A swing and a myth

Exploring the industry's resistance to variance and some persistent gambling industry myths and half truths

There is so much received wisdom in the online gambling industry that you sometimes forget to question the reasoning behind it. Here are six of the most persistent myths masquerading as truths…

Myth 1

The way things are is how they will always be

For an industry that depends on variance, the resistance to acknowledging low probability outcomes is surprisingly common. I’ve said before that online gambling loves a group think and allied to that is a fundamental belief that this time, definitely this time, there won’t any more radical change.

You hear analysts, operators and commentators talking about a settled state in terms of market shares, leading operators and the top suppliers as if we haven’t been down this road about seventeen times already. I have been through at least four iterations of an unassailable market leader, and many more in terms of the perfect operating model.

The best summary of this is around the attitude to grey markets. In 2001 they were OK, 2005 they were amazing, 2007 they were toxic, 2010 they were maybe ok but HOLD ON A MINUTE NO TERRIBLE in 2011, but wait they are kind of ok now in 2015 again and….no….terrible again now.

There seems to be a fundamental need in a business so suffused with risk, variance and unpredictably for things to be stable and predictable. We want there to be a settled state, to have winners and losers, and for nothing to catch us off guard. Except, something always does. It’s an endless cycle of people being surprised by their own shadow, like a sleeping dog jumping up and barking in shock.

I will go out on no real limb to tell you that the US market is not a de-facto three way death match between FanDuel, DraftKings and BetMGM, that Flutter is not the end boss of gambling firms. there will be at least one more start-up in the mature European markets that takes a lot of share and that at least one regulated market will go absolutely crazy and screw everyone over.

The way things are is just the way things are and is no more a guide to the future than the run out of red and black on the roulette table.

Myth 2

Spending more than you earn is always bad

This feels completely logical. You can’t possibly make money if you spend more than you earn right? This is most commonly heard these days around DraftKings with informed people claiming you can’t spend $1b or $2b or $10b on acquisition marketing and ever expect to make a profit.

That’s honestly one of the oddest takes I’ve ever heard. Because spending big money now to make even bigger money later is literally how online gambling works.

This is gambling. The answer is ALWAYS “it depends”. And the variables here are: how long are you retaining the customers for, how much of their ongoing spend are you keeping hold of and at what point do you begin to see retained players overtake new players? If you know the answer to none of those then you honestly have no clue if it’s burning money, a fantastic investment or somewhere in-between.

It really depends on the timeframe you are looking at. For the first 90 days of a customer lifetime you are almost always spending more than you earn on them. Online gambling is a very front-loaded business, especially in the US where almost all affiliates are CPA rather than revenue share based, with CPA effectively an averaged discounted rev share paid up-front.

The game is about keeping those customers, or at least some of them, coming back month after month year after year. Once they are retained customers your relative marketing spend per dollar earned starts to drop considerably and everything starts to rebalance. But if you’re constantly trapped in an acquisition loop and your new depositors continue to outweigh your retained players it just looks like an exercise in burning cash.

Now let’s be clear. You can get stuck in this loop by being operationally ineffective and not retaining enough customers or not sufficiently monetising those who do remain. But you can also get into the loop by aggressively expanding into new markets where you’re likely spending 100%+ of NGR on marketing for the first several months or even longer in that market.

So the question becomes: is this company good at retention, product and is it able to operate at least moderately efficiently? It’s not a question of the absolute amount it’s spending, it’s about how that relates to the underlying player values. And that, by design not by accident, is much harder to work out from company reports.

Myth 3

The Black Market is an ever present danger

This is one of those things that’s both a myth and a truth. Yes the black market is a real thing and yes it’s very large, but no it’s not a massive danger in most of the regulated markets in Europe. Where it is a danger is where it’s not really a black market at all and is just a continuation of the pre-existing grey market that most of the operators in the white market were previously part of.

This is the other issue with black markets, they tend to not be clearly defined. A black market is sometimes “a grey market we are not operating in” such as some Asian markets and sometimes they are more definitively a market that is explicitly banned by national legislation such as French online casino. For the latter markets there are a number of tools available to mitigate their impact, but you are never going to remove them entirely.

Crypto has only made the problem worse for gambling regulators with the main lever pulled previously being payments, but there is still ISP or DNS blocking, marketing restrictions and supplier blocking among other options to pursue. But ultimately the black market will always be present and the main way to prevent it is to have an offering that is sufficient that the vast majority of gamblers will never need to seek it out.

Operators would have you believe this means being able to offer all products, at all limits and market as freely as they like. This is not the case. But quite obviously heavily limiting all regulated online gambling won’t make the black market magically go away.

The black market, and crypto gambling sites, present a real and present danger to regulators who want to have complete control over their gambling markets. And its presence has to be taken into consideration in any serious discussion. But its impact in a well regulated open market is frequently overblown.

If I said what the best approach should be was I would be lying. I don’t know. And neither does anyone else. Europe is a case study of various regulators pulling levers often seemingly at random to see what the optimal results look like.

What you absolutely shouldn’t do is listen to anyone who says they know what optimal is here. Because I can promise you they absolutely don’t.

Myth 4

Restricting unprofitable customers is always good for business

Yes. Of course it is. Someone removing money from the system is not a good customer.

But…

OK. Here is the thing. How do you know they are unprofitable? There are some player types you can be 100% certain of, and we can all happily chuck matched bettors and bonus hunters into the sea. But the rest, well, just how good are your models? How much do you trust your ability to spot a long-term winner versus a short-term value hunter?

In an industry where traders take on a number of external inputs, go against their own instincts to follow consensus and are constantly re-assessing their own models, pricing and strategies there does seem an awful lot of confidence that when it comes to this they really have got it nailed. Which is sort of confusing when the bettors themselves are trying to make money from the same markets you don’t always 100% understand.

Is this happening in the major online gambling markets? You know I think it probably is, and most of the senior management I speak to sort of think it is too. But the fix for this is much much harder than it seems, and involves some pretty major technical and structural changes at a time when there are significant demands on resourcing and product roadmaps. So…it just gets pushed to the back of the queue.

But is it an increasing missed opportunity? Probably, maybe certainly.

Myth 5

They just want to get you into the casino

I mean, sure in a way. Why would you not want players to spend more money with you on another product. But no this isn’t the guiding ethos of every sports betting site that exists, even if it is becoming that way for poker and bingo. There is plenty of money to be made in sports betting as I’ve written about before. This is just lazy thinking that says nothing of value about the business.

Myth 6

Online gambling is a technology business

It’s not. Sorry. It just isn’t. No, not even that one.

Look, don’t get annoyed. Online gambling absolutely in part a technology business. It has some incredibly talented people doing some brilliant things and the depth of tech talent is growing all the time. But it’s absolutely not a business like google, or even Uber. The product is not the…product. One day I truly think it will be, even one day fairly soon. But not now, not yet.

In some countries, and supplier sectors, the market leaders are not necessarily the best product, but the least worst. The one with the fewest barriers to a half decent customer experience and the least number of potential operational pain points. This to me doesn’t immediately suggest an industry at the bleeding edge of tech innovation.

To repeat, that’s not to diminish the work being done at the moment to upgrade, and in some cases reinvent some ageing technology stacks and platforms, but just to take an honest appraisal of where we are in 2022. And more importantly to look at what does actually drive the business at the moment.

So what is online gambling?

It’s a marketing business, a customer service business and yes to a degree a technology and customer experience business. But it’s the first two that still matter the most. Get your acquisition and retention marketing right, keep your customers happy and you can operate on some pretty average technology with a fairly average customer proposition. Get those wrong and the best technology in the world won’t save you.

If you are an innovative and creative senior executive in this industry simply commission some market research as to why players signed up for your site. You need to scroll a few times to get past the various iterations of “good bonus offers, free bets and brand I recognised” in any of the ones I’ve seen. And if we’re all being honest there sometimes isn’t much to choose between firms other than those aforementioned bonus offers.

That’s not to say product doesn’t matter. It matters enormously. It’s the best retention tool you have. But is this an industry built around product. Not yet. Not close. And that is one of the biggest opportunities that remain.