It’s that time of year again. The time towards the end of the year when we stop dealing with the present and grappling with the future and start to consider the past. 2011. What sort of year has it been for the online gaming industry? Has the last 12 months taught us anything about the potential shape of the industry going forward?
In macro-economic terms, the story of 2011, as far as the global economies were concerned, could not have been bleaker. Confidence is low. Debt is high. Inflation is once more rearing its ugly head and governments are having to print money to keep their heads above water. And everywhere, for pretty much everyone, disposable incomes are falling. It was also the year which saw the gaming industry shaken to its roots with the biggest story in decades and a script which could have come straight out of Hollywood. So what has that meant for on-line gaming?
The answer – at least as far as Virgin Games is concerned – seems to be very little. Acquisition numbers have never been better. Conversion rates have gone through the roof. CPA’s are low and gross revenues are at an all-time high. It was always said that gambling was recession proof but it’s not as simple as that. Look at Las Vegas. Four years ago it was on a roll, its booming, casino-led economy finding a raft of increasingly flamboyant new hotels. Now, however, what was then the fastest-growing city in the US has been transformed into the foreclosure capital of America. Indeed, I doubt if there will be many people in Las Vegas who would subscribe to the view that gambling is in any way recession proof. Admittedly, it has been their dependence on non-gambling activities that has done for them, but it illustrates the perils of navigating a business through these chopping economic waters.
It is against this background, moreover, that I want to write my ‘end-of-term’ report on 2011. And very much in the tradition of end-of term reports, I want to focus on the 3 ‘r’s.
Only instead of Reading, ‘Riting and ‘Rithmetic, I propose to dwell on Regulation, Reputation and Revenues.
The elephant in the 2011 room, of course, is the bizarrely named Black Friday, when the US Department of Justice went after companies such as Full Tilt and Poker Stars who, it alleged, had been trading illegally in the US and indulging in various nefarious practices to keep the deposits coming in. From a reputational point of view, this was a disaster. Alun Bowden suggested in Inside Poker Business that the demise of Full Tilt, “formerly the second biggest Poker operator, could damage the wider gambling industry’s ability to paint itself as a regulated and responsible operator”; and there is no doubt that the collapse of the one-time giant of the industry has shocked everyone with an interest in online gambling. As Bowden asks “how can a firm with predicted revenues of $1 billion find itself at the mercy of a tiny island in the English Channel and having to beg for a relatively paltry $150 million in investment?”
Nevertheless, Black Friday, black though it undoubtedly was in terms of the industry’s reputation, was a necessary precursor to any sort of US regulation, and indeed in other territories who invariably follow their lead. Virgin Games has never taken bets from the US and, as a consequence, was operating at a severe disadvantage to those who did. Some companies, such as Party Gaming, stopped trading in the US after UIGEA and settled for $105 million. Others, like Full Tilt, simply ignored the illegality of what it was doing in the US, using the vast proceeds of its US business to attempt to set up a legal and significant business in Europe. As long as they were allowed to continue, it gave out a clear message that it was better to be ‘bad’ than be ‘good’, whilst the chaos that followed the D OJ’s move highlighted how lack of water-tight regulation and misplaced trust was denying players adequate protection. Add to that the fact that these companies, operating illegally, were making astronomical profits at a time when the state government through the US were drowning in debt and you have a pretty convincing argument for regulation. As Barney Frank of the US House of Representatives – and long-time champion of the gambling cause – said when discussing the fact that Full Tilt had potentially defrauded customers of millions of dollars: “It doesn’t change my view. If anything, it strengthens it. Online gambling should be legal, so the government can regulate it”.
That, moreover, seems to be the way things are moving. Land-based casinos, decimated by the recession, are looking to embrace the on-line space once it’s regulated. Caesar’s Entertainment, which owns several casinos, recently began increasing its lobbying to legalize online gambling companies. There continues to be support for online gambling in the US with two limited bills that relate to online activity recently receiving support.
In Europe, too, regulatory momentum is gathering pace and, after years of discussion about the freedom of movement of goods and services through the community, the EU has predictably decided to allow individual nations to by-pass its own establishing principles in favour of each nation taking its own sovereign view on a country-by-country basis with its own take on taxation, licenses, location of servers and protection of government monopolies. The economies of scale that come with an internet business are largely being eroded in the process, but, at least, it is regulation.
The UK, on the other hand, continues to ricochet from one side to another. Since the Gambling Act came into force four years ago and liberalized the UK’s gambling market, the number of sites that have applied for a UK license have been, as predicted, absolutely minimal. As someone put it, “the UK trusted too much in the carrot and forgot the stick when it came to its licensing system”. This means that, unlike with France and Italy, operators looking to advertise in the UK market need to be either based in the EU or in ‘white listed’ territories which also tend to double up as tax havens. As a result, the UK has been unable to profit from the huge online business that exists there. That is about to change with the announcement in July that the DCMS intends to make all operators selling into the UK market ‘hold a Gambling Commission licence to enable them to transact with British consumers and to advertise in Great Britain’. Days later, this was followed by an announcement from the Treasury that they are looking to raise the tax burden on the industry significantly.
Intentions, as the UK’s coalition government is finding to its cost, are very much easier to have than resolutions. And there are all sorts of obstacles in the way. Firstly, primary legislation will be needed for which parliamentary time (which is diminishing) would need to be made available. Secondly, the opportunity to put all gambling operators on the same tax footing is an incredibly complex undertaking and, thirdly, there is likely to be some form of legal challenge by the industry given that the DCMS has already announced that this has nothing to do with enhanced player protection. In any event, while, in all probability, nothing will happen until 2014, this year was still the year when companies operating in the UK were put on notice that they would soon need to find as much as an extra 15% of revenues just to stay the same size. For the smaller operators, that is a big ask and we can look forward to a period of industry consolidation as the deadline for the new tax approaches.
2011 also saw the arrival of gambling on mobile finally take off. At Virgin Games, we will be launching our mobile product next month. According to Chinese tradition, the Rabbit brings a year in which you can catch your breath and calm your nerves. It is a time for negotiation. We have this year completely redesigned our site and built our own state-of-the-art bonus tool. In other words, we have seen 2011 as a year to get ourselves ready and in shape for the real battle to come as the markets find a sensible and regulated centre of gravity. Bring on 2012, the year (quite possibly) of the regulatory Dragon.
