Winning Post: What Google giveth, it can taketh away

Industry strategic consultancy Regulus Partners breaks down a week in which Google wades into sports betting advertising in the US, and the scrutiny of safer gambling initiatives in the UK shows no signs of slowing down. 

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US: sports betting – still searching for the answer?

This year’s G2E set out the stall for sports betting in the US. Optimism abounded, some long-term forecasts were increased and former NJ governor Chris Christie opened the expo with a very clear message that NJ’s (not entirely) free-market way was the right (indeed the only) way to regulate– especially at the expense of Pennsylvania and Illinois. To add cream to the cake, Google removed its ban on online gambling advertising in the US (for regulated operators in those states which have legalised): a huge shift in a key (and selectively reticent) distribution stakeholder that might widen mass-market appeal. September (online) growth stats are also about as encouraging as was reasonably possible to expect. There is therefore much to fuel this optimism. However, there is still a big danger of false many starts and dashed hopes, in our view – especially for those hoping for ‘more New Jerseys’.

Google’s decision to allow gambling advertising in US states (as well as Colombia, Nigeria and – somewhat after the horse had bolted, Kenya) is potentially very significant on two levels. First, on the operational level it allows a proven method of advertising that can help (with uninhibited payment processing: still an issue) to crack the mass market; what has been abundantly clear so far is that non-DFS brands have struggled with this, so Google’s decision may help to ‘level the playing field’ somewhat from next year. Second, on the strategic-reputational level, having businesses like Google playing even a supporting role in domestically regulated online gambling can be a huge boon to credibility (e.g. in California); though we would caution that what the search engine giveth, the search engine can taketh away – the support of big business with lots to lose (similar to banks) can be withdrawn if the sector looks weak on governance and such a withdrawal could raise further tough questions: the risks have been raised as well as the rewards.

September trading data from NJ and PA reinforce, if it were needed, the relative power of mobile vs. in-venue, especially if those venues cannot easily command lots of mass-market footfall. The trading data has also shown two other things, however, which perhaps does not sit all that well with the accepted narrative of what to do (certainly not that adopted by former NJ governor Christie, which likely echoes many operational participants). First, PA achieved handle of US$195m vs. NJ’s US$445m – the latter up 140% on last year. NJ is therefore clearly growing into the mass market from a relatively concentrated start (very attractive for sustainability on a commercial level but also likely to attract considerably more fiscal-regulatory scrutiny than a niche), while PA is already ahead of NJ (by 6%) in terms of total September handle in the first year of launch. However, despite the fact that over US$450m in new handle has been created in just two states and the number of NJ apps has grown from 8 to 17, FanDuel and DraftKings still dwarf rivals. Certainly, the legacy user base, the ability to more broadly advertise (especially in New York) and very big marketing budgets all have a role to play, but the inability of other operators to materially cut through – even with a much-hyped new sports season – yet is very telling.

These dynamics matter given the opprobrium heaped upon PA by NJ’s former governor. PA’s high tax rates are not adversely impacting top-line growth (there is no reason that they should), and the idea that NJ’s low levels of tax is leaving plenty of room for R&D rather than simply bigger marketing budgets is questionable at best (certainly at this point in market development). Equally, while NJ’s model provides more choice than PA in theory (albeit not the free-market logical conclusion of splitting sports betting licences from casinos: one must pick one’s form of protectionism based upon one’s base), this is not meaningfully cutting through in practice, nor is it slowing the market. On this basis, not only does PA’s approach simply create a mirror of the commercial reality in NJ by other regulatory means (with the state rather than ad men as the financial winner), but IL’s proposed 18-month purgatory for DFS providers (the subject of more scorn) might actually have some egalitarian and market levelling sense, given the clear and even overwhelming early mover advantage the DFS brands have demonstrated online elsewhere.

Obviously different state models have different strengths and weaknesses; and where there is no online, then the weaknesses are likely to outweigh the strengths (if a key KPI is generating sportsbook revenue rather than venue footfall). However, the idea that all states need a low tax model to function is highly questionable in our view, especially for those states that don’t get to tax a wealthy neighbouring metropolis (and low GGR margins are completely irrelevant here to the economics of sports betting so long as no part of the cost base falls on handle). Indeed, as NJ demonstrates the extent of mass-market adoption, low taxes may prove counter-productive to a sustainable state-by-state model (see WP’s passim for the economics of this). Similarly, the idea that states need to provide lots of consumer choice may become true over time, but it is not what current customer behaviour is demonstrating. All of those market hopefuls with material market share projections have yet to demonstrate that they can shift material online spend away from the DFS operators – even in an exponential growth environment where the DFS players are reliant on largely European sportsbook technology. Further, in an environment where blended tax rates might (are likely to, in our view) trend upwards and marketing competition is likely to increase, profitability still looks a distant dream for most, if not all – an issue which might start to have structural implications if there aren’t many more ‘New Jerseys’ created…

UK: In Parliament – Out of Africa

The influence of Carolyn Harris on the gambling policy debate in Great Britain is beyond doubt, but this week it was revealed that her power is an international phenomenon. On Wednesday, politicians from Kenya visited Westminster to meet with the campaigning Labour MP for Swansea East and fellow members of her Gambling-related Harm All-Party Parliamentary Group.

We do not know what was discussed but suspect that it was not all one-way traffic. As well as an opportunity for Harris, Iain Duncan Smith (Cons, Chingford) and Ronnie Cowan (SNP, Inverclyde) to impart their wisdom, it seems likely that messages may have been passed back about the use of English football to promote betting in Kenya and possibly the activities of certain British licensees in that country.

The globalisation of the betting and gaming industry (particularly via remote channels) means that governments and regulators are increasingly talking to one another about ways to accommodate new technology within swiftly outmoded legislation. Over time, we may indeed expect others to beat a path to Harris’s door.

We currently have a House of Lords inquiry into gambling, Labour Party plans for a new Gambling Act, an All-Party Parliamentary Group inquiry into online gambling harm, a Howard League for Penal Reform committee on problem gambling and crime, various local authority strategies to tackle gambling harm and a never-ending stream of Gambling Commission reviews. Some might argue that the last thing the subject of gambling regulation needs is yet another (unconnected) instrument of political scrutiny. However, the Bishop of St Albans is not one of those people and this week his Private Members Bill to amend the Gambling Act 2005 – to ban online gambling “using money obtained on credit” and to banish ATMs from casinos, arcades and bingo clubs – successfully made it through the ballot stage. Such bills hardly ever become law but they can influence policy (notably, the bishop’s previous Private Members Bill in 2016 sought to tackle machines in betting shops).

Online gambling put in an appearance in a Commons debate this week on the subject of ‘public services’. Amidst heated discussion of knife crime, policing levels and spending on education, Anne Main, the Conservative Member for St Albans stated that her constituents (presumably one episcopal constituent in particular) were “very worried about online gambling, online self-harm and some of the darker webs out there” and were likely to be “puzzled as to why the Opposition parties will not support the Queen’s Speech” (which focused on internet harms).  Gambling’s usefulness as a political beachball is not lost on MPs and Mrs Main was swiftly supported by her former Prime Minister, Theresa May (Cons, Maidenhead) who claimed – perhaps in defence of her political legacy – that Britain was “leading the world” in protecting young people from the dangers of the internet.

In Holyrood, First Minister Nicola Sturgeon acknowledged concerns raised by Glasgow MSP John Mason about “the level of gambling adverts that young people, in particular, are exposed to” and used the opportunity to call for legislative devolution of gambling to Scotland. As we have commented before, attempts to deal with online gambling regulation at the level of the local authority (Glasgow City Council in this case) without clear leadership at a national level are likely to result in chaos. Meanwhile, entirely reasonable attempts to devolve gambling legislation to Scotland while at the same time trying to bring Northern Ireland under the UK framework illustrate just how confusing matters have become.

The former barrister and sometime TV presenter, Lord Taylor of Warwick (non-aligned)asked this week what plans the Government had to “address the number of children who gamble” (presumably in anticipation of the forthcoming ‘Young People and Gambling’ report from the Gambling Commission). Of course, according to regulatory data, the majority of gambling by under-18s appears to be legal (National Lottery products, low-stake gaming machines and private gaming and betting with family and friends). If the aim is to make meaningful reductions in gambling by children (as distinct from illegal gambling by children) it is likely to require a significant change to the National Lottery as well as the intervention of the State in the private lives of its citizenry.

Elsewhere, Conservative MPs, Sir John Hayes (South Holland and the Deepings) and Philip Davies (Shipley) probed HM Treasury on the possibility (remote in our opinion unless a robust benefits case can be made) for a reduction in pools duty.

There does not appear to be any gambling business scheduled for next week – although that is rather dependent on how one views the nature of Britain’s withdrawal from the European Union. Looking further ahead, the Bishop of St Albans has secured a debate on ‘online gaming and gambling’ in the House of Lords for 11th November (no sign of any armistice in the war on gambling).

Australia: regulation – “Not Amused”, Crown’s Anni Horribililes continue

Employee whistle-blowing over alleged money-laundering, lurid stories in the press about a UN-sanctioned arms dealer playing for high-stakes in a private gaming room – this was another bad week for Australia’s Crown Resorts.

Crown, once a star performer within the Packer media and entertainment empire has endured a shocking few years that has included yet another retreat from the US (the aborted Echelon integrated resort casino project in Las Vegas), the arrest and imprisonment of employees in China, allegations of graft over the granting of its Bangaroo casino licence in Sydney and suggestions of misdemeanours at home.

While not all of the claims have been substantiated, the litany of issues does suggest that all is not well at the company. Given the growing influence of the anti-gambling movement, such mis-steps can prove extremely costly; and as we see on almost a weekly basis in Europe, operators are increasingly acting as hand-maidens to their own misfortune.

 

Content provided by Regulus Partners

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