Spectrum Gaming & Gaming Economics: Go West…The opportunities for European providers as land-based gaming meets online in US

Michael Pollock- Spectrum Gaming

As European betting and gaming markets saturate and see industry-wide costs driven up, the USA may provide fertile land for European betting stakeholders as US gambling giants redefine their customer propositions.

 In a soon to be published industry White Paper, Spectrum Gaming and Gaming Economics assess current market dynamics, issues and stakeholder opportunities. 

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Overseas online operators and providers who hope to leverage their experience, brands and other assets in the potentially burgeoning US market need to keep certain realities in mind.

Online gaming – as demonstrated by the experience in New Jersey – can be an effective marketing tool to attract new demographics, and encourage those players to visit land-based casinos where they will gamble, as well as spend money in non-gaming areas, including dining, lodging and entertainment.

And, because those players can earn rewards that can be redeemed in brick-and-mortar casinos, they would play more online with such operators than they otherwise would. That statement is the rationale behind every loyalty program that presently exists in any industry: Loyalty gets rewarded, and rewards encourage loyalty.

Another reality regarding gaming in the United States is that a gaming license is considered a privilege, not a right, and that privilege is limited to federally recognised tribes and commercial operators who have earned that privilege and have demonstrated that they possess requisite integrity. The privilege of being a gaming operator in the United States is often accompanied by some level of geographic exclusivity. States either limit the number of licenses or the potential location of casinos or both.

Such a reality may be a form of benign protectionism. Private companies from Walmart to grocery stores to dry cleaners can locate anywhere that zoning laws permit such commercial operators. Gaming operators have no such freedom, except in locations specifically authorised by state law. In exchange for such limitations, gaming operators are encouraged – and sometimes required – to invest significant capital in their facilities. The ability to secure capital at an affordable cost is enhanced by such protections, thus everyone wins: States gain employment and tax revenue, while operators gain some level of certainty that their planned returns can be realised with limited risk of future competition.

Of course, not everyone wins. Applicants who were denied licenses or who lost on competitive bids are not winners. Even winning applicants are sometimes faced with negative surprises, such as more licenses being issued within their state, or new competition emerging across state lines, or through the authorization of independent retail gaming routes.

That leads to yet another reality; politics is never a pretty process, and the politics of gaming is particularly messy. Still, risk-takers can be rewarded, often handsomely by those who understand the challenges and accept the limitations. That holds true for land-based operators in the United States, but is equally valid for online operators from overseas who seek a route into the US market; develop a business model that adapts to realities, and leverages your core assets.

So how can online gaming be structured in any individual state or region to optimise the public benefit, to maximise the overall impact on such largely universal goals as employment, capital investment, tourism and tax revenue?

While the easiest answer is to limit online to land-based operators, that is not the only option. European operators can enter the market through offering services as white-label providers, securing independent licenses, acquisitions or by focusing on specific segments in which their experience or brands create significant barriers to would-be competitors.

Lee Richardson – Gaming Economics

Spectrum strategic partner Lee Richardson, founder and chief executive of a UK-based industry -advisor Gaming Economics, is a close observer of how the legal and political pieces of this puzzle are falling into place. He cites William Hill as a company that can serve as an effective role model for overseas operators seeking to gain a foothold in the expanding US market, particularly in sports betting.

William Hill spent approximately US$50 million in late 2011 to acquire three Nevada-based sportsbooks (American Wagering, Brandywine and Cal Neva Sportsbook, now all since rebranded William Hill) as part of its “establish-and-learn” strategy. Soon after these acquisitions, The Guardian commented…

“The acquisitions are not expected to affect William Hill’s profitability hugely, as the deals are relatively small … however, they are considered to be strategically important, as having a US operating license could become a lucrative asset if recent regulatory moves eventually end with the American gambling market opening up.”

Richardson views the investment by William Hill as an important beachhead that puts the organisation in a leading position to capture share in a market that is poised to expand significantly. He notes that most of the large, listed sportsbook operators (Ladbrokes-Coral, PaddyPower Betfair, William Hill, Unibet, GVC) garner most of their online sportsbook revenues, and profits, from the ultra-competitive European market, consisting of both “white” and “grey” revenues.

Currently, that European market is facing a series of structural challenges, including:

  • Lower relative market growth rates, as the compounded annual growth rate is likely to be reduced over the next five years…
  • Marketing, compliance and personnel costs are expected to increase…
  • Taxes and duties are likely to increase, as regulatory centers such as Gibraltar and Malta, as well as the UK, are amending tax regimes…
  • Regulatory challenges will increase in number and complexity. For example, the UK Gambling Commission and the Competition and Markets Authority are presently conducting enquiries on a variety of fronts, including consumer protection and related issues.

Richardson also notes that previous efforts to expand overseas proved to be a rather mixed experience, as some UK firms found less-than-desirable outcomes from expansion efforts in Australia, for example. Still, Spectrum and Richardson suggest that the potential opportunities afforded by US expansion are too large to be ignored by firms seeking significant growth over the next 5-10 years.

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Content provided by Spectrum Gaming Group & Gaming Economics

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Author Notes: Michael J Pollock

Michael Pollock oversees a broad portfolio of Spectrum services, including policy and impact studies for country, state and local governments, and financial and market studies for private-sector clients.

Pollock began analysing the casino industry in 1978 and served as spokesman for the New Jersey Casino Control Commission from 1991 through 1996. He was a close advisor to the chairman and oversaw the Office of Legislative Liaison. During this period of rapid deregulation, his charge was to maintain public confidence in the integrity of the regulatory system.

Pollock is the author of the award-winning book Hostage to Fortune: Atlantic City and Casino Gambling, published by the Center for Analysis of Public Issues in Princeton. The book examines the impact of casinos on Atlantic City and New Jersey. He has testified before the International Tribunal at The Hague, the World Bank in Washington DC, the US Senate Indian Affairs Committee and the US Senate Select Committee on Indian Gaming, and has been a featured speaker at the Congressional Gaming Caucus, a group of US House of Representatives members from gaming jurisdictions. He has also testified before numerous legislative committees throughout the United States.

He has led Spectrum economic analyses in markets throughout North America, as well as in Latin America, Guam and Korea.

Pollock has won 20 journalism awards and is the former editorial page editor of The Press of Atlantic City. Pollock is often cited by national media outlets, including The New York Times, Star-Ledger, BBC, MSNBC, ABC News and National Public Radio.

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