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Saturday, 22 August 2015

'Millennials’ gamble on Alternatives – an inflection point in the market?

By Michael Ellen, Partner, Regulus Partners

The footfall in the big US casinos is now driven more by food and beverage, pool parties and star DJs than by table games and slots; this is the prospect being addressed across the United States generally and it’s already true in Las Vegas. MGM’s proposed 5,000 seat theatre development at the Monte Carlo casino, for example, recognises in dollars and concrete the influence of “Millennials” (broadly those born in the 1980s onward) on their future revenue prospects.

The same generational disengagement (with the previous generation’s staple entertainment products) is visible in the UK where bingo clubs and arcades have been under pressure for some time. According to the latest Gambling Commission data, revenue from these sectors has shrunk by 4% and 19% respectively since 2009. Put in the negative, the land-based industry has clear evidence of the prospective market decline of traditional casino products, which appeal adequately to the post-war baby-boomers’ generations; but not so much to the succeeding ones.

Nevada’s Senate Bill 9 (SB9) gives clear evidence of the alignment of suppliers, politicians and regulators in searching out an alternative gambling vertical that will draw in the younger generations that are driving this change (even the Nevada Gaming Commission refers to “Millennials”), sustaining casino revenues within an evolving regulatory best practice.

It is interesting to note Nevada’s regulatory onus on market development. In other jurisdictions the regulator’s main mission objective is somewhat different: to capture black market activity within the regulated sector (as in Netherlands, for instance); or to link permissible gambling activity to social responsibility (as in UK, for instance). However what drives the weather, in gambling industry terms, is the reality of player demand.

Millennials across the globe already play eSports in unbelievably large numbers, bet on eSports in increasingly material volumes, as well as play and bet on Fantasy. These markets exist either within, alongside or outside the gambling sector and its regulatory parameters, with the position by jurisdiction often different (and sometimes vague).

In summary, businesses and products will always appear to fill customer needs. The challenge for the regulated gambling industry is to supply product that meets evolving customer needs while observing regulatory boundaries; the challenge for the regulator is to ascertain whether the product is gambling and then to ensure that it is not abusive. This evolutionary process works best when the industry and regulator share a constructive dialogue, common purpose and mutual understanding, as evidenced by what is currently going on in Nevada.

In the case of Nevada’s SB9 the industry has joined together, involving the regulator to build a gambling product that will attempt to capture one millennial market. The alternative vertical in question is skill-based gaming. ‘Hybrid’ slots – on which a player can risk the (win) outcome of a standard random slot game on a second-round skill-based game - will appear soon on the floor of Nevada casinos if the Governor’s weather-vane is indeed pointing in the right direction.

Moreover, the development of Hybrid slots is not limited to Nevada. It is likely that a series of gaming states in USA and Canada will follow closely behind the current urgent development effort being put in behind closed doors in Nevada. Leading European regulators are also monitoring the subject closely. The challenges in this case, affecting all of them but not necessarily similarly, will be in the revision of their technical standards and in ensuring that players, and operators, are correctly informed on their chances of success – theoretical RTP does not combine easily with a skill element.

eSports betting is another Alternative vertical changing the face of the gambling world. Pinnacle Sports has already recorded it as a bigger market than golf, enjoying geometric rates of annual growth. Betting on (unregulated) stock car races was once thought to be really exciting because it was rather naively believed to be genuinely random. eSports betting will need to differentiate its product from this position somehow and clearly demonstrate its probity if it is to enter the regulated gambling mainstream.  This vertical has huge cross-border markets, including major grey markets; a dearth of trade associations; no systemic protection of the vulnerable; and no coordinated public assurance of software integrity; not to mention AML compliance.

Fantasy provides some similar characteristics and challenges – such as significant public interest, cross-border markets some of which are also ‘dark grey’ and others of which are likely to become so. Whilst the UIGEA carve-out of the original Fantasy activity – basically prolonged statistical extrapolations for real individual performances in fantasy team – might have made sense, it is much harder to justify the daily variety (DFS) which may well be re-categorised soon as a form of betting in some US states.

Millennial gambling activities, so far, are more inclined to the remote sector than to land-based. Legitimate revenue growth, or even footfall retention, may require some significant changes in approach by the major land-based operators and their suppliers. There may be some empty deck chairs on the beach this summer, as the industry gauges its ability to catch the strength and direction of millennial market demand whilst maintaining high standards of compliance.

This article was first published in the September issue of EGR

Friday, 7 August 2015

Getting Smarter?

By Scott Longley, Partner, Regulus Partners

The Web as I envisaged it, we have not seen it yet. The future is still so much bigger than the past.Tim Berners-Lee

The latest figures for smartphone usage in the UK from communications regulator Ofcom feature a smattering of numbers and figures that are sure to find their way into presentations at upcoming gambling conferences and presentations, supporting remote positioning and an ‘omni-channel’ future.

A headline finding proclaiming the UK was now a “smartphone society” is likely a signal moment. The Communications Market 2015 report found that 33% of people say their phone is their most important device for accessing the internet compared with 30% that prefer their laptop.

When another 19% that opt for tablets is taken into account, it is clear that a sea-change has taken place. The combined smartphone and tablet percentage has risen from 23% in 2013 to 52% in 2015 while the laptop and desktop share has fallen from 74% to 44% over the same period.

At the same time, UK 4G subscriptions have leapt from 2.7 million to 23.6 million. Ofcom found that, as of May 2015, 55% of these 4G users shop online with their phone; 55% bank online; 57% watch TV and video clips; 49% use their phone to send videos and photos via services like Snapchat; and 63% use instant messaging services such as WhatsApp. Ie, transacting and being entertained through a mobile device is now a mainstream activity that the majority of adults engage in. The participation figures are also sufficiently large to suggest that socio-economic divides are being (or have been) eroded.

According to the report: “Developments in technology, and improvements in availability and affordability have made it easier for people to go online whenever they wish. These enhancements also have the potential to make the online experience more enjoyable for consumers, as internet connection speeds improve, particularly while on the move as the 4G network becomes more widespread.”

This channel switch has already been hailed by many in the gambling industry who have even gone so far as to predict the ‘death of the desktop’. Now that the scale of change has taken on apparently structural proportions, the clamour to proclaim the new gambling world order will likely increase in proportion to the statistics.

But the rise of the smartphone comes with its own pressures, not least for those operators that are struggling to keep up with the pace when it comes to digital innovation. This isn’t just about former land-based operators which are in danger of being left behind by technological leaps and changing consumer behaviour; some original online pioneers have also been caught out by the swift rise to prominence of the mobile gambler.

The figures from Ofcom show how channel shift is likely to pick up pace. The figures for 4G take-up in the UK in the past five quarters give an indication of just how fast subscription levels for that service are growing. (See chart 1)

Source: Ofcom Communications Market Report 2015
This degree of change appears structural and is likely to pile more pressure on operators scared of missing out to ‘do something’, whether that is to embark upon ambitious innovation programmes, or alternatively seek to cut costs, or to rely even more heavily on aggressive marketing and their supply chains.

The pressure will be all the more intense because of what the smartphone offers in terms of the relationship with the consumer. Having an app installed on a customer’s main communication device gives an operator an ‘always on’ ubiquity which is far more intimate and constant than the gambling experience enjoyed via a laptop or desktop, let alone taking the trouble to go to a licensed venue.

At the same time, the possibilities being opened up on the data front are giving an enhanced picture of each individual customer, and in particular their preferences, opening up the opportunity to offer a more personalised gaming experience.

The more forward-thinking operators are exploring what this channel shift means and where the device and data developments are pointing. Others will be playing catch up, not least with the consumer themselves.

But each should be wary of believing this channel shift to be an unalloyed positive. Buried within the report are some other statistics which should give pause. The first is that the average number of apps that smartphone users have downloaded onto their phones is 17. Space for even a couple of gambling apps here is at a premium, so getting onto this privileged list will be an expensive process; dislodging an incumbent will be even trickier. In both cases it will demand ever higher levels of marketing and advertising spend to persuade consumers that your app is deserving of selection. It will also put an increasing premium on product innovation, data-mining and CRM activity if market share is to be maintained.

One further stat from the Ofcom report also offers a clear warning of what ubiquity can mean: based on a scale of one to 10, the report found that 48% of smartphone users gave a score of seven or above to describe how hooked they were on their mobile phones. In the 16-24 age group that rose to 61%. The report notes that this appears to be part of a continuing trend of increased dependency on the device, up from 41% in 2012, and 37% in 2011. As much as that is enticing to the operations side, it should also act as social responsibility flag.