How many e-gaming brands can a particular market sustain? This interesting question was posted recently in relation to the potential for the new US sports betting market. It is a question that European operators, existing Us licence holders, investors and affiliates should ponder as they give thought to their strategy for US sports betting. GBGC has used the data it collects for its gambling reports to assess the issue.
The original question asked “how many sizable brands can exist in a mature market? New Jersey is looking at 20+ online brands in a population of 9 million people. But what is realistic long term?”
A gambling market’s population is clearly a good stating point in assessing how many e-gaming brands it can sustain. At its extreme case, a market with no population is unlikely to be able to sustain a gambling market. But beyond that point, assessing the ability of a market to sustain gambling operators based on population alone becomes more difficult. A number of other influences have to be considered.
Alongside the population size, a measure of the propensity to gamble within that population is also required to judge the level of brands that can be sustained. Hong Kong is an informative example. Hong Kong has a population almost one-fifth lower than New Jersey but has a gambling spend per capita of US$ 566, one of the highest in the world. Yet Hong Kong seemingly “sustains” just a single gambling operator in the shape of the Hong Kong Jockey Club.
Regulation and tax
Hong Kong highlights the fact that regulation and tax will influence the number of e-gaming brands will sustain. The issue is not solely dictated by the forces of competitive supply and demand. The government of Hong Kong restricts the regulated market to a monopoly licence and charges a high tax on the monopoly’s betting activities. But the demand from consumers is such that the market could easily sustain more operators, as witnessed by the supply of unregulated gambling, despite the severe penalties for doing so in Hong Kong.
Restrictive regulation and high taxes can suppress the number of brands that a particular market can sustain as compared to what population size and consumer demand suggest it should be able to sustain. The French and UK e-gaming markets are a reflection of this influence. Both countries have similar-sized populations, yet the UK regulated e-gaming market is some six times larger (as measured by GGY in US$).
France has a high tax e-gaming environment and also prohibits casino gaming online. A consequence of this is that France only has 15 e-gaming licensees running around 20 different brands. When the French e-gaming market opened up for competition in 2010 it was clear that an operator would struggle to turn a profit, given the rate of tax, VAT and levies. Nevertheless, numerous companies still applied for licences. Each one hoped to be the “last man standing”, having seen off their rivals, and could then take a greater market share for themselves. This situation seems to have been reached, with the number of active licences stable at around 15. Those licence holders, however, have secured themselves a share of a market stunted by regulation and tax. It is also hard to turn a profit in a market which in some previous years has had an effective tax rate of 53% of gross win.
In the lower tax, fully-competitive UK market there are almost 1,000 remote gambling licences. Clearly, there is a long-tail of very small operators and brands. Behind the 10 leading brands, however, the secondary and tertiary brands do at least have the opportunity to secure a niche in a market six-times greater than the French market.
Germany initially wanted to restrict the number of new sports betting licences to 20 for a population of 83 million under its new Gambling Treaty. But Schleswig-Holstein issued 25 sports betting licences under its own Gambling Act in 2012. After a ruling from the European Commission the Amended State Treaty increased the number of licences to 35, which equated to the number of operators who had met the minimum licensing conditions. In these events and the general mess that has been e-gaming licensing in Germany, there is little evidence to suggest that any of these limits was based on analysis as to what the market could sustain.
Onshore versus offshore
The attractiveness of a brand’s e-gaming services to consumers is determined by regulation and tax. Are casino games permitted, for example, or what payout does the sportsbook offer? This in turn influences the nature of offshore e-gaming sector targeting the market and, therefore, how many brands the regulated market can sustain. In the US, some states are proposing very high taxes on sports betting licence holders, which will lessen the betting offer’s appeal to consumers. This could reduce the number of operators a state can sustain based on its population and propensity to bet.
Sizeable brands and dynamic markets
E-gaming markets are dynamic and the number of brands that can be sustained will fluctuate. New operators can launch a new product or new brand that can carve a niche for itself, succeeding for a period before competitors catch up or copy. Brands also rise and fall in their fortunes at different points in time, maybe as a result of a strategic error by management or a marketing campaign that captures the consumers attention in the short term.
Gambling consumers are also fickle and will switch brands quite happily in return for a new bonus offer or incentive. As such, the number of brands that can be sustained by a market does not necessarily equate to the number of brands that are succeeding in that market at a specific point in time – some will be at a peak, others in a relative trough.
The consolidation that has taken place in e-gaming over recent years does mean that some operators are now responsible for multiple brands. As long as operating costs are not duplicated, having multiple brands can allow them to target different segments of the market, either by brand or product differentiation, and ride out the peaks and troughs more smoothly.
In the graph GBGC has plotted the number of people per issued e-gaming licence and the total gross gaming yield (GGY) per capita for a selection for jurisdictions. At one extreme of the graph, Canada appears to have too few e-gaming licences in issue, given its population and propensity to gamble. At present, only provincial lotteries can obtain e-gaming licences in Canada.
At the other extreme Denmark and the UK likely have too many e-gaming licences in issue, strictly from the perspective of meeting the demands of their gamblers.
Interestingly, New Jersey, the jurisdiction which sparked the original question, sits in the centre of the graph in relation to its existing e-gaming sector. This might suggest the New Jersey has the number of licence holders about right for its market demand. But the performance of New Jersey’s e-gaming sector has generally underperformed the expectations put on it by many pundits, particularly liquidity-dependent poker.
For a sustainable market, the New Jersey sports betting sector should have fewer brands than are currently available for e-gaming, especially if other sports betting brands are operating in neighbouring states.
In assessing how many brands a market can sustain, there is a presumption of economically rational behaviour to create the most sustainable market, taking into account operators’ profit, government’s tax take, and customers’ value. This is not always evident on the part of governments, regulators, and operators. For example:
-Setting prohibitive tax rates which limit the attractiveness of products and discourage consumers from using regulated operators.
-Paying over the odds for a licence or taking a licence in a market where turning a profit is almost impossible.
GBGC read an interview with the CEO of an e-gaming supplier recently in which he stated:
“Our ultimate goal is to procure licences in every regulated market in which they are offered. We don’t care if they cost more than we can make there, it is all about being a full-service supplier with a truly global footprint. In some cases, the return on investment will be strong, in others weak, but our policy is not to cherry-pick”.
If such thinking is adopted by e-gaming firms in their approach to US sports betting because they have a fear of missing out and will happily endure losses, then the number of brands a market can sustain is unlimited.