The trouble with forecasting
Turns out you do need a weatherman if you don't know which way the wind is blowing
Few things are a worse guide to the future than online gambling forecasts. From early 2000s CEOs talking about the unassailability of US offshore sports betting, to PokerStars management offering a similar view on poker ten years later, regulatory hubris has long been a big feature of the sector. Meanwhile we’ve seen game-changing products rise and fall, and barely loved products come from nowhere to dominate the sector.
Even in the near-term, we often see substantial variance from year to year on growth trajectories. There is, of course, always a good reason, but if you want a stable consistent investment then history suggests online gambling probably is not for you. This is an industry where giants can rise and fall in a couple of years, where slumbering firms can wake up with a cry and the loudest can suddenly be silenced.
I admit to being among those who have made dreadful forecasts in the past. It’s incredibly easy to do, and the reason for this is something nobody really likes to admit. The online gambling industry is an over-the-top service. It is a slave to technology, sports and regulatory shifts. It is no more in control of its own destiny than it it is control of the sporting results.
Going over the top
Now this is not an existential issue, and none of these factors prevent the industry from making money now or at any point in the future. But all of those factors massively impact the way money is made, the amount of money that is made and who makes it. At the minute in the US that’s mostly regulators, media firms, sports teams and lawyers but that will change.
This is an industry where it’s possible to make money, even at very high tax rates and restrictive regulatory conditions. You only need to look to operators in France or Poland or Portugal for proof of this. US operators will make money, lots of money, in good order. But their route towards this is probably nothing like as predictable as some would like you to believe.
Weirdly that’s not particularly due to the players. They tend to be more predictable than most other external factors. Gambling spend is notoriously recession resistant, and while it remains to be seen if that holds true post responsible gambling changes in Europe it likely will. People like to gamble. They have an amount of money they are comfortable spending on it.
ARPUs and LTVs aren’t fixed, but they are reasonably predictable and consistent. But what is not in any way as predictable is player loyalty. Churn is a huge thing in online gambling and something that’s infrequently discussed at the investor or media level despite huge acquisition campaigns each year and fairly slowly rising numbers of total actives. You’d think someone would connect those dots…
Nothing lasts forever
Most players you acquire won’t stay. This is especially true in online casino but is a big factor in sports betting too. Churn isn’t just about losing players entirely too. It might be losing them as a casino player but keeping them for sports, it might be losing them for most of the year but seeing them come back for football season, or it might be just losing most of their gambling spend.
Yes you might have kept those players from 2018 active on your site for four years but how many of them are now active and spending elsewhere too? That’s completely normal for any commerce business you will say, and you will be right. But at the heart of the online gambling model is the idea that nothing lasts forever.
How do we squeeze the most revenue out of the higher value customers and how do we keep them around for as long as possible? The focus is much less on how do we make the overall customer experience as good as possible for all and naturally benefit from high value customers coming along for the ride. It is much more about directly targeting those players.
Players have a limited lifespan, most first time depositors will never be second depositors and what we need to find it the select few big spenders who make this whole expensive marketing business worthwhile. This is written into the DNA of the European sector. It informs and directs almost everything that is done, from product features to CRM campaigns.
Now the definition of high value will change depending on the firm. A recreationally high volume operation could see high value as £200 a month in spend, while a small online casino group might not see it until ten times that amount. But this weighted approach to CX does create inherent instability in the model and makes predicting the future harder, as you’re slaves to the capriciousness of a smallish number of customers.
The way the wind blows…
But that is as nothing compared to the capriciousness of regulators. The ability of legislators to take a scythe to EBITDA margins through tax rates and fees is well known and remains the single biggest impact, but there are far more ways in which things can quickly and meaningfully change. Marketing is a very close second, with online gambling in many ways a digital marketing industry at heart.
Changing the manner and the channels on which operators can advertise can have a enormous impact on some businesses. Generally there is a degree of specialisation within even the largest companies and some may be more focused on broadcast and brand, others on affiliates and PPC and some others on influencers and social media. A simple re-write of the T&Cs at one of the major networks can be devastating.
Legislators can also ban advertising entirely, or heavily restrict its availability, they can place limits on the tone and content of marketing or they can accidentally create a weird pseudo-marketing environment where everyone is pretending not to advertise gambling really. The world of dot net ads that has existed since the early 2000s never ceases to surprise me with its ability to baffle regulators and legislators alike.
The danger in proximity
Product changes can also be damaging. Regulators can suddenly decide they don’t like auto-play, or being able to deposit from the bet slip or any number of random issues. And equally the big platforms such as Apple and Google can make sudden changes in how your product has to work that you have no choice but to comply with. None of this will generally be in the operators purview, and very little of it can accurately be predicted or planned for.
Sports betting also has the unique and complex issue of not owning or controlling the games or content its product relies on. This hasn’t really been much of an issue to-date, with there being sufficient separation between church and state and thorny issues such as a sports betting right, or integrity fees if you will, being squashed down when it rears its ugly head.
But the US and other markets are starting to push sports and betting very close together. Uncomfortably close in some cases. And while that creates opportunities for both parties it also creates real risks. When your fate is now dependent on the sports leagues continued happiness with your role then you better make sure you don’t, oh I don’t know, cause a huge media scandal involving college students and gambling. Just for an example of something that obviously could never happen…
What is your point?
So what really is the point of all this? Things are hard to predict because so little is in the control of the sector so we should just…not try? Assume massive volatility? Ignore it and just carry on as if it didn’t exist? Well to be honest you could make a reasonable argument for all of those but the point I want to try and make is simple. Zoom out.
It’s far too easy to get trapped in the online gambling bubble. It’s a unique industry that doesn’t feel or act like most others, and the feeling of control that comes from having massive amounts of data on your customers can be seductive. But that is only part of the story. This is an industry that absolutely depends on other industries to exist. Not to thrive, but to exist.
Zoom out. Look at the broader media world, the tech sectors, sports, especially at what’s being written and said about gambling in the mainstream media, what the lobbyists are saying and what the political mood and trends around the subject are. In many ways these will dictate the future more than any deal struck or operational efficiency achieved.