Regulus Partners observes new UK gambling sector realities drawn from improved granular statistics monitoring industry disciplines. Meanwhile, the strategic consultancy analyses the many binding narratives which will drive the forthcoming government review of the 2005 Gambling Act…
The GB Industry Statistics to March 2020 have further improved granularity, especially in quarterly reporting. Adjustments still need to be made (especially stripping out exchanges to get to underlying betting margins, the treatment of ‘other’, which includes unallocated, the impact of arcade bingo licensing and the potential for bonus distortion), but the official statistics are now approaching a quality worthy of the implied accuracy of the figures.
The trouble with the figures to March 2020 is that they are very noisy due to the pace of change: a full year without B2, betting margin volatility and 2 weeks of Covid impact (a 4% distortion in annualised figures, which can have a big impact on YoY changes). As always, therefore, the detail is more valuable than the headline.
We can now piece together with some accuracy what happened in the year after the B2 ban, with two caveats: first-year impact is not the same as total impact, and the extent to which ‘Before Covid’ ancient history is instructive can also be questioned. However, here are our key observations:
- We already knew the size of the B2 ‘hole’ (£1.15bn); 34% has this has flowed directly back into B3, which is materially better than expected; the whereabouts of the net £760m is more complex
- The consensus view is that betting has held up much better than expected also, but we caution against this for two reasons: first, SSBT momentum has simply continued (+ c. 23% to 25% betting mix: pre-Covid disruption), backing this out leaves OTC down 12% on an average estate reduction of only c. 6%. Second, OTC margins improved by c. 0.5ppts, meaning OTC turnover per LBO pre-Covid disruption can be triangulated at -11%: a very weak outcome, in our view, given supply reductions and the potential for B2 substitution
- AGC (the most obvious beneficiary) did indeed grow revenue by an impressive 14% Covid-adjusted; but c. 10% of this was underlying momentum prior to the B2 change: the total disrupted revenue flowing through to the sector would seem to be less than £20m
- Casino revenue fell 4% YoY, implying broadly flat pre-Covid disruption, but the two most fungible products (ER and machines) revenue change was also negligible, suggesting no system-wide pre-Covid sector benefit to B2 disruption
From a landbased gambling perspective, therefore the net reduction caused by the B2 ban is still at the upper end of a £700-750m range. This is significant in a post-Covid world on two levels. First, LBOs have been ‘lucky’ in terms of margins and SSBT momentum in the adjustment period (just as FOBTs bailed out the weak LBO betting model in the channel shift period): luck rarely holds, while SSBT momentum is not a medium-term given (though it has been boosted by changes in customer behaviour between lockdowns).
The medium-term outlook for LBOs is far less rosy than headline pre-Covid trading would suggest, therefore (NB, similar distortions apply in the between lockdowns trading), especially from an OTC perspective. Second, the inability of other sectors to attract a material slice of this revenue bodes ill for underlying appeal, in our view. Outside a few notable exceptions, UK landbased gambling is struggling to attract new customers to a level that replaces underlying attrition (especially new ‘regulars’): this is a difficult place from which to attempt to rebuild revenue from the massive supply and demand dislocation caused by government policy responses to the pandemic.
Online gambling lacks the abrupt 4% loss of trading days at the end of the reporting period, but the fact that the distortions are more subtle makes them less easy to pull out (or spot). From a Covid perspective, the few days of March are little more than noise in the betting data (eg, an initial 60% drop in betting revenue would equate to a 2.5% overall impact). Betting margins had a much bigger role to play in online, especially in horseracing and soccer:
- Horseracing had Cheltenham 2019 as a comp (as well as equine flu): the £50m hole caused also inflated racing turnover by c. £500m: both of these snapped back to medium-term patterns, but the annualised impact looks optically profound (racing turnover -5%, revenue +30%; two year CAGR a much more boring +1% for turnover and +3% for revenue). Critically for racing, the ‘cash-back’ distortion has been fixed from a Levy perspective (charged before incentives and the nature of incentives clarified in racing’s favour, GGY reported after), but the yoyo provides a useful reminder of the acute inverse relationship between revenue and margin; against this margin swing, the impact of two weeks of Covid disruption is barely visible (NB, due to timing: FY21 will be much messier)
- Football had a similarly big swing, with an FY20 revenue margin of 11% vs. a medium-term reported average of 9%; some of this is structural (more mass market, more bet-builder and multiples vs. in-play), but at least 1ppt is luck: this equates to c. £100m of additional revenue and implies c. £1bn less turnover with a 1.0 inverse correlation. Turnover was indeed down £880m YOY – pointing to c. 1-3% underlying growth and a negative 7-9% turnover impact due to shifting product mix and results (ie, revenue is shaping turnover via its relationship with margins and not the other way around, as with horseracing)
Given these big swings in sports that represent 76% of betting revenue (under normal conditions), revenue being up 15% and turnover being down 4% are both relatively meaningless as a directional indicator – both simply demonstrate the highly correlated inverse relationship between margins and staking (with margin swings being the key driver). However, a line between these two figures – ie, c. 5-6% underlying growth, would seem to be about right.
Gaming is far less volatile, meaning headline growth of 3.5% should be a more meaningful underlying indicator. However, this too should be treated with a degree of caution. Overall, a 25% increase in GGY for the last two weeks of March would imply an annual boost of £35m, or 1% growth (including all the reported poker growth); underlying growth is therefore c. 2.5%: a figure very close to HDI growth (2.3%), suggesting online gaming is ex-growth in real terms. There are four things going on here, in our view:
- First, while the long-term structural case for channel shift is clear, it is not clear that the c. £750m net dislocation of B2 roulette and high value slot spend has made any discernible difference to online: 10% substitution would explain all the pre-Covid growth, but that simply makes the underlying position worse (ie, it is long-term better for the sector if substitution were lower and underlying engagement higher)
- Second, it is very clear (and has been for c. three years) that the secular growth phase of GB online gambling is finished: c. 20% CAGR that was reliably delivered from the late 90s to 2016 (2017 was margin-driven) is over; itself an interesting dynamic since it demonstrates that concerns about online gambling growth are c. 4 years out of date
- Third, in addition to the underlying slowdown, the crackdown on VIP accounts has clearly provided a significant break: customer funds held by operators are down 23%, with funds per account providing a misleading metric given the number of occasional (World Cup) customers in the prior period: active accounts were also down 8% (with actives likely down even more given that multi-account users are more stable than big event activated solus account users)
- Finally, given the betting margin swing, gaming comps are tough and some of the recycling benefit seen in FY19 would have been reversed back into sports hold
All of this means that getting to an underlying figure is almost impossible. However, this in and of itself is instructive: 20% CAGR conquers all ‘noise’, c. 4% does not. What is clear is that UK online gambling is now low growth, event-cyclical and volatile. And that is before a pandemic and a legislative review…
UK: In Parliament – the Great British Gambling Review; ready for the off
The week ahead will bring the start of the first major review of gambling legislation in more than a decade, if the Westminster scuttlebutt is to be believed.
It is now more than a year since the Conservative Party made its hasty manifesto pledge to conduct a review to make sure that gambling laws remain “fit for the digital age”. Since then, the Gambling Commission has banned the use of credit cards for online gambling while the Department for Culture, Media and Sport (‘DCMS’) has commenced a review of loot boxes in video games. That just leaves online stake and prize limits and the question of whether a statutory levy is required to fund treatment for gambling disorder from Government’s original list (with the levy looking like a done deal despite the absence of rigorous review). It seems likely therefore that next week’s announcement will go far wider than originally intended.
Time has allowed the Government to reflect on the doubtful wisdom of its original thinking – like allowing the Department of Health and Social Care (‘DHSC’) to lead the review and the bizarre proposal to convene an ‘independent panel’ of vested interest lobbyists to guide reform. The DCMS (one of the last bastions of reason in this debate) will be responsible for conducting the review, coordinating input from the DHSC, HM Treasury and Number 10.
On the flip side, the Gambling Commission’s decision to jump the gun by announcing its intention (subject to a notional consultation) to introduce spending caps for online gambling bodes ill for coherence. As we have observed previously, for a matter so profound (in terms of market regulation and personal freedom) to be carved out of the review and determined with such little scrutiny ought to prompt grave concern.
There are other reasons to be worried. The prelude to review has been marked by scant respect for hard evidence and very little thought for consumers. One prominent group of parliamentarians has admitted that it made up evidence in producing its report this summer; while the Gambling Commission has justified its plans for spending caps with a highly selective and – in parts – misleading interpretation of survey data. The DCMS has shown a greater willingness of late to push back against parliamentary fibbing (in responses to PQs). It will need to demonstrate a strong backbone in the face of dogmatism, vested interest and lobbying from all sides.
The review is long overdue. Staunch opposition (until fairly recently) from the Gambling Commission and many gambling companies has deprived them of the opportunity to frame its scope and thus allowed their critics to establish terms. Those parliamentarians who now criticise the Government, the Commission and the industry would do well to reflect that the Gambling Review Body (2000-2001) proposed a structured system of review in order to recalibrate legislation that was subsequently jettisoned. The present agitation for reform is around a decade overdue according to the Budd Report’s timetable. It is too late to change the events that have brought us all to this pass; but there are important lessons to be learned for those who dream of a more sustainable future.
Article edited by SBC from ‘Winning Post’ Sunday 29 November 2020 (click on the below logo to access a full unedited version)