October 2015 Issue
Over the course of the last few years, the global gaming industry has undergone a period of significant transformation. The turbulent global financial market has had a considerable impact on the space, with a number of casinos filing for Chapter 11 bankruptcy protection. Even some of the world’s most easily recognised gaming brands such as Caesar’s Palace have endured a considerable degree of financial difficulty. One of the company’s most notable units – Caesars Entertainment Operating Company – entered bankruptcy protection in January.
Yet the restructuring of the gaming industry has not been brought about merely by the rigours of the financial crisis. A number of transformative events in recent years have helped to reshape the sector. An influx of new actors entering the market, and in emerging locations, has also had a major impact. Since 2002, Macau has blossomed into a $45bn gambling heavyweight, roughly seven times bigger than Las Vegas. However, it appears that not even Macau is immune to the headwinds affecting the gaming sector, as revenues in the Chinese peninsula have been declining since 2014, pushing the industry into a critical condition.
In 2015, Macau has seen revenue plummet as tourism to the region has fallen considerably. New visa restrictions have cut down on visitors from mainland China and new regulations banning smoking in casinos have been unpopular with gamers. As a result, there is now considerable pressure on the casinos to make up for lost visitors. In addition, the renewed push from Chinese authorities to stamp out corruption has had a major effect. In Q4 2014, the region’s economy shrank by around 17.2 percent. Clearly, China's anti-corruption campaign has given gamers cause to think twice about visiting the only legal gambling site in the country.
Chinese casino stocks were also severely impacted by the crash of the Chinese economy at the end of August. The continued deceleration of the Chinese economy and massive sell off of global equities and the devaluation of the Yuan saw casino stocks plummet. The majority of gamers in Macau place their bets in Hong Kong dollars, so the devaluation of the Yuan made it more expensive for mainlanders to use Macau’s facilities.
Given that gross gaming revenues in the region fell 35 percent in July, and that precipitous decline continued into August, the outlook for the Chinese gaming market appears bleak.
Online
The emergence of online gaming has been another major influence on the sector’s shifting sands. As tablets and smartphones have grown in popularity and influence, so too has the usage of gaming websites and dedicated mobile applications.
According to a Research and Markets report released in July, the revenue of the global mobile gambling market is set to grow at a compound annual growth rate (CAGR) of 43.08 percent in terms of total annual wagers over the period 2014-2019. In terms of growth gaming yield, the global mobile gambling market is expected to grow at a CAGR of 18.36 percent during the same period.
To that end, the rise of online gaming has been one of the key trends to emerge over the last 18 months or so. As Peter Reynolds, communications director of online gambling company Bwin. Party Digital Entertainment, explains, online gaming is a phenomenon that has been led by sports betting as well as casino games. “We have seen this most powerfully demonstrated in the UK over the past 18 months where, in a relatively benign regulatory and fiscal environment the take-up through mobile has been spectacular. We believe that other European markets are destined to follow a similar path.”
“The emergence of online gaming has been another major influence on the sector’s shifting sands.”
Mobile gambling is having an impact in other jurisdictions too. In the US, for example, online gambling is prohibited by the 2006 Unlawful Internet Gaming Enforcement Act, however newer companies are finding their way around the law. New ‘fantasy’ betting companies are circumnavigating the ban with federal approval. The federal government has ruled that fantasy sports offerings from companies such as DraftKings and FanDuel are games of skill and not luck, and therefore are not held to the Act. Companies which have strong mobile offerings are flourishing. DraftKings, for example, received $304m worth of fees from users last year, and in July sealed a three year, $250m advertising deal with broadcaster ESPN.
A further area of online gambling growth comes from ‘social casinos’, which offer virtual slot games on smartphones and tablets. They are one of the fastest growing groups of games in the various smartphone app stores. According to figures from Eilers Research, a firm that monitors the gaming industry, revenue from the space is expected to reach $3.5bn in 2015, a significant leap from $2.8bn in 2014 and $1.3bn in 2012.
Increasing regulatory pressure
Understandably, in the modern gaming landscape, generating revenue is a genuine concern for traditional gambling facilities. With the advent of online and social gaming platforms, regulatory bodies are focused on tightening their own local regulatory approach. They are looking to licence, regulate and tax online gaming between providers and players within their frontiers, without allowing for cross-border activity. Many countries, such as South Africa and China, are cracking down on online gaming. “We believe that the shift to nationally regulated and taxed markets is inevitable,” says Mr Reynolds. “As a large public company with a broad geographic footprint, we wanted to ‘grasp the nettle’ and have taken positive action to focus on the nationally regulated or taxed markets – a strategy that meant that we chose to forgo revenue from unregulated markets which by their very nature are more prone to regulatory attack or shutdown – as evidenced by the US, Belgium and Greece. We are also starting to see this take place in parts of Asia as well.”
Australia, too, has begun to act, as Jamie Nettleton, a partner at Addisons Lawyers, notes. “There has been recent press involving investigations conducted by the Australian Communications and Media Authority (ACMA) relating to betting services provided by three of the country’s leading corporate bookmakers. These reports suggest that those services have been referred to the Police to investigate whether they are being provided in breach of Australia’s Federal gambling law. There continues to be reports of complaints made relating to gambling advertising by various wagering entities. In many cases, these complaints have been dismissed by Australia’s self regulatory advertising body, while other complaints have been pursued by Australian regulators to the extent that they relate to betting inducements.”
Clearly, gaming in Australia is coming under increased pressure. There have been various calls for the government to adopt tighter curbs on online gambling and there have been reports of an imminent announcement by the Federal Government that it will review the current regulatory regime relating to online gambling and what enforcement measures are appropriate.
Data and privacy
Over the course of the last decade, the speed of technological advancement as it pertains to mobile and gaming technology has been stunning. Every day, millions of mobile users pour their personal data into social media sites, email platforms and shopping websites. And seemingly every week, there is a new cyber security breach giving cyber criminals access to an endless mine of valuable information. If gaming companies are to fully exploit their online presence, they must be aware of their data privacy obligations. “Customer security is the number one priority,” says Mr Reynolds. “As an online business where the competition is just a click away, the adage that reputations are hard won and easily lost is magnified a hundred-fold. Right from the outset, management recognised that in order to succeed, the business needed to command the trust of its customers as well as potential customers. Whilst there have been a limited number of cases where some data has been compromised, given the volume of business being conducted these have been isolated and limited. That is not to say we are complacent; the reputational risks alone are sufficient to ensure that we take these matters very seriously indeed. In addition, the increasing number of territories adopting rigorous but commercially viable regulated frameworks means that for licensed operators, such events have become very rare indeed.”
In Australia, privacy issues and customer dealings are very relevant to online gambling industry participants. “Most participants have in place strict compliance procedures to ensure that relevant legal requirements are met,” says Mr Nettleton. “This issue has been highlighted recently in legal proceedings brought in the Australian Federal Court by AUSTRAC, Australia’s anti money laundering regulator, against Tabcorp relating to alleged contraventions of relevant Australian legislation. Tabcorp has responded by indicating its concern about the complaints and its objective to ensure compliance. We anticipate increasing enforcement by Australian regulators against Australian online gambling participants in this area.”
Differentiation
In an increasingly febrile market, gaming organisations are finding it ever more important to differentiate themselves from their competition. In the burgeoning days of mobile gaming, many companies’ smartphone applications were merely poorly actualised versions of desktop websites, but this is no longer the case. Firms are offering players increasingly optimised and individual features which provide players with much vaunted ‘social’ elements. Social gaming is believed to be valued at around $2.5bn in 2015, making it an attractive market for online gaming companies in particular to exploit.
Gaming companies will need to move forward in an increasingly regulated and evolving environment. Conventional casinos and gambling facilities in Las Vegas are unlikely to close their doors en masse anytime soon; however, firms must be mindful that times are changing. Much like the retail sector, and other industries which have seen mobile technology encroaching upon their ‘turf’, it is time to adapt or perish. “As a mature market, the business environment faced by Australian gaming industry participants remains challenging,” says Mr Nettleton. “For all participants, continuing efforts will be made at product differentiation to enhance customer demand. In certain cases, new products are being developed, particularly in the online space, with a view to attracting new customers. This is the case in respect of the services which have been investigated by ACMA, as well as other wagering products which have been developed. In addition to the Federal Government inquiry on online gambling, the other development likely to give rise to challenges in the next year relates to the new Victorian regime relating to responsible gambling. This comes into force in December 2015 and it will be of interest as to whether the gaming industry suppliers are affected by these developments,” he adds.
Conclusion
The gaming sector is changing, with new pressure from both regulators and competitors driving the industry’s transformation. In the years to come, we may see companies respond in new ways. For example, M&A has not been a major consideration in the gaming sector, but it is becoming more prominent. There has been some degree of industry consolidation recently, as more companies, particularly in the UK, look to respond to increasing tax obligations and tightening regulation.
As with many other industries, the biggest challenge for the gaming industry will be the online market. Whether traditional brick and mortar gambling houses can cope with the rise of more agile online rivals, or exploit similar strategies themselves, remains to be seen.
© Financier Worldwide
BY
Richard Summerfield