Right now there is nothing certain in the eGaming industry except Regulation and Taxes.
When we review the landscape for the eGaming industry we see a key trend, the grey market gravy train is coming to an end. The medium term trend that we see accelerating for the eGaming industry is that markets will either regulate or completely block eGaming at either an ISP or Payments level.
We’ll leave a country-by-country review to the experts but it is easy to see a lare number of jurisdictions reviewing their Gaming legislation. Some recent examples include regulation beginning to take shape in the Netherlands (vote in parliament happening the day I write this article). In Canada we see the state of Quebec blocking gambling sites at an ISP level (with a blacklist being maintained by the only licensed State Operator). To the government in Japan, who is working on integrated resort legislation similar to what we see in Singapore and Las Vegas.
We expect to see this drip-feeding of country legislation to continue and our expectation is that the biggest losers will be the grey market operators.
When a country regulates and issues licenses we typically see two categories of winners, the first category is the national or state operator who pre-regulation already had a large market share, for example PMU in France, SISAL in Italy or Danske Spil in Denmark. The second category of winners in a newly regulated market is the large international operators such as (among others) bet365, PokerStars and Tombola. These large international operators are able to dominate their vertical by owning their technology roadmap, successful marketing and product excellence. These three in particular have demonstrated to enter a newly regulated market quickly and become the number 1 or 2 operator for their product vertical.
In both of these categories, the operators are able to execute successfully in a newly regulated market as they have the size and skill to be able to go complete a lengthy (and costly) application process, customize product for local legislation as well as absorb the tax costs. When we compare this to the experience faced by grey market operators, just the increase in tax alone can make a new market unprofitable.
When we then look at the flipside of this where legislation is passed that actively prohibits eGaming, this leaves a shrinking pool of countries that a grey market operator can target. So from either end of the spectrum the grey market operator is facing a squeeze on margins and a natural limit to growth.
So what are the options for the grey market operators? The obvious suggestion is consolidation and scaling but we feel that’s actually far easier said than done. If your business is primarily grey market, it can be difficult to find potential buyers or raise the capital to acquire other companies.
Instead we would recommend focusing on two key areas. The first is building your own technology. Unlike, even five years ago, eGaming software and platforms are now a commodity product. It is relatively straightforward for a small development team to build a good back and front-end platform for an operator. This control of technology mitigates counter-party risks, can significantly reduce costs and allows the freedom to innovate.
This then leads onto the second core area, which is to increase, the sophistication of player acquisition and retention. We have seen time and time again that the smart use of data and automation of workflows has a significant impact on an operators marketing performance. Not only does the marketing get more efficient but also no additional head count is required, even though campaigns can be 100x more granular.
By taking these steps, grey market operators can afford to move themselves from the shrinking grey market world and operate at a level where they can handle the only two certainties of Regulation and Taxes