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The ever changing online landscape

How will M & A and moves within the industry to consolidate change the landscape and what effect will the combination of this and the migration of offline casino giants to the on line world have for the future of I Gaming?

It was Clemenceau who said that the future is always with the avant-garde. And so it would seem to be in the world of gaming, despite John Lennon once describing ‘avant-garde’ as the French for bullshit.

The internet as we know, has changed, and is changing, everything. Goods and services, as well as information, are now available 24 hours a day from anywhere for everything at nothing more arduous than a click of a mouse. For those who like to gamble, this has created a whole new way of indulging themselves and, as a consequence, online gambling as an industry has grown astronomically in size and at a prodigious speed. And, on this journey, it has consistently been confronted with obfuscation from some jurisdictions and disdain from governments.  The recession, however, has changed everything.

Governments are broke and looking for additional sources of revenue. Since online gambling will take place in their countries whether they wish it or not, they have been converted from positions of moral disapproval to enthusiastic supporters for regulation both as a means for additional taxes and an opportunity, in some cases, to defend existing monopolies. This has led to two major ramifications. First, the realisation that, when regulated, online gambling is big business and is here to stay, with the concomitant land grab that is now taking place as more and more markets – particularly the US –  move towards regulation and, secondly, the barriers to entry and the cost of competing have risen significantly.

And nowhere is this change in attitudes more evident than in the land based casinos, most of whom have dramatically revised their opinion on internet gambling. Hitherto, their policy had been to oppose any legalisation of online gambling which they saw as unwelcome competition. The recession has caused them to reconsider. Traditionally, land based casinos had held up well over precious economic downturns, as gamblers like to gamble come what may. However, their increasing dependence on non-gambling activity for revenue meant that, when the crunch came, gamblers could continue their gambling on line and could dispense with any unnecessary costs such as travel, entertainment, accommodation and so on. For land based casinos, the realisation dawned that the best way to compete with online was to try and harness the power of their offline brands online. In other words, if you can’t beat them, join them.

Consequently, as lawmakers in the US work on overturning the Unlawful Internet Gambling Enforcement Act, the larger land based casinos are rushing around to make sure their online casinos are up and running by the time the law changes in the US. Harrah’s, for example, has recruited Mitch Garber, the former CEO of Party Gaming to launch an online proposition through Dragon Fish. Indeed, it seems strange that, for a company which not so long ago was denouncing the legalisation of online gambling, it is now beginning to advertise its online gaming sites on TV and in US Newspapers. This is a battle, however, that will be fought out in the media in terms of advertising. And it will not be a battle for the faint-hearted. It will involve deep pockets and steady nerves.

For while Tobin Prior of Sun International argues that the big land based casinos have established brands, established customer franchises to market to, established credentials and established reputation, it is by no means guaranteed that they will succeed. As Kevin Flood CEO of pointed out at “having had the opportunity to launch online brands in Europe for land based casino brands taught me how difficult it is to establish online brand awareness for a well branded land based casino”. Indeed, he sees it as every bit as challenging as starting with an entirely new entity. As he says: “just because you have a great offline gambling brand does not necessarily entice players to use your online property. This is especially true if the space is already occupied by well-known online gaming brands”.

However, this is only part of the story. As the need to have bigger and bigger marketing budgets to compete in the spate of new territories that are becoming regulated, there is no longer any form of open season out there anymore. The regulatory and licensing regime that Italy introduced insists that poker liquidity is strictly confined to its geographical boundaries and is not open to players from other countries. Other countries are also poised to adopt this model, which means there are fewer economies of scale to be washed through the operations, there are often strong local players to be competed with and there is the need to secure individual territory licenses and try and build critical player mass country by country rather than over a more extended geographical area. This too is expensive. As Nigel Birrell, Director of Mergers and Acquisitions at Party Gaming, pointed out: “The opening up of new markets will undoubtedly influence M & A activity: the upper echelons of online gaming industry will be keen to acquire local companies that achieve a decent and sustainable market share through first mover advantage.”  Bwin’s acquisition last year of Gioco Digitale is a case in point.

This all represents a fundamental change to an industry, which, since its inception, has had a low cost of entry. That is why, increasingly, we can expect a move across the industry to consolidation. Firstly, there is an abundance of operators that have miniscule, and often shrinking, market shares and need to join forces with other companies or face being swamped and inevitably drowned by what Nigel Birrell refers to “the abnormally high competitive tide that has risen up in these unusual and changing times.”

Secondly, the proliferation of new opportunities and new territories, particularly the prospect of the US regulating on a state by state basis, means it is not only incredibly expensive to secure major market shares in these new territories, but that also to survive and prosper companies must continue to reduce costs and sweat their resources to the limit. They must fight for market share as markets mature – the low hanging fruit has long gone – and they must create economies of scale and cross sell as effectively as they can. All of these are key drivers for consolidation. The recent merger of Bwin and Party Gaming perfectly illustrates this. As Jim Ryan, Chief Executive of Party Gaming described the deal “with market-leading positions in poker, sports betting, casino and games (in particular Bingo), the enlarged group will have a winning formula to exploit the growing online gaming market, supported by a strong balance”.

Other operations, like G Tech have been infilling their portfolio of offerings. In the last few years, for example, it has acquired Boss Media, St. Minver and Finsoft.

At the other end of the scale, there are a number of small operators, who are finding it more and more difficult to break even and who are looking to cut and run by effectively becoming overcoming an affiliate and outsourcing to all of its operations to another operator. Others, like William Hill are taking the affiliate approach in a slightly different direction and marrying operator with platform provider in order to broaden their foothold in the industry.

Many are finding it tough and that’s without any change to the tax rate, which will in itself inevitably have an impact. Many of the big names have taken themselves offshore, at some expense, in order to remain profitable. Any local changes to legislation will inevitably mean additional spend either in terms of re-aligning operational centres or tax, thereby curtailing spend possibly to the detriment of other areas such as M & A and expansion.

All of this would suggest that consolidation equates to survival and growth and will continue to be a major driver for change over the next few years. Yet within this industry, things are not always what they seem.  Who will be eating who? Big online brands, big offline brands, traditional bookies, state-owned monopolies, lottery operators and niche players will all be fighting amongst themselves on a market by market basis.  Meanwhile, gamblers, as we know, remain promiscuous and notoriously fickle in their relationships with established brands.  For them, other than where liquidity is concerned, big doesn’t always equate to being better or faster. So rather than it just being a case of the big eating the small, maybe there will be instances of the fast eating the slow.  It’s a fascinating contest.  And it has only just begun.


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