Will never happen...
Is the online gambling industry bad at dealing with low probability outcomes and what might it be missing in the future?
For an industry built around assessing risk and uncertainty, the gambling sector tends to get caught on the back foot a lot. And it’s arguable the online gambling industry is fundamentally bad at assessing long tail risks.
Or perhaps it just ignores them entirely and accepts them as a cost of doing business. No point worrying about things you can’t control. But after two decades of being told things won’t happen only to see them happening, it’s not clear at all to me that is really working.
By long tail risks I mean events with a very low probability of occurring, but that are not zero probability. The recent pandemic is perhaps the most obvious example. But for the online gambling industry you could cite the US crackdown on offshore gambling, or perhaps the European responsible gambling backlash as two recent examples.
You could quite easily argue none of those were long-tail risks and all should have been predicted, but that is the point. Anything outside probable outcomes is generally not accounted for. And perhaps even the assessment of what constitutes a long-tail risk is poorly managed within the sector.
Regulation, regulation, regulation
By far the biggest impact on the online gambling industry in the past ten years has been regulation. It has gone from a minor inconvenience to the single largest factor impacting day to day performance. Tax rates have gone from 0% to 20%+, while limits on advertising, net deposits, bonusing and various other areas have been introduced.
The balance of power has shifted from an offshore business broadly in charge of its own destiny to an industry cowering under regulatory pressure. Operators cannot dictate the terms of operation any longer and have to walk within the increasingly narrow lines painted by regulators and legislators.
This hasn’t been a sudden shift, but a gradual ratcheting up of tensions with various European and latterly US markets watching, copying and in some cases expanding on the work of each other. Each market also feels the need to reinvent the wheel so you end up with a patchwork of legislation in every territory demanding considerable resource to contend with.
The net impact of all this is a broad reduction in revenues and international expansion becoming much harder. But have we really seen the worst of it or is more to come?
What happens if a market bans online casino?
European regulators have drawn a clear line in the sand over online casino in recent years. It is viewed as the “danger” product, and one that requires far more restrictive legislation around product, deposit limits and marketing. So it’s not out of the realms of probability for them to go one step further and ban it altogether.
France has never legalised online casino, nor has Poland, and Germany has only legislated for online slots in its initial online gambling regulations. There is no doubt many of these laws are drawn up to protect land-based interests more than player safety, but the latter is a much more compelling case to lawmakers.
Could this happen in a market such as the UK or the Nordics? It feels very unlikely, but you would be a brave man to say it is totally impossible if some other European markets move first and the regulatory momentum begins to build.
What happens if an RG scandal hits in the USA?
There are two lines of thought regarding the US experiencing a day of responsible gambling reckoning. The first is it’s a near inevitability with the market broadly following a similar development to Europe, and the second is the cultural differences are too big for it to ever happen in the land of the free (market).
You can make a plausible case for either, and the idea of imposing affordability limits on the great American public does feel deeply unlikely at the present time, but that is kind of the theme of this article. Things always feel like they can’t happen until they can. And there are some big weights bearing down on the US market that could suddenly tip the scales.
Player values, and average spend levels, are very very high in the US market. There is also very aggressive marketing to the 18-30 age groups, not least with sponsorship of college sports, and a culture of machismo and reckless betting in some elements of sports betting media. This is not an ideal scenario for avoiding some responsible gambling backlash.
The combination of a deeply conservative culture in some states, and no long track record of regulating online gambling means a sudden U-turn does not feel wildly improbable. All it really would take is the media to take after the issue with some support from state level politicians. This doesn’t need to be a national scandal to stop the industry in its tracks.
And at the scale the US market is already at, you wonder if it just becomes a numbers game eventually. At some point the industry gets too big to not fail…
What happens if there is a talent exodus in the UK?
You could argue this is already happening, with the online gambling sector becoming a less attractive place to work with each passing year. Public sentiment towards gambling has certainly shifted to a more negative slant, company valuations (and share options) have slumped and the years of endless growth seem behind us for now.
But there is still a lot of tech and senior management talent in this sector and it is vital the industry keeps hold of as many of them as possible if it wants to continue to innovate and grow. The alternative could see a brain drain to other sectors or other markets, with the US already acting as a bit of sponge to soak up some of the younger more ambitious talent in this sector.
What would remain would be an industry struggling to keep up and increasingly becoming a victim of the M&A monster it has been feeding for so long. The end of the British Empire in online gambling could be upon us? You know it really might be.
What if there is a run on the bank?
This is the most obvious risk, and really needs its own article to discuss properly. But what if there is a freak set of results that leads to a run on the bank the industry simply can’t afford to pay out. UK horse racing nearly provided one a few years back, and while soccer or the NFL is structurally less likely to do so it’s not an impossibility.
Millions of bettors placing similar or identical accumulator or same game parlay bets that all come in would cause carnage. There are levels of long-trail risk taken on by trading teams most weekends that are enormous, but are considered so unlikely to happen they are just seen as a normal course of business.
As the industry continues to grow and as recreational betting becomes an ever bigger part of the picture, however, the impossible could become the improbable and that could create some very nervy moments.
What if someone solves poker?
Some forms of poker are already solved, but the big target of no-limit hold’em is still hanging on in there and sites are scrambling to protect players from the various tools that exist to “solve” for the optimal decisions in many situations. But at some point the game may reach the stage backgammon got to many years back where it is a de facto solved game. So what then?
This is something many smarter minds than I have already thought about and are working on solutions for, with the most obvious being ensuring it is a human and not a machine you are playing against. But what if operators leant into it? What if they turned poker from a peer-to-peer game into a game against the house? What if they became the bots?
Solving poker likely throws up a number of challenges but also some more limited opportunities.
What if someone “solves” sports betting?
This feels less likely, and obviously in totality is basically impossible. But there are several potential ways there could emerge partial solves that make life very difficult for operators. The point here isn’t to extrapolate for what they could be but to raise this question: what do you do if suddenly all your bettors are sharp?
I don’t think operators or traders have an answer to this question and perhaps it is one they should be ready for in the mid-term. Player education is about to go up several levels as the US sport betting market expands and simple tools that ensure players are betting optimally, or as close as matters, are by no means improbable in my mind.
What if a new user experience changes betting?
OK this is obviously so nebulous that it might as well say “what if something happens that does something”, but the point is more what happens if the UX changes to something unrecognisable from today. Everything about sports betting is much the same as it was in the late 90s just a bit shinier and sexier. But what if that was no longer the case?
What will that look like? Will the current generation of operators be able to catch up? Do they have sufficient product and market diversity to recover if there is a paradigm shift in product? A technology shift, say to blockchain or metaverse or something as yet made into a buzzword, would probably be easier to deal with than a fundamental change in how and why bets are placed.
But I guess ultimately it comes down to one final question. Should they even worry about it when they likely can’t do anything to stop it anyway?
Well that’s kind of the point isn’t it…
Just as a footnote, I received this feedback from a senior executive in the sector who knows far more than I ever will so thought I would add it in for context.
Nearly all of these do get consideration particularly in the bigger, more professional companies. If you are listing or listed you need to lay out all of the risks and the solution in many cases is ‘diversification’.
Of the risks you mentioned, the only two that I think aren’t really valid are the solving poker one (too small and if it didn’t exist most of the money would go elsewhere) and ‘solve sports betting (impossible as you say) - though some sort of minimum bet law might make life slightly more challenging.
Regulation is obviously the biggest one which is a high likelihood rather than long tail risk. It’s interesting though that spend per head in Australia is highest even without casino.
One interesting one you didn’t mention, that is getting a lot of discussion is whether todays young people get their gambling type thrills elsewhere either through gaming or crypto ‘investment’ or something else (not regulated as gambling). Personally think this is unlikely but reasonable people disagree.
For what it’s worth I don’t agree that poker is too small or that the money goes elsewhere as such, but that is another big article in itself. As is Australia and its very very weird gambling market. Two to add to the list!