Growing Up Is Hard To Do: Maturity and Consolidation in E-gaming
A state of maturity is a good attribute for certain things – cheese, savings bonds, and potential husbands, for example – but in a business sector maturity is not always so desirable. With the e-gaming sector seeing a number of acquisitions and mergers in last 18 months, it does appear that the sector is ‘growing up’. Such a phase of consolidation has implications for all those involved in the industry.

As ever in the gambling sector, regulatory change has been one of the main reasons behind this consolidation and move to maturity. In the US, the ever-tantalising prospect of e-gaming regulation has seen casino gaming suppliers snapping up European internet gaming software companies. WMS acquired Jadestone Group as part of its strategy to create Williams Interactive LLC, for example, whilst Bally Technologies acquired the B2B division of Chiligaming in February 2012. 

In Europe, the fragmentation of the region into separately licensed jurisdictions has made the scale of e-gaming businesses important as they try to cope with the increased regulatory, tax, and operational costs of holding multiple licences across the continent.
When the plan to merge Bwin and PartyGaming was announced in 2010 the companies stated the merger would “create the world’s largest publicly listed online gaming group – a group that will be ideally positioned to take advantage of the rapid consolidation of the online gaming industry and to open up new markets around the world”. 
Norbert Teufelberger, now Co-Chief Executive Officer of bwin.party, explained at the time: “The online gaming industry is going through a phase of consolidation, making market players’ size and geographic diversification more crucial than ever.”
In the online poker sphere in particular it was inevitable that consolidation would have to happen. With a revenue model that depends upon sufficient player volumes, there were always going to be brands that did not reach the necessary critical mass to survive on their own. These brands were able to join wider poker networks, and again there were networks that could offer greater player liquidity than others. 
Throw into the mix the fact that two brands – PokerStars and Full Tilt Poker -chose to continue operating in the biggest poker market, the US, without competition, thus giving them a dominant position, and there was always going to be a shake-up in the sector. With these two brands now under the same ownership, further rationalisation is expected in the rest of the sector.
These concepts of maturity, rationalisation, and consolidation are not necessarily beneficial when applied to the internet gambling sector. They suggest a ‘solidifying’ of the sector, a move to make it more ‘corporate’. For a sector that has been characterised by innovation, nimbleness and technological development, the idea of becoming more corporate does not sit comfortably. Being more corporate does not necessarily mean being better, more professional, or more efficient.
In addition, a lot of corporate mergers and acquisitions simply do not succeed, either in the gambling sector or in the wider corporate world. 
One recent example of this was the acquisition of the Entraction poker network by IGT in May 2011. IGT paid approximately US$ 115 million for the Swedish poker company and at the time of the deal all concerned were effusive as to what a good thing it was for everybody.
Entraction’s CEO Peter Astrom believed the deal “represents a fantastic opportunity for our employees, customers, and shareholders alike”, whilst Patti Hart, CEO of IGT, stated “The addition of Entraction advances IGT’s position in legalized Interactive gaming markets. It strengthens our interactive portfolio by adding poker, bingo, casino, and sports betting. This combination will drive enhanced value for our global customers and partners”.
Unfortunately this ‘fantastic opportunity’ did not materialise for everyone because just over a year later IGT announced the closure of the Entraction poker network. 
A spokesman from IGT explained, “As part of our regular business process, we have been evaluating our resources, products and markets from a commercial and compliance perspective. As a result, we are consolidating our product development, allowing us to combine a number of locations and focus on the most attractive opportunities. Change and uncertainty in European market conditions have diminished the expected returns in certain real money wagering products.” (author emphasis). Here, consolidation has been dressed up as a good thing, a strategic decision, but it was not really good for the shareholders of IGT, operators using Entraction’s software in Europe, or players who enjoyed their poker in Entraction’s online poker rooms.
Another common feature of maturing business sectors is going public – the IPO. 
Again, this is often presented as being a good move for companies, opening up new financing options, raising funds for acquisitions and increasing the status of the company. But in many instances the IPO is of most benefit to a company’s founders, enabling them to get some money out of the business, and the banks which handle the IPO. In the gambling sector the IPOs of Betfair and the new Bwin.Party entity have not been a success as measured by the share price performance. 
But a look at the IPOs of Facebook and Zynga show that this is a problem not exclusive to the e-gaming sector. There is also the sense that once a company goes public and becomes beholden to shareholders and investment funds senior executives in the company can lose focus on running the business and developing the services their customers want. Instead the executives are focused on appeasing Wall Street or City analysts and paying more attention to the share price than the operation of their business.
This might all seem an irrelevance to affiliates, too much to do with ‘the suits’ and the corporate world to have any influence on their day to day work. But as e-gaming firms mature and become more corporate they also become more averse to risk (perceived or actual), especially if they are, or become, public companies too as part of the maturing process. As companies take fewer risks with regulation they withdraw from the ‘grey’ markets. With fewer companies operating in fewer markets it could be argued there will be less demand for affiliates, so that sector undergoes its own process of consolidation.
The process of consolidation through merger and acquisitions means the e-gaming sector is left with fewer operators. 
There are several knock-on effects of this process for affiliate marketing. First, there is the disruption caused if a software supplier withdraws their services to certain markets when it is acquired by new owners. This can cause problems for an affiliate’s customers if they cannot use the software or play the games they prefer. They might wish to switch to a different operator. The affiliate might also have disruption to their business and increased costs if they have put time and effort into promoting a certain brand in a market which suddenly withdraws from that market when a new owner ‘reviews the business’ they have just acquired.
A decreasing number of e-gaming operators means those that remain are in a stronger negotiating position with affiliates. If they choose, the operators could reduce the revenue share paid to affiliates in certain markets because they know that the affiliates do not have as much freedom of choice to work with other brands as perhaps they did in the past. As maturity and consolidation lead to larger, more risk averse e-gaming brands, there is also the possibility that these brands only wish to deal with larger, more ‘corporate’ affiliates and conduct greater due diligence on all their suppliers, these affiliates included. 
Naturally, this trend could put pressure on smaller affiliates as they are squeezed from the market because they cannot reach the scale and supposed corporate professionalism required.
Clearly, a business sector and individual companies within it cannot stay in the start-up phase forever and avoid growing up. There are, indeed, some merits associated with maturing, not least that it brings greater status to the sector and makes it harder for governments to dismiss. But equally affiliates must recognise the growing pains associated with the consolidation process and the potential disruption it can cause to their clients, operations, and ultimately their profitability.
  

This article first appeared in GPWA Times in January 2013