Everything is awful and everybody is happy
The mess that is Europe never went away and the growth outlook is poor, so what happens next?
The first quarter results season was one full of regret. Revenues are down against “tough comparatives” and executives are quick to tell you they said it could never last. “Ah if it wasn’t for COVID ending things would be so much better…” is basically the subtext. What an industry!
Revenues remain high, profits are falling a bit and there are tough regulatory times ahead in many markets. So, there are clearly reasons to be cheerful? Well, no not really. Although I guess if you squint very hard in the spring sunshine you can sort of see a way ahead that doesn’t look completely terrible.
A lot of the players who moved online during COVID have stuck around. The debt fuelling the US money bonfire might look a bit less weighty on the balance sheet if inflation keeps going up. There might be another pandemic. If people can’t afford to drive their cars anywhere they might play more online bingo?
More seriously though there are some small indicators that perhaps the worst of the regulatory upheaval is coming to an end in Europe, and we might start being able to build back better a bit worse.
The low point countries
The big issue for many major operators in the second half of 2021 was Germany and the Netherlands falling off a cliff. Germany remains a basket case of a nation when it comes to online gambling, but it can’t really get that much worse unless they ban in-play altogether. Oh, they might? Great stuff.
Meanwhile the Netherlands has mostly kicked everyone out and seems to be making stuff up as it goes still. But Sweden has sort of stabilised and operators are doing good business there, and that should give everyone hope the Netherlands will follow a similar path.
In all honesty I expect it will do but it might take a couple of years to reach settled state and the rollout of the old grey market operators is not odds-on to be smooth. But France and Belgium have proved even the most ostensibly awful regulatory regimes can still work if you are flexible enough.
Most of Europe is now settling down to a point where at least you know what the operating conditions are going to be. Yes, generally, they’re not great and massively favour incumbents and local operators, but you won’t be setting money on fire trying to launch there at least.
A settled state Europe where the worst of the regulatory upheaval is, almost, over is not the most exciting outlook though is it. A low growth grind and a hope that the gradual secular shift to online from Gen Z and younger Millennials will save us all in the end. But in many ways, that’s kind of where we are.
What we have we keep
In the UK it’s very hard to argue the fight for market share and revenue growth amongst the big players isn’t predominately one of switching and share of wallet. In Italy what we’re seeing is growth is massively dependent on persuading people to stop betting in cash and start betting online. But it took closing literally all the shops to even get a small double-digit percentage of them to do so.
I don’t have the time, and you don’t have the patience, to go through every other major European online gambling market but suffice to say the days of easy wins, and massive growth expectations are pretty much done. Where there are new markets, they are overlaid with a weighted blanket of regulatory controls that limit everything from advertising to deposits. And everyone who is growing is mostly doing so in the grey markets.
It was interesting to see Flutter International (nee PokerStars) laying out its key growth territories as Brazil, Canada, India, Armenia and Georgia. The first two are PokerStars markets, the middle one Junglee, although maybe PokerStars too, and the latter two Adjarabet. So, growth in markets through acquisition or in near regulation grey markets firmly outside of Europe.
Canada is really the last greenfield opportunity for European online gambling operators with many having a good brand presence in the grey market and a player base as similar to Europeans as they are to the US. Brazil on the other hand could still be anything and a dominant presence in the current grey market should not be taken as a freeroll into the regulated market in my humble opinion.
We don’t talk about Bruno the UK
And of course, the big elephant in the room remains the UK market. It’s not UK-centric to focus on a market bigger than the next three biggest in Europe combined, it’s just the reality of where the money is still to be made in 2022. And the UK is not looking in a very healthy state at the present time.
Yes, revenues remain high, yes many of the operators have put themselves in a good place to try and ride out the Gambling Act review and pending changes to affordability limits, advertising and slots stakes. But outside a miracle save from the UK government at the last minute logically there has to be some revenue decline if most or all of those measures come in.
There is a reasonable argument that any big restrictions on advertising might be EBITDA positive, and they certainly will be for the big firms in the short-term. But I remain far from convinced this will be a net positive for the sector and will doubtless lead to declines in new player growth and in player ARPU.
What we’re really discussing is what the level of revenue and EBITDA decline will be, not if there will be any at all. And that doesn’t feel like a market with fantastic growth prospects to me. And this is true throughout Europe to varying degrees.
Generally, although pockets of excitement exist in European online gambling, as a whole it’s a fairly depressing place at the moment. And I don’t see how that changes much in the near-term.
So what does happen next?
Well, we either continue as we are with ever shrinking EBITDA margin and ever-expanding mega-corporates sucking up “local heroes” in various markets to maintain the illusion of growth, or we find some new settled state where unit economics rationalise a little.
One potential ray of light on the horizon is the possibility of operating margin improvements, to borrow some insight from one of the smarter men in the sector. His view is this won’t just be through marketing savings, but also platform spend reductions as brands consolidate at least in an operational sense. In his own words.
While I think revenues will be set for slow growth (after a modest reduction post white paper assuming it actually happens), I do expect operating margins to improve as the benefits of cost savings and marketing reductions outweigh possible tax increases and increased media and data costs
Don’t forget most of these companies are using broadly the same operating model as in the old grey market days and just hoping a few tweaks here and there will fix everything.
Many of the executives are from those days too and the ones below them have followed in their footsteps. Low tax, low regulation, high value customers and endless growth were the order of the day for most of the 2000s and at least half the 2010s. Right now? Yeah, not so much of that. But let’s crack on with £200 CPAs, aggressive CRM and cross-sell to get those ARPUs up and hope it all works out in the end eh?
I’m sure it will. Everything is fine. Honestly…