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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

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