Chaos theory - making sense of the UK market
Looking behind the numbers at what's driving growth and decline at Flutter, Entain, 888 and the one everyone always forgets to mention
Chaos theory used to be all the rage.
A butterfly flapping its wings in the Amazon causing a hurricane halfway around the world really captured the public imagination, and it’s not a terrible metaphor for what’s happening in the slightly less exciting world of UK online gambling.
Safer gambling began to be an unavoidable feature of the UK sector a couple of years back but operators are only really feeling the impacts of the affordability butterfly flapping its wings now.
Entain and 888 William Hill reported revenue declines in the UK during 3Q23 and while Flutter saw growth it can in part be attributed to the same issue, with Flutter having felt the pain a year or two earlier.
Flutter revenues were down -5% in 3Q21 while they were up single digits for Entain in the same period, but now Flutter is back to growth while Entain and 888 are stuttering in their move to a recreational revenue model.
This is by no means an unusual thing where consequences lag actions. For a digital industry there is a surprisingly long lead time on impacts and this year’s results are usually the impact of what happened a year or even two years ago.
Sky Bet introduced request a bet and the immediate impact was modest, then big then suddenly huge and enough to take it to clear market leader. See also cash out at bet365 or platform migration led decline at Paddy Power for some of many other examples.
The big leaps forward or backwards often feel like small stumbling steps initially. But the next one is quite hard to see at the moment. In fact, it’s hard to even see the small ones unless you look very closely.
What happened in the third quarter?
Not a lot to be honest.
The Gambling Commission data set, which comprises the major UK operators who are approximately 95% of the sports betting market and 75% of the gaming market showed growth in gaming and decline in betting for an overall flat sector in 3Q23.
My understanding is the long tail of casino operators that make up the missing 25% grew at a decent clip in 3Q23 so it’s probable the true gaming market grew more like 7% for a market size of just over £1b.
The betting market likely looks largely as its shown, with maybe slightly less decline with tier 3 sportsbooks doing reasonable business in the quarter.
Either way what we are seeing is every indication of a very static mature UK market with regulatory pressures dampening down any opportunities for double digit growth that do arise.
We have a steady uptick in gaming, which is partly a lockdown hangover with players who tried out online casino sticking around and partly the industry being more aggressive at cross selling to make up for lost revenues.
Sports betting is suffering from a lack of innovation and is probably near or at its peak in terms of potential customers from the current product so low to no growth seems a very reasonable mid-term outcome.
It’s not a new story either. And in many ways the UK seems a very very dull market at the moment.
Is the UK boring now and should anyone care?
Is it boring? Well…yes if you are fans of growth and rising share prices. There are a number of reasons to still be interested though.
It generates a ton of cash.
It is insanely competitive still.
Switching is where it all gets a bit fun.
Firstly, the cash. We like cash. It buys things, like more companies that make more cash. or dividends, or market share in the US or LTIPs so disgraced ex-CEOs can buy a racehorse. Cash is good. And Flutter UKI alone generated £303m of adjusted EBITDA in 1H23.
There is still a lot of money to be made in the UK market, even within the bounds of safer gambling and responsible operating and other adjectival dynamics. Which is why it is still so competitive. There are four power players (Entain, Flutter, bet365 and 888 William Hill) a bunch of tier 2 firms of decent scale (Kindred, Super Group, MGM LeoVegas etc) and at last count about 18 billion tier 3 casino and sports brands.
We’ve also seen strong levels of active player growth due largely to the Covid lockdowns, with a lot of the gaming and some of the sports betting players sticking around to today. An average month now sees around 4m slots accounts and 6m sports betting accounts, which even if we say one player per four casino accounts and one per two sports betting accounts is a lot of gamblers.
Annualising these numbers, we’re looking at something like 15-20% of the UK adult population being a regular active online gambler and each one spending nearly a grand every year. It’s hard to see how the industry gets much bigger from there really, although there’s absolutely space for gentle incremental growth by improving the user experience.
As a result of this switching or share of wallet gains, or whatever else you want to call it, is the name of the game in the UK. As the market reaches maturity it is turning into a zero-sum contest between the major players. And we can see that playing out a little in the 3Q23 results where there was one big public winner, two big public losers and one big private winner.
They were, in order, Flutter, Entain, 888 and bet365. Flutter grew at 11%, Entain didn’t disclose UK numbers, but I’d estimate declined about 10% y/y, 888 was down 10% y/y and bet365 was up low double digits by a few different sources. The lazy narrative there is Flutter and bet365 are executing well and the other two aren’t.
The prevailing narrative, as mentioned above, is that Flutter and bet365 are about a year ahead on safter gambling initiatives and are reaping the benefits of this now. What that means in practise is Entain and 888 are still shutting down accounts and making changes, while Flutter and bet365 are now optimising.
The bigger picture and the butterfly
This view is coherent and stands up to both data and anecdotal analysis, but it doesn’t really capture the full picture. This optimisation from bet365 and Flutter does more than just capture share in the short term, it starts those butterfly wings flapping for future market share gains.
Designing and refining a product for the customers of today, with a lot of work behind the scenes being done on bonusing efficiency and targeting, lots more work on enhancing bet builders and new feature development creates a new baseline of customer expectations that may not be met elsewhere in 2024.
On the other hand, we have the really interesting picture of aggressive growth in active players at both 888 and Entain (both numbers disclosed) and double digit revenue decline (888 actual and Entain estimated). At Flutter and bet365 (revenues up double digits and actives up single digits) we see the opposite picture as both those firms are out the other side of safer gambling measures and are focused on ARPU growth.
So can Entain and 888 bounce back with double digit growth in the near future? Well…yes. But that doesn’t mean they will. What’s additionally worth noting is that while these three firms are 75% of the online sports betting sector, they are less than 50% of online gaming.
There are a lot of smaller operators out there taking share and making moves. Could one of them be a big disruptor in future? Perhaps. The butterfly wings are flapping right now and who knows what chaos they will bring in the year to come. Well, that’s the theory anyway.