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E-gaming: mergers, margins and money
Wednesday, September 26, 2018, by Lorien Pilling, comments 0

The British punter has never had such incredible betting value as they do today.  The pay-out ratio to punters has never been so high.  Government policy seems to be based on the premise that this will last forever.  The nature of competition in e-gaming means your competitor is just one click away, so operators are absorbing costs such as regulation and increased taxes.  The Government has thrown a lot at the sector, believing that the operator will simply continue to absorb the costs and not be able to pass it on to the consumer.


But will it last?

David Smith the economics editor of the Sunday Times wrote an interesting article (2 September 2018) on the “Amazon effect” on inflation.  He said that Amazon had helped keep prices, and thus inflation down, and this was confirmed by Jay Powell, the head of the Federal Reserve, at a presentation to the Senate banking committee

So far as gambling is concerned the internet has been the main driver in lowering margins and thus increasing the value to gamblers.

But a further study by Alberto Cavallo from Harvard Business School (More Amazon effects: online competition and pricing behaviors) said that online retailers can change prices much quicker than their high street counterparts and this forces them to respond by also cutting prices. Conversely as higher prices take hold through increases in regulation, taxation, energy or wages, the internet operators can adjust more quickly.  But lower prices and lower inflation could never be permanent.  There is a limit to how far margins can be squeezed.

E-gaming is now looking down the barrel at the potential of limits on stakes, higher taxes and regulation.  The operators have been busy consolidating, trying to save costs through scale of “synergies”.

Theoretically consolidation on the scale seen in e-gaming should, at some point, affect pricing. 

A decade ago, Betfair was the main driver in driving margins down but not anymore.  The prices offered by the major internet bookmakers are better or equal to Betfair with more liquidity available to satisfy large staking customers.  Indeed, Betfair has become a sportsbook with an exchange attached, rather than primarily a betting exchange.

The consumer, however, is finding life tough. The UK workplace pension scheme now has 17.7 million people actively participating and last year £90.3 billion was saved.  This is a lot of money taken from discretionary spending.  Nationwide Building Society stated recently that after analysing its customers four in 10 live on under £6.60 a day after they have paid their bills.

Since 2011 PPI compensation has cost the major banks £36 billion, money directed to the consumer’s pocket. I suspect that the recipients spent most of the windfall on consumption.  That significant boost to the economy ends on 29 August 2019.

At the same time the Government is currently taking more in tax than before. According to the Adam Smith Institute UK taxpayers will give over £ 700 billion to the Treasury this year, 40.65% of net national income.

There is good reason for this.  The Government is building reserves to cover for any eventualities caused by Brexit but also to give back to the people prior to an election (scheduled for 2022).

My conclusion is that margins will for the next 12 months remain tight as operators remain competitive in a market where the consumer has less disposable income. As the consolidation phase starts to wane there will be less supply, and the consumer will start to feel better off toward the election, giving rise to better margins.  

As margins increase we may see new entrants to the sector but the barriers of entry are now quite high, not from capex, but the cost of bringing a brand to market. 

It could be argued that everything bad (taxation and regulation) has now been priced in to the share price of the major gambling companies. However, it will pay to hear what the forthcoming Budget has in store.