The UK is not OK
Things are not looking bright for the small island off the French coast despite what the management teams will try and tell you
After a first half of steep falls and a third quarter with no expectation of a return to growth in the near-term the UK is the biggest market nobody cares about. It barely got a mention from Flutter, Entain mentioned it almost in passing and investors could not be less excited about its growth prospects.
But things aren’t that bad are they? The gambling act review white paper now looks like being a much softer landing, most of the big changes have already been made and we’ve now got a sustainable and exciting technology led sector that will continue to innovate and improve the customer experience. So good right? Right?
Well the operators still seem fairly bullish, on the surface at least. There is talk of a busy World Cup at the end of the year, a return to single digit growth in 2023 and less dark skies ahead of us. It’s less hubris and more an in-built expectation that a market that has always managed to find a bit more can continue to do so one more time.
The question really is who is it going to come from? Existing players spending more money? Why are they going to do this without any significant product innovation and with a much tighter safer gambling regimen? If they didn’t want to ramp up spend the last 10 times you asked them it feels fairly punch to think they will next year with 6% interest rates.
Growth? What growth?
Perhaps then a big influx of new players? This would be players who have somehow not seen a gambling advert in the last 10 years, didn’t set up an account during Covid and who have become gambling converts during a period of fairly intense negative media scrutiny. Good luck with that one. It’s definitely viable there will be more land-based migration and there is always a new slate of 18 year olds but it is going to be fairly slim pickings out there.
Well what about high spenders coming back into the system? Spending a few months with sub standard offshore products or black market bookies before swallowing their pride and emailing off a bunch of bank statements to a board compliance executive in Leeds. To be honest this isn’t especially implausible, but there will still need to be fairly strict controls on their spend relative to income and it is most reasonable to assume this will be a trickle not a flood.
Alongside all of this you have the counterweight of negative pressures on acquisition, retention and spend levels and the effects that are already being seen in the UK market. Player numbers aren’t really growing and spend levels are falling. The same or fewer number of players are spending the same or less on gambling. This is due to a combination of regulation, macro-economics and in my view some small element of gambling just not being as “fun” as it used to be.
But crucially none of these pressures look like letting up in the near future. In fact regulation looks like it may be heading for the worst outcome of all. Stasis.
Regulatory stasis
Gambling reform campaigners really want the white paper. The industry really wants the white paper. The government, however, seem less enthused about the whole affair and when it finally does see the light of day you suspect it will be heavily watered down and not change a great deal from where we are now. Which is good right? Well….
What remains is where we are now. Where everyone is afraid of doing the wrong thing without any real clarity about exactly what the wrong thing is, a Gambling Commission increasingly fierce in its desire to control operator behaviour and a real imbalance between operators trying to play by the rules and those trying to bend them as much as they can get away with. It’s a mess and it makes plotting a sensible strategic course hard.
It is possible some of the big operators will roll back some of their safer gambling measures if they feel they can push back harder against a Gambling Commission which no longer has the mandate from government to hack away at the legs of the sector. Could we see legal challenges? I personally think it’s at least a 2/1 chance and it could even be from one of the big boys.
But to spend two years putting in place gambling controls and saying how you agreed they were needed only to throw them out of the window as soon as you can get away with it is a fairly punchy position to take. You’d not be shocked if it happened though. But even if it all comes to nothing, there is still a lasting impact on the sector.
Sorry, I work in gambling
The general public’s view of online gambling as an industry is also another risk factor. Saying you work in online gambling almost carries with it a default apologia these days and when you work in a business that requires top level tech and marketing talent that is a little problematic.
This potential talent drain tied to a maturing industry could easily create product roadblocks. Everyone basically looks the same these days, and most betting and casino apps are fundamentally identical with the differences in the margins. It’s hard enough to innovate as a start-up in this sector never mind as a legacy operator on a platform built 20 years ago trying to reinvent yourself on the fly.
And it’s hugely risky. What if you get it wrong? Much easier to keep plodding along keeping parity with your peers and doing just enough to stop the dreaded decline. And perhaps that really is where the market is now? Are we just looking for gold under rainbows that doesn’t exist? The UK industry is already very large and very profitable. Even if it does face ever more threats.
Black market clouds
One of those are new operators that have come through almost as a by-product of regulation that could act as headwinds, namely a rapidly developing black market that the regulator doesn’t appear to be on top of. While I don’t want to overstate the size of this black market it’s no longer insignificant and if revenues start to become bigger you will see some more serious players enter the fray.
At the moment it’s really just the dregs of the offshore world and some amateurish bookmakers taking bets from higher stakers over whatsapp either not realising or not caring they are breaking quite a lot of laws in the process. There is a lot of anecdotal evidence of bettors who can’t or don’t want to pass affordability checks seeking out these options at the present time and that is a market that can only grow without some major enforcement attempts in the very short-term.
What will probably happen is it’s just left to grow in the dark like mould until it becomes something that is too big a problem to ignore. And by then of course it will be too late. Such is the way of things in the online gambling world. In the meantime though the industry faces an even bigger challenge of reshaping itself for a new generation of betting.
The great reset
It sounds trite, but this really is an era of major change. The Covid and Gambling Act review chaos means it’s easy to dismiss what is happening as short-term disruption but that is to miss the existential impact regulation has had and is having on the UK online gambling industry.
The old days are not coming back.
This is a new world of lower ARPUs, higher player numbers, different competitive challenges, higher costs and a much less glamorous industry perspective. The dual pressures of regulation and a maturing market are going to either create some new diamonds or just crush the sector under their combined weight. And it’s probably not evens the pair to be honest.
As one industry veteran told me, this will be a disruptive twelve months for the sector.
Going to be a very interesting year next year. Rates will heap pressure on firms carrying around piles of debt, costs across the board are going up 20-30% and you have a consumer recession on top. Smaller firms are in a lot of trouble. It’s a closed shop now and it wouldn’t be a big surprise to see some further big M&A activity as the pressure on the cost side will weed out inefficient operators pretty ruthlessly.
At the same time the industry is saturated with executives who have been hugely successful running strategies that don’t really work anymore, managing teams who have been taught to do things the same way. Adjusting to meaningfully lower player revenues and a newish marketing environment is not an easy task and is going to test a lot of operators over the next few years.
Rebuild or patch it up?
Perhaps though we are trying to solve a problem that doesn’t really exist. Maybe this is the market now? A huge, very profitable business that faces a low growth outlook but will continue to fire out cash like a fire hose. But that’s never going to satisfy the markets and investors.
We have everything we need and it’s not enough. We want more. More growth, more revenues, more market share. And that is not coming without some fairly radical reinventions of operating models and gaming and betting products. For that we really need new blood at the top of the big firms and people who aren’t tied in to existing industry wisdom.
More of the same is going to still work, not least in markets that are relatively greenfield. But simply saying “let’s go do Africa and esports” does not count as breaking free of industry and operating model consensus. It seems reasonable to say the UK industry needs to stop looking externally and think more radically about its own future. The big question then is whether the UK is a fixer upper or a new build? It’s certainly starting to feel a bit like the latter.