Industry in focus: Gambling

For the gambling conglomerates that the Gambling Act helped create, there are hard decisions ahead if they want to preserve profitability. These encompass consolidation, diversification, digital transformation, and social responsibility. For them it means jettisoning some of the questionable growth strategies of the last decade that attract relentless negative press. And it may mean growth, at least in the UK, will slow. That process has already begun: revenues fell from £5.6bn to £5.3bn in the year to March 2019, according to the Gambling Commission.

“No one can say that consolidation in this industry is bad or good, it is how as a CFO you prepare for it and what you are trying to achieve with it,” says Ronen Kannor, the FD of Stride Gaming plc, a bingo and casino operator, “If you’re not going to be acquiring or merging, how are you managing your dividend structure? Your margins? Where are you going to be more efficient? Everything is being squeezed.”

Kannor knows of what he speaks, as Stride was recently acquired by the Rank Group plc for £115m. It’s a good return for a business that was a start-up in 2014, but it was the outcome of a strategic review that decided further organic growth was not in the interests of shareholders.

The problem for all but the largest operators, Kannor explains, is that as the cost of regulation increases and differentiation becomes harder, economies of scale become more important. “If you have a platform you are not unique. Small operators will not be able to have a strong regulatory framework with margins being squeezed significantly. It’s down to scale and diversification, and your capital structure to achieve it.”

The need for scale has led to a consolidation not seen since the 1980s. GVC is not a household name, but you will have heard of its brands: Coral, Gala, Ladbrokes, Sportingbet, or partypoker. Paddy Power and Betfair once the challenger brands in the industry, now combine under the name of Flutter. The Stars Group? Try Sky Betting and Gaming.

As marketing incentives and a shrinking pool of potential new wallets increases the cost of customer acquisition, then Kannor argues that the era when a brand like Bet365 – founded in a Portakabin in Stoke in 2000 – can become one of the world’s major players is over. “Small businesses are not able to grow with margins at 15% or 20%. So small operators will not be able to join the market,” he says.

Even if times are harder for gambling companies, retailers, utilities, and airlines might still look at them with envy. Denise Coates, the famously reclusive CEO of Bet365 plc, spotted the growth opportunity while working as an accountant for her father’s small chain of betting shops. It worked out well: her personal earnings were £265m in 2018 alone. The question for these highly profitable businesses will be how to achieve the best return on that capital for organisations that are geographically concentrated, to avoid being squeezed out by the competition. Many operators do little business outside their core markets. William Hill plc, for example, does 82% of its business in the UK.

And so overseas markets are increasingly an essential part of their strategy. GVC eyes Brazil, where the proponents of gambling’s 30-year struggle to create licensed sports betting have reached a happy conclusion: in February, a delegation of Brazilian MPs visited London to pitch for UK firms to invest in its planned casinos. Bet365 has focused on the, largely unregulated, Asian market.

William Hill and Flutter have been setting up joint ventures in the US, eyeing the increasing liberalisation of sports betting. But, warns Joe Thomas, analyst at HSBC, we still don’t know how an untried market, in which all UK entrants are starting almost from scratch, will perform.

These operators will soon go up against a new set of deep-pocketed competitors, and it will not be cheap. US expansion is the rationale for the desire of Flutter and Stars Group – between them representing 40% of the UK’s online sports betting market, and 26% the overall online gambling market in the UK, according to Redburn – to complete a £10bn merger, which is currently being reviewed by the UK’s Competition and Markets Authority.

In 2020, ICE London (“the world’s gaming innovation showcase”) is not so much the gambling industry event that was, now more a technology show with a bit of a gambling theme. The stands promoting casino chairs or exotic playing cards are at edge of the hall, while in the centre giant screens offer “one-stop solutions”, “your cloud partner”, “API white label”, and “payment intelligence”.

The move to gamble online in the UK, which represents a rise in gross yield from £1.2bn in 2007 to £5.5bn in 2018, according to analysts Regulus Partners, has also shifted the centre of gravity of the businesses involved. Pete McLachlan, a recruitment consultant at Bettingjobs.com, places senior executives in gambling operators, moving around the industry. But changing times means a search for new blood, particularly from the finance sector.

“We have been going for 17 years, but eight or nine years ago it totally transformed into digital,” he says, “there are too few good people and there’s massive demand. There are more jobs out there than there are people to fill them. There’s focus on innovation, and companies are working with huge volumes of data. It’s very modern and in-your-face now. If you enjoy the corporate life this is maybe not for you.”

Indeed, at ICE, start-up culture is much in evidence. A digital industry is using the same metrics and techniques that other online retailers do to manage its growth, creating a generation of back-office innovators. “Anyone who wants to integrate a sportsbook, we can cater to them,” says Eva Berkova, the COO of Betby, which started up in 2018, and now has around 20 clients. Its AI-driven software is used by online casinos who want to integrate sports betting, she explains, but don’t have the expertise to do so. So, they licence it from Betby, which combines Latvian developers with a marketing operation close to their potential clients in Malta (see Moving offshore section).

It’s a million miles from the financial management of the old school bookmakers like William Hill or Victor Chandler, who used lightning mental calculation and eyes on the odds that rivals were offering to adjust prices, lay off (insure) bets, and create a perfect market: one in which, whatever the result, their “vig” – the locked-in margin – would be the same. Today’s betting expertise involves data-driven analysis of segmentation, loyalty and time on the site to guarantee the house always wins.

But, just because they can, doesn’t mean they should. And this may yet be the greatest challenge for the financial management of gambling operators in the future. It is also the one that’s attracting the most censure and may lead to constraints on the profitability of operators in the future.

On 4 September 2019, at the sixth inquiry session of the Gambling Related Harm All Party Parliamentary Group’s Inquiry into “Assessing the Impact of Online Gambling”, MPs questioned the CEOs of gambling businesses. Well, some of them.

Carolyn Harris MP, who chairs the committee, noted the absence of three CEOs: Kenny Alexander of GVC, Philip Bowcock of William Hill and Peter Jackson of Flutter, “apparently due to other business commitments”. They were “too cowardly” to speak publicly about their actions, she added.

The list of harms is long, and much of it relates to what in other industries would be the customers classified as “low-hanging fruit”. This includes the super-rich who like to gamble, but also, of course, problem gamblers who may be rewarded as “VIPs”, and given benefits. In one case in 2019, an undercover reporter for the Daily Mail found that Bet365 gave some of its biggest losers large cash loyalty rebates so they would carry on spending. Bet365 has since closed down many of its VIP accounts, and other operators are doing the same.

Those CEOs who did attend the hearing were quizzed on why they did not impose stake limits; at what point they investigated where money being gambled was coming from; their investment in treatment for problem gamblers, and the paucity of background checks. The solutions on the day included recognising that they needed to do better and promising to learn from past mistakes. The MPs were not inspired by the industry’s attention to where profits were coming from. Harris concluded the session by pointing out that some people in the room “had lost loved ones, their homes, their jobs, and all have lost their dignity”. Would the industry executives like to say sorry? They all did.

Hence, at ICE London in 2020, the stands focusing on technology to improve anti-money-laundering (AML) and know your customer (KYC) capacity. The rules around KYC checks were tightened on 7 May 2019 by the Gambling Commission, so that players need ID verification before they can deposit money. “Prior to that, individuals only had to be checked after 72 hours,” says Scott Winstanley, global marketing director for Hello Soda, which automates KYC and AML checks for clients including Bet Victor, BetFred and the GameSys Group. “For a gambling operator the challenge is to meet the regulation while making sure the onboarding process is seamless,” he says.

Using a specialist service provider for these checks not only automates and speeds up the process, but because that provider is using the same expertise on other automated markets (porn is, of course, one), then its systems are more accurate. Hello Soda has run automated AI-driven background checks for customers in 177 countries.

Traditional, manual onboarding involves checking documents. “These methods mean more bodies, and if those documents have to be manually checked you need a supply of scarce expertise,” Winstanley warns. Result: the process creates diseconomies of scale, and punters are likely to hop to another site with quicker, laxer approval processes. So, without automation, there is a tension between an operator’s risk appetite and the rate of customer acquisition.

Investments in technology to offset regulatory pressure are, in gambling parlance, table stakes. Kannor argues from experience that regulation affects all operators equally, but the challenge for the next generation of CFOs, he says, is to explain how the bonanza of the last two decades can be sustained. “The challenge is what’s next. The major issue is what story you tell your investors about how you are going to grow,” he warns.

As gambling has moved online, regulation has moved out of the UK. Victor Chandler had a flash of inspiration and moved his business to Gibraltar to 1999. Others have followed, as well as to the Isle of Man, the Channel Islands, and to Malta, looking for low tax, a pool of skills and, sometimes, lax regulation. But the competition between jurisdictions has led some to fear a “race to the bottom” on regulation.

Lyle Wraxall, the chief executive of Digital Isle of Man, is keen to argue that the only sustainable model is strong regulation. “Five years ago, it was easy to attract new business to the island. Now that’s more difficult for everyone, and we are focusing on retaining our high-calibre businesses, supporting them as they grow.” This, he says, is also a reaction to the consolidation in the industry, and the desire for professional management. It means that the cost of any licence is small compared to the potential benefits in infrastructure, partnership and innovation in these offshore locations, which now house hundreds of the tech staff online gambling operators need.

For the Isle of Man, it is its leadership in the blockchain technology that can help reduce AML headaches and costs. But there is a trade-off, as operators, wherever they are regulated, will have to relocate more of their staff to those locations in future.

“Our businesses would not have come to the Isle of Man if they were only looking for light-touch regulation,” Wraxall says. “Our licence will never just be a brass plaque next to a door. But the dialogue that they have with the regulator helps them to be innovative.”

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