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Winning Post – Deals continue to be secured in the US market

Regulus Partners, the strategic consultancy focused on international gambling and related industries, takes a look at some key developments for the gambling industry in its ‘Winning Post’ column.

US: post PASPA positioning – first mover advantage?

It has been a very busy week of deal-making, launches and planning in the US, as well as the Q2 reporting season. The biggest deal from a financial perspective was GVC-MGM, though ‘access partner’ Boyd rapidly demonstrated it was not a one-partner kind of business. Stars has extended its NJ partnership with Resorts to cover sportsbetting. DraftKing’s has ‘soft launched’ the first mobile sports product in NJ. PPB has given a 4% equity share in FanDuel to Boyd for an access agreement not dissimilar to MGM’s. Scientific Games won Caesars for NJ and Mississippi, where William Hill will also soon launch, along with a NJ mobile product and a partnership in WV. MGM has also done a deal with the NBA on rights. But what does this frenetic activity tell us about how the market is shaping up?

Access is key – sort of
So far all the major online gambling states in the US have required landbased (or lottery) incumbency for access, and this is likely to be a reasonable working assumption for the majority of forthcoming states. That is why we did not think much to the MGM-GVC deal (heavily Vegas-led) without Boyd and speculated that Boyd might not be fully locked in. It now seems that was more prescient that we realised, with Boyd doing a deal with PPB within days – and one which involves equity – arguably therefore a tighter relationship than with MGM-GVC. Two online providers consequently have access to pretty much the same 15 states, but whereas PPB (powered by GAN and IGT in the US) has existing online customers in them as well as Boyd access (FanDuel, TVG), GVC only has the former – and not (as perhaps some hoped earlier in the week), uniquely. However, Boyd’s choice of multiple partners demonstrates another broad rule of thumb: where a state allows skins, then access is largely commoditised. We would therefore question the real strategic value of ‘access deals’ (beyond convenience) that are not both broadly based and deeply embedded (GVC-MGM is the latter, but not the former, in our view).

Access to sports data is critical to betting, especially in-play. With ‘integrity fees’ less certain, MGM’s deal with the NBA for official non-exclusive data access and brand partnership takes on an interesting light. The value is likely to be totemic (reportedly three years for US$25m) as it is almost impossible to base a figure on anything fundamental (especially given MGM’s relative lack of exposure to sportsbetting), but it is at least commercial rather than legislative. What MGM really gets for this is unclear (beyond sponsorship and brand promotion), as is the extent to which data (rather than picture) rights can be locked down in jurisdictions which are relatively unfriendly to IP claims. US gambling companies that work closely with sports will undoubtedly gain a number of (often hard to value) advantages, as they do elsewhere in the world – what might soon be tested (commercially and legally) is what happens to those companies which choose to swerve that particular cost but offer a compelling product anyway…

Technology is key as well
So far, technology solutions have been cobbled together in order to achieve ‘first’ milestones and the user experience remains rather dated (and/or limited). This should start to change with mobile launches in NJ. It also really needs to change with retail development elsewhere than Nevada. While we fully accept that Nevada landbased sportsbooks are somewhat underwhelming from a user experience perspective, we have not yet seen innovations in either the operator or supply chain level that will significantly move the dial from the c. 1% GGR that Nevada achieves (ex mobile and OTB). Being first is great, as is validating that there is pent up demand (although that was obvious), but the US needs to invent an entirely new retail betting experience if the market is going to deliver anything like the promise hoped of it (excluding the few states that allow relatively unfettered online).
We will be blogging on this key theme later in August.

Is there any first mover advantage?
We hear a lot about first mover advantage and there is a clear hope that many of these deals will have significant long-term repercussions for their protagonists. First mover advantage definitely applies in the very early days of any market development from a purely market share point of view (fairly obviously). It might also apply (more lastingly) in a licensing environment that severely restricts new entrants. But first usually means cobbled together, learning on the job, and managing a meandering organic development that builds technical debt often faster than it builds sustainable value. This also applies to technology / JV partners – it is impossible to see who his holding the best cards when we still aren’t sure exactly what game is about to be played. We therefore see flexibility (throughout organisations and technology) as more important than ‘locking in’ early scale or vaguely parallel experiences/skill-sets at this stage. In practically every market, it is the best product that wins out, meaning the ability to understand the customer and effectively deploy R&D will be the key driver of success (within regulatory constraints), in our view. Therefore, we believe that despite a flurry of activity, the US sports betting market is still wide open to invite winners and losers in every participating state – even Nevada…

PS – lawmakers in the state of Massachusetts demonstrated how seriously they take the state’s betting sector this week by accidentally making racing and betting at its three racecourses and simulcast centres illegal, after forgetting the final procedural vote on a licence renewal before their summer recess.  Stories such as these are worth remembering when the industry gets caught up in a sense of its own destiny… (state congress and the governor fixed the problem in informal session later in the week – just in time for this weekend’s race meeting)

UK: regulation – Commission to adopt new advertising powers from Halloween as Stride investors take fright
We are told that with great power comes great responsibility; and this is something that the regulator and regulated of Britain’s gambling industry are likely to reflect on after a week in which the Gambling Commission flexed its muscles and indulged in a little further body-building.

On Wednesday, the Gambling Commission announced that from 31st October, it would adopt tougher new powers to deal with breaches of social responsibility around gambling advertising. At present, the Advertising Standards Authority has lead responsibility on dealing with complaints about gambling ads but that seems likely to change following a consultation exercise carried out by the Commission earlier this year.

In the past, both the ASA and the Commission have come under fire from gambling concern groups that sanctions have been too weak with repeated breaches drawing little more than wrist slaps and short-lived embarrassment. There has even been speculation that certain operators have deliberately strayed the wrong side of the line in order to generate publicity. That seems certain to change.

While the Commission’s announcement will give rise to understandable concerns within the industry, this may be an example of tough love. The scale and nature of gambling advertising has attracted unwarranted attention and controversy to the industry over the course of the last decade (and particularly over the last five years). Given the level of disquiet over the issue, it may be that closer policing by the gambling regulator will do more to ameliorate concerns than previous attempts at self-regulation.

At the same time, good regulation is a matter of balance – and there are limits to just how tough the regulatory love can become before it strays into abuse.

On Thursday, Stride Gaming issued a Stock Exchange announcement to advise investors that the Gambling Commission intended “to require [the company] to pay a significant financial penalty”. How large the penalty is, whether it is a so-called voluntary settlement or a regulatory fine and what the company is alleged to have done to warrant the penalty were not disclosed. Investors were thus left better informed but none the wiser. Stride’s shares fell by around one-third on the day.

Stride’s management clearly felt that they had an obligation to inform the market of the development but – as with last year’s announcement from 888 that its licence was then under review – it is difficult to regard the attendant uncertainty as a positive development.

Interestingly, the company has left open the possibility of challenging the Commission on both its ruling and on the scale of the penalty; and this hints at the heightened challenges for the regulator as well as the regulated. As the financial cost of licensing failures rise so too do expectations that it will act fairly and proportionately. It is not always clear why some licensing breaches result in penalty packages and others do not; and there does not appear to be a standard tariff of punitive sanctions.

A few years ago, when the penalties were relatively low (largely limited to foregone revenue and Commission costs), operators were incentivized to take their medicine and move on. However, as penalties increase in scale (as the Commission has advised is likely to happen), so the balance of risk and reward has shifted. The odds are surely thus shortening that one day one operator may choose to roll the dice and challenge the Commission. Such a challenge would be risky for the licensee (who may face tougher sanctions if unsuccessful) but also might pose a threat to the credibility of the regulator if it was judged to have acted excessively or unfairly albeit credibility seems to be nothing but enhanced so far – certainly in the realms of enforcement and policing).

The scale of penalties also demands much higher levels of governance around disbursement of funds. In the past, valid questions have been raised about where the funds have been consigned to and what benefits have resulted from divestment. Evaluation is a two-way street and with annual settlements topping £18m in the last financial year, the Commission is likely to come under much greater pressure to demonstrate good governance and positive results.

The Gambling Commission appears to be a much stronger beast than in previous times. So far, this greater potency appears to have achieved the desired effect – in general licensees today do appear to take the licensing objectives far more seriously than in the past. At the same time, power exercised without commensurate wisdom can result in negative consequences. There is no doubt that large swathes of the sector needed tougher love from its regulator. The key question now is whether evolution and enforcement can stay in the regulatory layer (for most issues): should either side feel the need to appeal to law makers or judges, the risks rise considerably for all concerned…

Italy: regulated commercial gambling – no more ads part two
The lower house of the Italian parliament approved the Dignity Decree this week, which proposes to place a ban on gambling advertising and sponsorship with 312 votes in favour to 190 against. The vote will now pass to the Senate on 6 August and unless there are any binding objections it will become law shortly afterwards. Much attention has been focussed on the absolute ban on advertising in the decree, but there are many other facets which are aimed at reducing the harm from gambling, which will also have significant and lasting impact on the industry.

The main changes proposed by the decree include:
An increase in tax on AWP and VLTs to fund gambling related harm prevention measures (€147m increase in 2019, €198m in 2020)
A comprehensive reform of gambling to eliminate risks related to gambling disorders, counteract illegal gambling and tax evasion within six months of the decree being enacted (yet to be announced).

Changes to Lottery scratch cards to include gambling related harm warning messages covering at least 20% of a ticket
The introduction of access control measures to prevent minors playing slot games – (no small task given the secondary location / small footprint nature of most of Italy’s machine footprint)
The introduction of a ‘No Slot’ logo which venues can display to identify them to the public as being gambling free. (trying to establish non-gambling as a differentiator for venues and modify public perceptions)

These measures represent a concerted effort on many fronts to tackle problem gambling, underage gambling, crime and tax evasion, yet the extent to which they will be effective is not yet clear, indeed in some cases the detail for example in the case of the further reforms have not yet been made public. Before being voted in, the new government made a pledge to tackle gambling amongst other issues that according to the decree erode personal dignities and by any political yardstick the progression from conception to law has been rapid. The successful and consistent implementation of these measures will be key, in order to deliver on the government’s pledges, which in the recent past has been elusive and subject to local political interpretation. Whilst the industry needs to concentrate serious resource on harm minimisation efforts, it is faced with multiple threats facing not only landbased slots but also online gaming and betting, with the increasing fear that these measures are just the beginning of an arduous reform process.

France: Q2 online results – l’oeuf du curé
The French online market grew by 34% to €302m in Q218. Unsurprisingly, given the WC as well as underlying trends, this was driven by sportsbetting, up 66% to €181m (60% mix); though growth was also seen in horseracing (+5% to €61m, 20% mix) and poker (+2% to €60m, 20% mix). These are impressive statistics, especially since the sportsbetting margin was relatively constant (at a decidedly unappealing and regulation-driven 18.1% – all the growth was ‘activity’ led.

The French online sector is therefore continuing to appeal to a growing mass market despite product and tax constraints. This is undoubtedly (if only theoretically) shifting the balance of leakage toward domestically licensed operators, in our view. However, while the French market probably captures the clear majority of players, it is still very unlikely to be capturing the majority of revenue. Regardless of growth, we see this as structural while players (especially) seek out casino content and attractive sports betting prices.

So far, Italy’s biggest slots operators have coped with fiscal regulatory pressure relatively well, largely due to endemic overcapacity being removed. The extent to which they can remain resilient to this level of legislative change could become a significant challenge, in our view.

Sweden: online regulation – open for a less open market
The Swedish regulator is now taking licence applications, receiving 22 on the first day and 3 on the second. As we have discussed before, Swedish ‘re-regulation’ is likely to present a lot more problems than opportunities for .com exposed operators with material existing market share (tax, regulatory restrictions, tougher monopoly competition, potentially enforcement action). A tangential pointer toward this is the regulator’s recent exhortation for prospective licensees to read the forms properly and fill them in correctly rather than rushing them in. In this context, the .com industry’s tendency to be excited and sloppy will probably cause nothing more than mild irritation, but if this approach is also applied to regulatory governance (and it is not as if licence applications are unimportant), then risks are likely to increase significantly for the newly regulated, in our view.

Australia: Sports integrity – Government publishes Review of Australia’s Sports Integrity Arrangements
The Government has published an independent review, chaired by James Wood QC, containing 52 recommendations to address current and emerging threats to the integrity of Australian sport. The wide-ranging report covers sports betting integrity threats as well as anti-doping concerns and will be of much interest to operators already active in, or considering entering, the jurisdiction.

The main structural and policy recommendations focus on the establishment of central bodies such as a National Sports Tribunal and a National Sports Integrity Commission. Such proposals link to a stated desire to become a party to the Macolin Convention and establish a “national platform” as described in that instrument. The establishment of central, consistent, and efficient regulations, systems, and processes seems sensible, in our view, and should ease the administrative burden on operators. Further, the recommendation that the current prohibition on online in-play betting be reconsidered stands out as a pragmatic response when the temptation might have been to increase, not relax, such restrictions.

Operators will also be heartened to see it has been suggested that responsibility for decisions on permitted wagering contingencies be taken out of the hands of sporting bodies (where there were at least perceived conflicts of interest given the connection with negotiations over product fees) and handed to the Sports Integrity Commission to make decisions following consultation with all relevant stakeholders. This key step would preserve the concept of financial return to sports bodies, while moving a potentially contentious decision to an arms-length body with (one hopes) the necessary expertise and procedural independence to make such determinations in a more consistent manner.

Global: M&A Watch – Blackstone / Codere; Apax / Genius; Stars Group Australia; Playtech / Snaitech
It has been reported that Blackstone is preparing a bid for Spain’s largest operator, Grupo Codere. Combining Codere with Blackstone’s recently-acquired Grupo Cirsa would create the leading operator across Spain and several LatAm territories.
Apax Partners has acquired Genius Sports Group. The deal – the financial terms of which are undisclosed – is set to complete in Q3 2018.
Having been brought within the ownership of Stars Group earlier this year, CrownBet and William Hill Australia will be merged and relaunched under the revived BetEasy brand.
Playtech has announced that the squeeze out process over the remaining minority shareholdings in Snaitech has been completed, resulting in Snaitech becoming a wholly-owned subsidiary within the Playtech Group. The shares in Snaitech have been successfully de-listed from Mercato Telematico Azionario (organised and managed by Borsa Italiana).