphasised the often precarious regulatory footing on which the industry has to do business.

The first of these was that the opening of the French online sports betting market looks unlikely to occur until after the World Cup due to the draft bill being held up in the French Senate.

Second, it emerged that Belgium plans to implement a dot.country model for online poker. And finally, UK Sports Minister Gerry Sutcliffe announced plans for a new licensing system for all operators targeting the UK, ostensibly to more effectively control problem gambling and to generate income for the UK horse racing industry.

On this, Julian Harris, senior partner of UK-based gambling law specialists Harris Hagan, told eGaming Review: “This [decision] was heavily influenced by both by the dwindling number of operators holding UK licences and by the prospect of generating revenues similar to those achieved by the Italian Government through their new licensing system.”

Taxation was not among the issues covered in initial studies by the government department with oversight for gaming in the UK, the Department of Culture, Media and Sport (DCMS).

However, James Hollins, leisure analyst at Hollins Stewart, said: “It is unlikely to be overly punitive, in order that a sensible taxation level can be applied in order to ensure that operators secure licences and that illegal offshore gambling is prohibited.”

The proposed changes requiring primary legislation and the fact that a new government will take office after the UK general election this year means no new regulatory licensing or regulatory regime in the UK is likely to emerge until 2011 at the earliest.

A consultation period during will also give operators both in the UK and overseas the opportunity to contribute their views on the plans to DCMS over the course of this year.

Landmark European Court of Justice (ECJ) judgments in cases between private operators vs state-enforced monopolies are also due in the Netherlands, where Betfair and Ladbrokes are challenging De Lotto’s right to act as the EU Member State’s sole legal supplier of online gaming, sports betting and lottery products, and in Germany, between Carmen Media Group and the regional government of Schleswig-Holstein.

Private operators will be hoping that Bwin co-chief executive Norbert Teufelberger’s prediction in his column for eGR late last year that the ECJ’s support last year of Portuguese betting and lottery monopoly Santa Casa da Misericordia was just a temporary setback for private operators in the EU holds true.

As Harris points out (see box out on p38) much of the outcome for private operators in the ECJ judgments due in 2010 will hinge on the Court’s interpretation of the proportionality issue, for instance how much restriction of private operators’ right to offer services between Member States is justified in order to safeguard consumers from perceived risks such as fraud and money laundering. These judgments will have hugely important implications for both private operators and state monopolies in Europe.

But with concrete market openings ahead in France and Italy, and developments in California suggesting the US could start opening on a state-by-state basis during 2010, this year promises to deliver more than last in terms of actual regulated entry into valuable egaming markets. But the inherent uncertainty of the terms and timing of legislation means the sector will necessarily be circling all promised opportunities on this front over the year ahead with cautious optimism.

Bolt-ons or power marriages?

Given the flurry of acquisitions across the sector towards the end of last year, it’s perhaps unsurprising that the third and final factor eGR sees playing a critical role for the online gaming industry in 2010 is consolidation.

While the consolidation play perhaps took longer to emerge than widely predicted, given the sector’s early stage of development and strength in the recession relative to others, this finally started to unfold in September with Bwin’s buy of Italian poker site Gioco Digitale.

December saw Greek lottery systems provider Intralot buy a 35% stake in poker software provider CyberArts, ostensibly in preparation to tender for the contract to provide the poker operating platform in California, should the state legislature pass an enabling bill in 2010.

Betclic, Bet-At-Home and Expekt parent company Mangas Gaming also moved for Everest Gaming, lending it liquidity and positioning in the French and German poker markets.

In the casino provider space, Playtech fought off rumoured competition from Dragonfish to land games and open platform provider Gaming Technology Solutions (GTS) for an initial €10.8m (see analysis on p28). Finally, Dragonfish moved for Wink Bingo in a deal valuing the business at up to £60m, giving 888 around 9% of the UK bingo market, according to the group’s chief executive Gigi Levy.

US horse racing also got in on the act in November, racecourse owner and betting operator Churchill Downs buying online wagering site YouBet with the acquirer stating the main reason for the deal as enabling it to benefit from growth in online betting on US thoroughbred racing, currently accounting for less than 14% of all horse race wagering activity in the territory.

Following these deals and with the sector showing demonstrable growth, analysts are predicting further bolt-on deals in both the B2B and B2C spaces aimed at driving revenue and earnings growth.

But sector analyst Nick Batram of KBC Peel Hunt suggests the huge complexities around long-mooted industry-transforming deals, including Bwin-PartyGaming, PartyGaming-Ladbrokes, Ladbrokes-888, counts against these transactions happening during 2010.

Batram says: “The scale of these challenges should not be underestimated. It is possible that we will see a major deal in 2010, but we should not expect a feeding frenzy of large-scale transactions.”
However, Batram adds that a spur to these deals happening this year may come from actual, rather than promised regulation in the US. “This could see significant deal activity if land-based companies were to seek to acquire online expertise,” says Batram. US casino groups Boyd and MGM Mirage are known to be supportive of internet gaming, if licensed and regulated at the state level.

And while the sector faces the same difficulties as other sectors in accessing debt markets, promising news came in the form of PartyGaming’s announcement in its December trading update that it had secured a £35m three-year bank facility on favourable terms of 6%.

In addition to enabling Party to perform a potential cash-and-shares acquisition of up to £80m, this also represented a vote of confidence in the gaming sector based on its proven ability over the last year to demonstrate growth amidst challenging conditions.

2010 and beyond

Thus while this summer’s football World Cup looks set to provide a welcome fillip to sector revenues and a focus for the growth and penetration of sports betting into new verticals, constituencies and geographies, how the two crucial underlying trends of regulation and consolidation transform the sector by year’s end is far harder to call.

But as last month’s overview of the industry’s first ten years proved, the industry has consistently proved itself resilient and fleet of foot in adapting to the shifting foundations on which it sometimes has to do business. There’s little reason to think 2010 will be any different.