GC Assurance Statements: assuring better gambling businesses

By Paul Leyland, Founding Partner, Regulus Partners

“The government are very keen on amassing statistics. They collect them, add them, raise them to the nth power, take the cube root and prepare wonderful diagrams. But you must never forget that every one of these figures comes in the first instance from the local village watchman, who just puts down what he damn pleases. “
“It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities.” Josiah Stamp

The Gambling Commission is currently consulting on a new Annual Assurance Statement, which would require the larger operators (over £25m UK revenue, which the Commission estimates to be c. 40 operators with c. 90% combined UK market share) to inform the Commission as to how they are understanding, measuring and mitigating the key risks captured in the Commission’s licensing objectives, notably:

·         Keeping gambling crime free

·         Protecting the vulnerable

The consultation documents can be found here:

http://www.gamblingcommission.gov.uk/Publications-consultations/Consultations/Open-consultations/Supplementary-consultation-on-the-introduction-of-an-annual-assurance-statement.aspx

I believe that this process is an important addition to the UK licensing regime for three reasons:

• It puts operators’ social responsibility practises under clear and systematic scrutiny
•  It should encourage operators to further increase the internal and external priority of social responsibility measures
• It may start to resolve some the natural tensions between social responsibility best practice and (short term) profit maximisation

It will be tempting for some operators to see this as an unnecessary regulatory burden, or, worse, an attempt to gather (partial) information in order to justify increased regulation. If starting from that viewpoint, the resulting submissions are likely to be little more than desk exercises produced by ‘compliance people’. I think such a response would be both short-sighted and bad business.

Short-sighted because there will always be pressure from groups within society to curtail some or all forms of gambling activity; whether reasonable, well-meaning, protectionist or just plain atavistic. This pressure tends to get politicised when issues are denied or obfuscated, rather than tackled (convincingly) head on: if there is no problem then it is not unreasonable to demand evidence to demonstrate that fact, failure to do so raises concerns even from the previously indifferent.

Half-baked attempts to provide such evidence are at best unconvincing and at worst grist to the mill of tougher regulation. In order to escape current and future politico-regulatory issues the industry must be seen to be taking its social responsibility seriously: that is the reasonable expectation of large swathes of society; and now - election year after all - is the time to do it.

To see why it is bad business, let’s consider what the Commission is really asking for.

The Annual Assurance Statement essentially comprises six questions:

• What control systems and governance does the operator have, especially relating to crime (AML, criminal spend, integrity) and social responsibility (fair, protecting the vulnerable)
• What actions have been taken in the last 12 months to improve these
• What plans are there to improve systems and governance in the next 12 months
•  What is the operator’s narrative assessment of the extent to which its revenue potentially comes from harmful gambling
• What tools are being used to identify problem and at risk gambling
•  What actions have been taken and how is effectiveness and impact evaluated and improved

None of these questions are particularly onerous or dangerous and most operators should be doing some or all of the above already. Further, developed properly this can have significant positive impact on the business and the industry as a whole. We see five key business areas where this increased scrutiny and process should generate clear benefits.

Reputation is the most obvious starting point for a gambling industry which is regularly battered in Parliament and the press. A clear policy of focus and improvement is something forward thinking operators can use to demonstrate that they are on top of the problem, in a more sophisticated (and therefore convincing) way than before. The Gambling Commission and the industry can also reasonably argue that sufficient duty of care is being carried out. This could prove to be a key pillar in protecting the industry from further regulatory encroachment.

Risk management is another area which can prove to the benefit of the business. There have been several reported incidents where both remote and landbased operators have been caught inadvertently handling the proceeds of crime or assisting in money laundering. To state that this is bad business is to state the obvious (commercially, legally, reputationally) and systematically improved measures to prevent this bad business can only be a good thing.

Better customer understanding should come from enhanced problem gambling tools. Ladbrokes has flagged that it is rolling out its leading algorithm developed from its Odds On card. The temptation to believe that only card based or remote play is data rich is dangerously myopic, however – practically all forms of gambling are data rich and customer engagement is key. It has long been a valid criticsm of the gambling industry that it is not customer-centric enough (even in terms of customer service), a clear spotlight on customer behaviour should be used to accentuate the fun as well as reduce harm.

The Assurance Statement is clear that it is to be signed off by very senior executives (eg, CEO). This is important in ensuring that social responsibility is recognised as a key business driver right from the top (and when a CEO cares about something the organisation tends to). While all operators pay lip service to this, a pervasive culture of pushing problems the way of compliance is only just being overcome and any accelerant to this will make operators much stronger in being able to deal with issues of public concern, from both a cultural and operations management perspective (ie, minimise poor practice and mistakes, and handle the mistakes that do occur more effectively).

I am also encouraged that the Gambling Commission intends to take an active role in fostering and spreading best practice: this is an area where the industry will fail to gain from a lob-sided or patchy approach: even though some operators are already embracing this approach, they are in danger of being let down by the laggards. Effective coordination, and even leadership, is therefore vital.

In short, by fully embracing and embedding the purposes of the Annual Assurance Statement, the industry will not only justify the logic of relatively light touch regulation, it will also improve its reputation and produce more profitable and more sustainable businesses.

Time to think outside the box

By Dan Waugh, Principal Consultant Regulus Partners

“Creativity requires the courage to let go of certainties.” Erich Fromm

It may seem strange to suggest it now at a time when gambling is once again at the centre of a fairly major public policy debate – but there may come a time when even the Daily Mail recalls with misty eyes a time when gambling was part of the fabric of British high-street life.

Looking at data from the last five years suggests that – notwithstanding the current concerns around proliferation (principally betting shops) - we should be concerned about the future of land-based gambling.

Everyone knows that 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. These are the show-ers.

What is less widely reported is the state of the supposed growers. The betting shop sector has experienced solid growth this decade delivering a c. 40% gross win increase since 2004 – but decline in its core product (horse-racing and greyhounds) has been masked by stunning (and relatively easy) growth from machines. Over and above the political risk on machines, there is something unsettling for the industry about this situation.

It’s all a little reminiscent of Robert Putnam’s 1999 work ‘Bowling Alone’, in which the Harvard Professor of Public Policy described the decline in community participation in the USA during the second half of the twentieth century as age cohort by age cohort people gradually disengaged from traditional methods of interaction.

Meanwhile, the casinos sector exceeded £1bn in table revenue for the first time last year and has generated an impressive 7% compound growth rate over the last five years. However, the lion’s share of this growth has come from London (where Mayfair has benefited from a buoyant international market and the mainstream has been bolstered by about £90m of capital investment split between the Hippodrome in Leicester Square and Aspers at Stratford).Taking London out of the reckoning, casinos start to look a little anaemic with CAGR of just 2% over the last five years. Meanwhile, annual participation rates (for playing casino games in a casino) were stuck at just 3% according to the most recent health surveys – hardly the boom we were led to believe would follow the Gambling Act 2005.

On the other hand, remote gambling – now in its 21^st year – keeps growing, with mobile putting a new spring in the step of the sector. Indeed at over £3bn in revenue, remote is now bigger than any single sector of land-based gambling (other than the National Lottery)

One of the problems facing the land-based element of our gambling industry is that the unit classifications have not really changed in the last 40 or 50 years. We have on-course betting, betting shops, bingo clubs, casinos and amusement arcades – concepts defined in the 1960s. There have been product ‘innovations’ (but these have largely been limited to EGMs) as well as some significant regulatory gains. Bingo clubs and casinos are typically larger now than back then and betting shops are permitted to admit natural light and even to offer toilets (as well as four B2/3 machines per shop) – but the core nature of the units themselves has remained largely unchanged. We have had supply-side and regulatory modifications on a theme but nothing more fundamental.

In land-based gaming (unlike in the remote sector) the licence – rather than customer needs - still largely determines the product and experience: casinos are distribution points for roulette and card games; bingo clubs for bingo games; arcades for slots. Betting shops may now generate the majority of their revenue from machines but betting on horses is still the draw for most customers.

Britain is a remarkably accommodating market for gambling. Just about all products are available, gambling taxes are generally on the low side, advertising is (controversially) prevalent, and regulation is designed to be of the light-touch variety. Yet while we have all types of gambling, we don’t have all formats – and attempts to add new formats have been limited.

In Connecticut right now, a British company, Sportech is developing sports and sports wagering bars under the Bobby Vs brand – yet the idea that it might transplant the concept to its home market is almost unthinkable because the necessary regulations are not in place.

Taking a global look at each of the key gambling product categories – betting, casino, bingo and slots – it is apparent that our solutions are not the only ones available. The obvious example is casinos where Britain’s limited amenity locals market format looks increasingly out of step with the global development of destination-style venues. However, there are also international alternatives to the British model of bingo club (community gaming centres in Canada for instance or the new style venues emerging in parts of Spain), betting shops (casino-based sportsbooks in Nevada, PMU bars in France, TAB outlets in Australia) and slots arcades (the Station Casinos Wildfire concept in Nevada, arcades as mini-casinos in parts of Spain and in the Netherlands).

The common strand to most of these examples is that they tend to be larger and more complex outlets than their British counterparts – and typically incorporate a wider range of non-gambling amenities, including licensed bars.

Over the course of the last 50 years, Britain has developed as a convenience gambling market (the Gambling Commission regulates more than 10,000 licensed venues, not including pubs with slot machines). This is in contrast to the situation in a number of culturally similar jurisdictions where governments have favoured concentration and control rather than dispersal.

The problem with the UK situation (from a commercial standpoint) is that convenience is now the trump card of the remote sector. This presents a structural issue for ‘purely transactional’ gambling in traditional outlets. In order to compete effectively, venues may need to enhance the experience of gambling – and that is likely to require a much more sophisticated approach to concept development (including a willingness to embrace the risk of failure in order to learn and innovate). The alternative is to give up gradually on land-based gambling and seek to shift one’s business over time from venues to remote channels – but this is not without its risks.

Gambling often blames DCMS and the Gambling Commission for impeding innovation. However, it seems likely that the real culprit is a lack of industry imagination. Instead of trying to excite government about the possibilities of new gambling formats, or testing new concepts on customers, operators more commonly engage in trying to find loopholes through which to sneak in more products (generally slots) without offering much in the way of economic or social value or compensating customer protections. Unsurprisingly, this finds few supporters in government and tends to spark in-fighting with neighbouring sectors.

Remote gambling is now an important and valuable part of our gambling industry – especially in terms of consumer choice - but it would be a shame on many levels if it came in time to be our gambling industry.

Contrary to the current direction of travel, I believe that there is a ‘win-win’ solution in the gradual replacement of our existing formats with more sophisticated and more powerful land-based units – something that would arguably be easier to regulate, better able to offer social protections, of greater economic value and better suited to changing market conditions.  If so, it would seem that now is the time for the industry to start thinking ‘outside the box’.   

How I Learned to Stop Worrying and Love Taxes

By Paul Leyland, Founding Partner, Regulus Partners

 “Thinking is the one thing no-one has ever been able to tax” Charles F. Kettering

2015 was always going to be a difficult year for gambling operators from a fiscal perspective:

• UK remote Point of Consumption taxes (15% revenue from December 2014)
• UK B2 Machine Games Duty increase (5ppt increase from March 2015 to 25% revenue)
• EU Point of Consumption changes to VAT (especially impacting Germany-facing operators
• Italian machine tax increases (VLTs from 5% to 9% of turnover; AWPs from 13% to 17%
• Austrian enforcement of its 40% casino tax on non-domestic licensed operators
• Ireland’s 1% turnover tax on remote betting likely (finally) to come into force in 2015

It would be wrong to suggest that this is a one-way street: for example the UK bingo industry had its duty halved to 10% last summer (after some effective socially-focussed lobbying). However, the tide across Europe is very much in the direction of tax increases – in many jurisdictions and across many products and channels. We probably haven’t seen the last of it this year either.

This is hardly news, and I have written before (Sin Tax Error, October 2014; below) that I see some (most) industry attempts to halt the encroachment of the tax man as likely to be counter-productive on many levels.

Tax is on my mind again now for two reasons:

First, governments are generally persuaded that increasing the taxes which obviously impact ‘ordinary’ people (sales and income) is deeply unpopular and can be economically damaging; conversely the trend in business taxes and treatment of the super-rich is, if anything, increasingly liberal. And yet growth is proving elusive and deficits remain stubbornly high. So the temptation is to look for ‘specialist’ taxes to levy, which cause minimal economic and political (popularity) collateral damage. The only thing that stops gambling from being the perfect victim of this trend is its small size and fiddly complexity. Nevertheless, we are likely to be hearing a lot more about gambling tax increases this year.

Second, all other things being equal, there tends to be a correlation between a low tax footprint and growth. This is unsurprising - high levels of tax and regulation tend to inhibit growth in all sectors, and gambling is no different. Whereas business has largely won the debate since the Reagan-Thatcher era, gambling is not always seen as the sort of business governments want to encourage, even when those governments are supposedly ‘pro-business’. Consequently, the principle ‘economic benefit’ of many forms of gambling is seen by government as tax yield and an ‘optimised’ tax rate is the one that provides the highest yield (rather than promotes growth). More tax and regulation can therefore be handed down lightly by our political masters if it gets them out of a political or fiscal hole, with the risk of hitting growth not really bothering them.

So, with fiscal pressure building and gambling likely to be further squeezed (NB, there is likely to be two Budgets in the UK this year), am I bearish on growth in gambling? Well actually no. Quite the opposite, in fact (and for those of you who remember me as an analyst, not being bearish now might come as a surprise).

I am very bullish on medium / long-term gambling sector growth precisely because of the developing fiscal squeeze. One of the biggest problems with the sector over the last decade has been the relative ease with which many operators generated comfortable double-digit operating margins (often due to low-to-nil tax footprints). This led to big marketing budgets, big dividends, and big senior pay packages. But did it encourage innovation? No. Did it drive an even defensive focus on the customer? Quite the opposite.  Did it foster a strategic and responsible approach to stakeholders and suppliers? Again, painfully, belligerently and often counter-productively, emphatically not.

As with Tesco – once a doyen and now being dragged over the coals – success rarely breeds anything other than arrogance and complacency, which can lead to bad decisions and loss of control. Thanks to mounting fiscal and regulatory pressure, I believe this attitude is now leaving the sector - and its departure will leave it much stronger (when the humility stops – stop).

A leaner, more humble, gambling sector will have to fight to retain its customers, not just pay to obtain (and re-obtain) them. It will have to get every last ounce of innovation from its supply-chain, not just every last ounce of saving from a contract. And it will have to treat its key stakeholders with responsibility and respect in order to avoid further encroachments on its capacity to do business. All of this points to a more intelligent, more productive, more customer-focussed, and more strategic gambling sector. Each of those traits drives growth far more surely than big cash flow returns.

There are bound to be losers as well as winners because of this change – not all will manage it effectively (or even try). The process of change is also likely to be painful and difficult even for the winners. However, my prediction is that 2015 will mark the beginning of a new culture in gambling – a culture fit for driving growth which has been largely absent for nearly a decade.  Existing ‘big’ businesses need to play by these new rules to adapt to a less forgiving environment – otherwise they will see themselves replaced by more dynamic newcomers though some (much needed) “creative destruction”. 

Time for Gambling to wise up

Alan Alda once said: “Be as smart as you can, but remember that it is always better to be wise than to be smart”.

Ingenuity may have fuelled the growth of the gambling industry in recent years but wisdom has often been in short supply. As the ICE expo – pantheon of gambling smarts - prepares to hit London, Dan Waugh asks whether now is the time for a return to wisdom.

Looking at the state of gambling in Britain at the start of 2015, it is difficult to avoid the conclusion that the ratio of smart to wise has moved a little out of whack. Everywhere one looks one is confronted with problems – many of them the result of industry ingenuity – with no really workable blueprint for resolving them.

First, we have the ‘known knowns’. Most prominent of these is the issue of the FOBT and betting shop clustering – a controversy that is unlikely to go away anytime soon. This is supplemented by a host of other issues which we can expect to grow in prominence over the course of the year – TV advertising for (chiefly remote) gambling services; bingo licensing and fears that Greene King will turn its pubs into gambling dens; the question of how much (if anything) betting companies should pay to the sports that provide them with markets; and sports integrity (albeit that is more of an international than domestic issue).

Then we have the list of ‘known unknowns’, headed by the question of how the Gambling Commission intends to regulate remote gambling once it moves beyond the licensing phase and gets its teeth into the specifics of conduct. Meanwhile, mobile gambling (largely undeveloped at the time of the Gambling Act), seems destined to become much more than merely a subset of remote regulation precisely because it has the potential to blur the neat lines between terrestrial and remote gambling.

To this already long list we should add a couple of latent issues. First of these is the embarrassing fact that a decade on from the Gambling Act, ambitions for destination casinos in Britain remain largely unfulfilled. Genting’s new £200m development at the NEC in Solihull, which opens later this year, will be the first (and possibly last) venue that would meet the expectations of those who framed the reformist legislation. It is perhaps telling that over the last ten years the balance of gambling in Britain has shifted even further towards convenience and away from destination.

Then there is the matter of so-called ‘social gaming’, which so far seems to have evaded legislative scrutiny on the view that acquired credits are not the same as cash. Given the reported spending patterns, the propensity for customers to lose control of their play and the fears that social games are ‘grooming’ future ‘real-money’ gamblers, it seems likely that regulation of this activity has been deferred on the basis of complexity rather than principle. It may just take one of the world’s gambling regulators to show us the way.

Then there are the ‘macro-issues’ from the European Union – its fourth anti-money laundering directive and (potentially significant for the industry’s advocates of ‘Big Data’) the forthcoming data protection directive.

Finally, there are two important questions of responsibility – who is responsible for the minimisation of gambling-related harm?; and who is responsible for enforcement of the spirit and the letter of the legislation?

We may have a Responsible Gambling Strategy Board[1] – but it is difficult to decipher just what this country’s strategy for harm minimisation is amidst the alphabet soup of competing (and sometimes antagonistic) organisations and pressure groups.

Meanwhile, the Gambling Commission could be forgiven for feeling a little unsure of its own mandate following two successful challenges to its authority in the courts since May last year (Luxury Leisure vs Gambling Commission and Greene King vs Gambling Commission). Under its chief executive, Jenny Williams the Commission has done a creditable job under trying circumstances - with little in the way of thanks from any quarter. As Williams prepares to step down later this year, her successor will need to feel confident in the parameters of the Commission’s responsibilities.

The sheer breadth of issues have turned gambling regulation into a game of political ‘whack-a-mole’ - an exhausting and unproductive cycle of opportunism and controversy.

In the absence of a clear blueprint for gambling in Britain, proponents and critics of the industry have a tendency to fall back on either libertarianism or the Gambling Act’s mandatory licensing conditions. This is facile. Freedom always has its boundaries (and very few gambling companies want a truly free market) while the mandatory conditions are intended to describe what gambling should not be (unfair, criminal and predatory) but they do not by themselves provide a vision of what it should be.

For the sanity of all concerned, now is the time to take stock. By taking time to distil clearer views on the role of gambling in Britain, what we want our industry to look like and how gambling might be harnessed to the interests of the nation, we will become better equipped to develop coherent solutions to tactical issues. The real ‘FOBT problem’ isn’t about whether the maximum stake on a betting shop slot should be £2 or a £100; it’s about where gambling sits within society and what expectations we have of different forms of gambling.

This will require creating time and space for wise and independently-minded people to explore the complex issues (economic, societal, sociological, psychological, political) that surround gambling, to reflect and to propose a clear way forward. This was the chance given to the industry at the start of the century, when the British government’s economic big gun, Sir Alan Budd led a year-long review into gambling and Professor Peter Collins ran a highly respected multi-disciplinary gambling studies unit at the University of Salford. In theory at least, gambling policy formation never had it so good. 

Since that time, we have had innumerable public consultations on discrete matters of policy but only one period of reflection – the disappointing select committee enquiry of 2012 (whose recommendations, which included increasing the number of FOBTs per betting shop, have been largely side-lined).

Today, even our academics (with a few notable exceptions such as the excellent Professor David Forrest of Liverpool University) have been suckered into trying to prove or disprove theories of harm rather than engaging in systematic and long-term studies of costs and benefits (which might then be used to inform policy).

The problem with all of this is that the scars of the Gambling Bill (and its derailment by the media in the run-up to 2005) run deep. Mention the possibility of new primary legislation and politicians and operators alike turn ashen. Insofar as the country at large is concerned, gambling is sufficiently unimportant for the current unsatisfactory state of affairs to continue. Matters are only likely to change for the better if those who care about the industry – operators, researchers and regulators – can forget about being smart for a while and try to find a little more wisdom.

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[1] In fairness to the RGSB, its mandate is to advise rather than implement or coordinate

Mad Men: Lib-Dems keep ad ban in-play

By Scott Longley, Editorial Director, Regulus Insights

The timing of the leaking of a letter from Danny Alexander, chief secretary to the Treasury to his government colleague Sajid Javid, the culture secretary, about the issue of betting adverts around sporting events was unfortunate for the gambling industry.

The publication of the letter in the Daily Mail (of course) came on the same day that the new gambling industry body Senet launched its own responsible gambling advertisements, with the tag line ‘when the fun stops, stop’.

Conspiracy theorists within the gambling sector are likely to see dark motives behind the timing of the leak, but whether coincidental or not the reported contents of the letter suggest there is unlikely to be any let up in political pressure on the sector in the run up to May’s General Election.

Alexander said in his letter he was “increasingly concerned” by the prevalence of gambling-related adverts around televised sporting events that, because they occur before 9pm, are more likely to be watched by children. Alexander went on: “It has now become almost impossible to watch any kind of sports event without being bombarded by highly solicitous advertising. The decision by the previous government to allow betting companies to advertise during sports events before the watershed is completely anomalous. It was, of course, part of a grubby deal cooked up by the last Labour government.”

This weaponising of the anti-gambling debate on the part of the Liberal Democrats is sure to make life even trickier for the sector. Polling evidence last year would suggest the party sees gambling as one of its potential touchstones with potential voters. A YouGov survey in April last year found that fully 71% of intended Lib Dem voters thought there should be further tightening of the regulations around gambling.

Barely have the Senet ads got an airing, and the industry is once again on the back foot. As a part of the new industry body platform, the industry has already imposed a voluntary ban on the advertising of free bets before 9pm, but this has clearly failed to quell disquiet among the industry’s critics over the insistency of ‘in-play’ ads around football matches.

Specifically, Alexander was calling for the DCMS to speed its own response to a recent review of gambling advertising issues by the Advertising Standards Authority (ASA). The DCMS responded by repeating its mantra that player protection was “at the heart of gambling policy”, adding that its review would be published shortly.

The difficulty for those now lobbying the government is to know what to expect next. The ASA report, covered previously by this blog, did not recommend any actions with regard to pre-9pm watershed. Recall, though, that it did note that the ‘bet now’ ads typified by bet365’s Ray Winstone spots were due further scrutiny. “We’ll be more proactive on issues relating to social responsibility, especially around ‘toughness’ in ads and particular appeal to children, finding ways to continue to source data to inform our decision-making,” the ASA said back in November.

As the news this week about plain packaging of cigarettes has proved, just because there is every indication that an issue is being kicked into the long grass doesn’t mean it is going to stay there. The shooting of Labour foxes is likely to be a general pastime on the part of both coalition partners, and the Liberal Democrats in particular will be looking to aim both barrels at any issue which they think they can legitimately own. Increased regulation of is arguably one of those.

The Daily Mail article suggested the DCMS was ‘resistant’ to change, but it is unlikely the gambling industry and its lobbyists can take much comfort from that. In the words of Alexander, “this is a matter of principle, and I believe the time to act is now”. It’s the handicap bet the industry never wanted to see come about – bet now v act now. There can only be one winner.

Risk in gambling: fortune favours the brave

By Paul Leyland, Founding Partner, Regulus Partners

* *Disclaimer:Ignorance is not a substitute for bravery. Bravery may result in misadventure as well as success. Virgil cannot be held liable for any failure attributed to feats of bravery

'It seems to be a law of nature, inflexible and inexorable, that those who will not risk cannot win.' John Paul Jones

Last week I had the pleasure of participating in a recording for Timandra Harkness’s slot on risk for Radio Four’s Human Zoo, over a roulette wheel at the Hippodrome.

It was a pleasure on three levels: First, she is a very erudite and entertaining lady who can put across complex ideas in a clear and engaging manner. Second, my efforts to show that chips are likely be quickly lost if bets are ‘high risk / high return’ rather backfired with a couple of lucky wins. Finally, it got me thinking about the sector’s rather odd relationship with risk.

Risk is at the very heart of the gambling sector: It is a key motivator of betting and gaming customers. It is also accentuated from an industry perspective (versus ‘normal’ business) due to the often troublesome presence of regulation. For customers and businesses alike, things can go wrong when people lose their understanding of risk, or perhaps gain an appetite for it above their means or abilities to engage with it.

Given its products, customers and operating environment, the gambling sector should be one of the most switched on sectors to risk. However, it is often curiously blind to it. The sector has proved spectacularly bad at predicting or managing regulatory risk in many cases: Only recently bingo’s tax victory came after years on the wrong side of change. From a product perspective, the default setting is typically to keep gross margin high rather than engage with value and recycling which is especially seen in betting but also in gaming.

The betting sector has boomed over the last fifteen years, but it is instructive to consider this started from government-backed regulatory reform with the move from turnover tax to GPT, and then led by ‘outside’ innovators (eg, Betfair for the exchange and racing value, Bet365 for in-play). The established operators, who have theoretically been managing risk as a business model throughout their long histories, tended to be on the wrong side of these big changes and have often suffered, or caught up late accordingly.

A similar trend has historically been seen in gaming machines and pools.

Managing risk should be about logically weighing up probabilities and then taking a course of action to suit your needs.

For some businesses and customers this might mean a dull but sustainable low return environment: to be noticed the bets would have to be big as per GTECH – IGT. For other businesses and customers, the hope of doing something that has higher returns but contains much higher risk might be more desired or appropriate like the example of IGT buying Entraction. A key problem is that risk is often asymmetric and latent. 

Curiously given the lessons of risk, some customers and most operators don’t even ‘plan to lose’ even in a high risk environment, instead they fall for their own hype. When IGT bought Entraction for US115m, in a space it had the capacity to fully understand, a year after the acquisition it was closed down; conversely it bought social gaming site Double Down for US$500m – a bigger price in a space far from the ‘regulated real-money’ core which has (so far) gone from strength to strength. Often executives are taken in by upside potential and choose not to properly understand the downside, especially if the target is in an ‘exciting’ space distant from the acquirer’s core expertise (by geography, channel, or product or, in the worst cases, a combination). This isn’t usually managing risk, often it is simply being seduced by it.

 Further, this seems most prevalent in the ‘high growth’ remote sector: as my colleague Scott Longley explored in his blog “Show US your knockers”, “hyperbole and online gambling are inextricably linked.”

What happened in the US dotcom market is a good case study. Prior to UIGEA (which interpreted a poorly worded ‘prohibition’ on online gambling to allow its enforcement), US-facing operators told everybody there was a very low risk of negative legislative change; for year after year nothing happened. The money rolled in and they looked as if they were right; suddenly in October 2006, they weren’t right anymore. Perhaps because it was a Bush White House which passed the restrictive legislation, the sector ‘got away’ with blaming a small cohort of reactionary politicians: how could they have predicted that? It wasn’t their fault…

But all the warning signs were there: for example, the fate of Neteller’s founders (a major US-facing ‘wallet’ and payment processor), who were arrested and pleaded guilty to conspiracy in 2007 would have happened even without UIGEA - creating a much harder situation to explain to hitherto gullible investors.

Similar ‘bromide’ dialogue about regulatory risk was deployed around online operators exposed to protectionist states within the EU (especially Germany), the loss of certain gaming machines in the UK bingo and casino sectors in 2007 (Section 16/21 machines), and numerous other examples which have led to entirely predictable profit warnings and business dislocation. The problem is not necessarily that the sector misrepresents risk to its stakeholders, it often misrepresents risk to itself, even when possessed of ‘all the data’: a subject reflected on by my colleague Dan Waugh in his blog “Crouching Tiger, Hidden Black Swan”.

A sustainable corporate strategy, as well as effective dialogue with lawmakers and regulators, must be based upon a clear, articulated and honest assessment of risk. Without it, the sector is likely to stumble it to yet more regulatory pitfalls while focused on ‘growth’ or looking for others to blame.

Show US your knockers: The limits of boosterism in US online gambling

By Scott Longley, Editorial Director - Regulus Insights

‘The booster’s enthusiasm is the motive force which builds up our American cities. Granted. But the hated knocker’s jibes are the check necessary to guide that force. In summary then, we do not wish to knock the booster but we certainly do wish to boost the knocker.” Sinclair Lewis in an editorial entitled ‘The Needful Knocker’, 1908

Hyperbole and online gambling are inextricably linked. From the very first inception of the form, online gaming has surfed a wave of enthusiasm based on double-digit player number expansion rates and sky’s-the-limit predictions for continued future growth.

But even as the online gambling boosters continue to preach the message of state-by-state regulation in the US, it might be argued that their argument is in danger of losing its lustre as other forms of gaming, unencumbered by existing tight regulation, grab the headlines - and crucially the players.

The latest eruption of online gaming hype comes in the form of Amaya. It’s share price performance in 2013 was one of the stories of the year within the global gambling sector as the company moved to complete the coup of the decade in completing the C$4.9bn reverse-takeover of PokerStars.

The legitimation of PokerStars and its holding company Rational Group – at least in the eyes of the investors and the institutions which bankrolled the buyout – has provided all the encouragement that was needed for those that believe that Stars’ belated entry into the regulated US online gambling market will kickstart what has otherwise been a lacklustre – not to say moribund – beginning.

This is not just about New Jersey, where PokerStars is tipped to gain entry to the market in the first quarter of 2015. It’s also about California where the Stars’ presence among the market entrants is seen by many as a pre-requisite for a poker-only market to have any chance of not being stillborn.

Appropriately perhaps US state-by-state boosterism is perhaps the last bastion for the cheerleaders of online gambling, and PokerStars in particular has become the totemic cure-all - the one necessary ingredient which will unleash the flow of revenue in any given virgin market.

All of which might well be true; in truth no one knows because the company and its product is yet to be tested in any regulated US market. We know that in terms of gross revenues PokerStars has been successful in regulated markets in Europe – though whether that extends to profitability remains open to question.

What we do know is that PokerStars and its new owners have a number of reasons to be hopeful; as David Baazov, chief executive at Amaya Gaming, made clear in his interview with Forbes magazine in September last year PokerStars has 89 million registered customers.

That number means a lot, particularly if Baazov and Amaya succeed in the stated aim of successfully converting those to date poker-only customers to casino and sportsbook. But the number is still worth examining in the context of other online phenomena currently also underway in the US.

The 89 million is global lifetime customers. According to Forbes, monthly actives stood at a more digestible five million. That is still a substantial number, given the likely revenue per player per month figures that accompany it. But it should be seen in the context of the kind of numbers being racked up by the social casino sector.

Playtika – owned by whichever is currently the most solvent of the Caesars corporate entities knocking about at present – and its Slotomania offering achieved in the third quarter 5.64 million average daily active users and 17.8 million average monthly active users.

Double Down – bought by IGT back in 2012 for what seemed an outrageous sum of $500m – achieved a daily active users number in the quarter to September 2014 of 1.82 million and a monthly active users figure of 5.72 million over the same period.

Over at Zynga the social casino segment saw revenues grow 77% year-on-year in the third quarter while monthly average users rose 35% sequentially, and there are more such impressive figures further down the feedchain from the likes of GSN/Bash Gaming, Big Fish Games (recently bought by Churchill Downs), Williams Interactive, PlayStudios and many more.

Crucially this growth comes unhindered – mostly – by the type of regulatory mantraps that ensnares gambling companies. Regulation plays the statutory role of the knocker in our booster analogy, as the owners of the social casino operators are all too aware. From inception, they have lobbied – to date successfully – for social casino to remain outside the remit of the various gambling regulators.

(It’s likely all the more galling that many of these social gaming operations are owned by largely land-based gaming entities, but that’s a not altogether unimportant side issue).

But social casinos aren’t the only sector enjoying life without regulatory frontiers. Growing at a similar pace in recent years has been the daily fantasy sport operators. Enjoying a form of favoured trading status with the all-powerful US sporting bodies, the fantasy sports operators such as Fanduel, Draftkings and Draftday have successfully swerved any regulatory restrictions or prohibitions.

It was the subject of a carve-out from the UIGEA legislation in 2006 and two court decisions – Humphrey v Viacom in the US District Court of New Jersey in 2007 and Langone v Fanduel in the US District Court for the Northern District of Illinois in 2013 – have agreed that participation in daily fantasy sports does not constitute having a bet or a wager.

While the dotcom operators were hounded, prosecuted and otherwise harried out of the dotcom space from the early 2000s onwards, fantasy sports found, like social gaming, the ‘online games’ field vacated and quickly filled the vacuum. According to widely publicised figures from the Fantasy Sports Trade Association, the industry now has over 41 million customers and counting in the US.

Online gambling still has its champions – Amaya’s 2014 share price performance is proof of that – but they are now operating in an increasingly complex environment where the competition will be unlikely to give up ground easily.

Whether state-by-state gaming – whether poker-only or not – will be able to generate enough excitement to gain any substantial traction is very much open to question. The fear among the pro camp must be that it is now seen as a form of online gaming participation whose time in the spotlight has already been and gone.

Boosterism in the US was originally driven by the railroads, a form of transport which was superseded by the introduction of the automobile. It might be the fate of online gambling to find itself similarly overrun by a newer, faster and nimbler form of transport.