Regulus Partners begins the week by looking at the highly anticipated reopening of UK casinos and the law of numbers behind the rise in betting on esports.
Betting on esports: the law of small numbers
Tucked away in the detail of the GB Gambling Commission’s latest (May) data on customer behaviour and revenue patterns during lockdown is a breakdown of revenue derived from betting on esports. We should caveat that when we get to this level of granularity, endemic data accuracy issues can be quite distortive. Nevertheless, the broader patterns stack up vs. what we were expecting (betting down c. 44% on 2019 stripping out the Cheltenham margin distortion starting point; slots up 15%; casino up 30%; Virtuals up 66%; poker up 107% and already easing back) that the esports betting figure looks methodologically credible. And so, drum roll please – esports betting was up 2,992% YoY in March and c. 3000% to May. 3000%: that is a figure to get excited about.
Except that the March 2019 base was just £50k of revenue, implying annual run-rate of £0.6m or 0.03% of total sports betting in GB. The run-rate figure (for May) is now £4.6m: an annualised £55m and 4% of lockdown betting (including virtual). In GB at least esports has grown 3000% to become the niche size that many evangelists thought it was pre lockdown.
There is no doubt that some markets have much stronger esports penetration: Everymatrix has published that it was seeing esports account for c. 50% of betting turnover in May and even c. 17% of betting turnover in June despite the resumption of some sports. This suggests that sports resumption has cannibalised c. 40% of the extraordinary esports volumes during the perfect storm of lockdown on consumers and the broad abeyance of physical sports. Even with this cannibalisation, esports in June for some operators/markets is still 1300% bigger than pre lockdown. However, this was also from a lower base (c. 1%) than the 5% oft quoted (due at least in part to Malta regulatory information that we believe to be significantly overstated due to operator misreporting, which has since been pulled).
It would be fair to say that the UK is among the least friendly betting markets for esports (compared to CES Europe, East Asia) and that EveryMatrix would still also underperform in terms of scale and/or mix vs. the more successful esports specialists. However, even factoring this in we would stand by our estimates that esports betting was a c. US$140m market in 2019 (albeit a reasonably fast growth one), of which c. 70% was in Asia. That isn’t a lot to go around European operators and markets.
Another key element to the recent boom in betting on esports is that it has been overwhelmingly led by sports titles rather than traditional fighting/strategy titles. These suggest high levels of substitution which are likely to be significantly eroded with the full return of sports (we have already seen this start in June figures). Further, this substitution has been made much easier by the level of sport engagement with esports during lockdown (giving fans an easy pathway and plenty of publicity to start betting) – even if this were to continue at similar levels (unlikely, though there will be some structural sports engagement gains), it would still be supplementary rather the main event now that sports have (largely) resumed.
Betting on esports is undoubtedly an attractive niche for some operators when they get it right. However, recent data, even when aggressively spun, has shown the product’s pre-lockdown limitations and the likely substitution (vs. underlying adoption) nature of much of the growth. Betting on esports will also continue to grow and this will be given a structural accelerant by lockdown (not all of the gains will be cannibalised away, but we would expect c. 60-70% of them to be). However, if there is a useful statistic or triangulation in the latest disclosures, it is not the hype of 2992%, but the demonstration that betting on esports is still a very nascent product in most markets and is still very hard to get right. Operators hoping that simply to add it is to join in on the next wave of growth are likely to be very disappointed…
UK: land based casinos – You Shall Go to the Ball
Casinos – for so long the Cinderellas of Britain’s gambling industry – have finally been given the go-ahead to reopen from the start of next month. The news will bring temporary relief to operators, who had been in danger of developing complexes having been initially carved out of the business rate relief and then shunted to the back of the queue for reopening.
Delight at being permitted to rejoin the free world is likely to be tempered by the challenge of needing to operate sustainably under conditions of diminished capacity, heightened operational complexity and uncertain demand. There is also the risk that new found freedoms may be short-lived with the potential for localised or system-wide shut-downs. For now though, operators can at least take a first step down the road to recovery.
UK: horse racing – remembering everything and learning nothing…
British horseracing put its best foot forward as lockdown eased. Racing started on the first day possible and has been frequent enough to provide an attractive betting product; field sizes were typically approaching the imposed maximum of 12 (suiting both punters and bookmakers), and; the quality has been both excellent and highly accessible (on ITV). Betting customers have apparently engaged strongly, especially on the televised quality. The reopening has therefore provided a very valuable test on a number of levels to get the fixture list right based at least in part upon what customers want rather than what betting operators think they want or what horsemen and courses are inclined to provide.
Covid-19 disruption is a big problem for racing even with a largely well-managed return and one that will have a long shadow even when ‘normality’ returns. Indeed, returning to the ‘normal’ of an overpopulated fixture list, a weak understanding of the betting customer (especially the remote customer), poor levels of managed engagement (especially for new customers and Class 1 racing – with a few notable exceptions), almost no levers that connect to optimising competitive field sizes (subtly different to larger field sizes: vide Ireland) and a weakened retail betting estate, would probably doom racing to decline even without the return of internecine squabbling. If racing divides into its vested interest camps and obsesses over money rather than the quality of its own product then it will cause its own destruction whether it tries to blame bookmakers, other stakeholders or acts of God. Now is the time to look at data, not opinion; focus on demand and productivity, not supply and subsidy; and (most critically) address governance and leadership rather than play at power struggles and self-interest (however well-meant these motives sometimes are).
To thrive amid the economic and consumer dislocation of a post-Covid world, and indeed to survive the forthcoming gambling review, GB racing needs to show that it is different. After a promising start, recent spats do not bode well…