The Forces Shaping the Online Gambling Industry

Whilst the online gambling industry has witnessed tremendous growth in the past 10 years it remains a very young industry, currently capturing c.6% of the gambling industry’s total gross gambling yield of c.$336bn (Barclays Capital). As the industry continues to grow and mature, an increasingly complex operating environment is presenting both challenges and opportunities to operators. This blog entry seeks to examine the key forces that are shaping the online gambling industry today.

Regulation

The regulation of online gaming markets is opening up opportunities for legalised online gambling in European markets, which is primarily being driven by the need for governments to effectively manage the taxation of the online industry. The regulatory map in Europe remains complex and in flux following a series of European Court of Justice rulings during the past 2 years. The spectrum of regulation across Europe is wide, ranging from online gambling being banned, such as in Germany, to liberal regulatory regimes like in the UK. In between are countries that have regulated online gambling with varying licensing and taxation regimes.  Whilst growth of the online market in Europe will continue with the further opening of markets, online gambling in all forms remain illegal in the USA.  Despite opposition to legalising online gambling in the US, it is expected that the trend towards regulation will continue over the next 2 years.  Whilst a more uniform regulatory playing field in Europe remains at least 5 years off, Michel Barnier’s Green Paper on European online gambling is due to be published at the end of this year and is being eagerly awaited by the industry.

Technology

At the 2010 EIG product development was highlighted by Mark Blandford (Sportingbet founder and Valhalla Investments) as more important than marketing as players demand richer, more varied and more mobile gaming experience. Advances in technology is allowing game developers to take 3D gaming to new levels, and this trend of enriching the user experience will spread to the online gambling sector. The number of mobile broadband subscribers is rapidly increasing i.e. there were 257m subscribers in 2009, which is predicted to expand to 2.5bn by 2014. Operators are also investing heavily in developing advanced analytics solutions to better understand customer behaviours to make marketing campaigns more targeted and meaningful. Whilst there has been a large focus on customer acquisition in the past 5 years, operators are now focused on reducing player churn during key phases of the customer lifecycle. No one operator will be able to develop market-leading technology capabilities across all these areas in isolation therefore best-practice collaborations with specialists will be required to remain competitive. Potential new competitors are emerging as social media technology platforms mature and attract more users and gamers, with the distinction between legalised gambling and gaming with virtual currencies becoming increasingly blurred.

Consolidation and Convergence

The industry is now entering a phase of consolidation as brand, capital and scale become key levers to entering new markets and attracting customers through competitive prizes, odds and gaming variety and experience. The biggest moves in the market in 2010 included PartyGaming and bwin’s merger to create the world’s largest listed online gaming firm and Betfair’s recent flotation on the London Stock Exchange, signs that access to capital and scale will become increasingly important to succeed. Sportingbet and Unibet are also in discussions regarding a £600m tie-up. As well as revenue generating synergies, consolidation will provide vital cost reduction opportunities through economies of scale which will become increasingly important. Sales and marketing costs typically make up between 30-40% of an online operator’s costs and it is likely that retaining these budgets will remain an important weapon in the battle for market share. Further competitive pressures will result from the continuing trend of convergence, with land-based operators looking to leverage their brands and gain market share in the online sector. Convergence within the industry between B2B and B2C will also continue as online operators look to expand their business models and find new revenue sources to augment existing revenues from players.

Corporate Transparency and Trust

Given numerous corporate crises across many industries over the past few years there is an increasing expectation that all corporations should be ‘whiter than white’ and operate in a socially responsible manner. The online gaming industry has in recent years increased its focus on delivering a socially responsible industry for players. The regulators who license operators have responsible gaming codes of conduct in place that operators must adhere to which are both prescriptive (e.g. age verification, self-exclusion) and open to interpretation (e.g. prevention of problem gambling). Whilst it is difficult to predict whether recent economic and corporate failures will result in a permanent change in the corporate attitude towards CSR or tougher regulations, focus from the media and policy makers will continue to grow on industries with perceived reputational issues, such as gambling. The internet also offers an unparalleled level of transparency to customers, whether it’s comparing operators’ odds, prizes or which organisations they are accredited by. Given increasing competition and very low switching costs associated with online gaming, customer loyalty cannot be guaranteed solely by brand awareness marketing and customer inertia. Brand equity will remain incredibly important and nurturing customer loyalty and trust will play a key role in growing an online operator’s brand value.