Online Gambling: Market forecast and assessment to screendigest

Transcription

1 Online Gambling: Market forecast and assessment to 2010 screendigest

2 Table of contents Online gambling: Market forecast and assessment to 2010 Table of contents 3 Tables and charts 5 Executive Summary 9 Online gambling forecasts 9 UK 9 World 11 Assumptions in our forecast model 11 1 Coverage 15 Remote Gambling 15 Remote gambling business model 15 Operational impact of supplying online gambling products 16 Single wallets and shared purses 17 Territorial coverage 17 UK 17 UK gambling market 18 Offshore operators 19 Gambling product categories 20 Basic gaming formats 21 Sports betting ( Sportsbook ) 21 Fixed Odds 21 Exchange or Peer-to-peer (P2P) betting 23 Spread Betting 24 What is spread betting? 24 Financial spread betting 25 Gaming 26 Online gaming 27 Poker 28 Peer-to-peer Skill Gaming 30 Games 30 Competition Formats 31 Third party suppliers 32 2 Market drivers and barriers to growth 35 Regulation 35 Regulation in the UK 36 Existing UK regulatory situation 36 UK Gambling Act UK regulatory reform 38 The Gambling Commission: 38 Regulating remote betting 40 Regulating remote gambling across national borders 41 The single market? Regulation in the EU 44 Greece 46 The Netherlands 46 Hungary 46 Denmark: 46 Norway 47 Sweden 47 Germany 47 France 47 Italy 49 Europe and beyond 50 Regulating Remote Betting in the USA 50 Enforcement 52 Guerilla Marketing 53 3 Platform installed base 57 Narrowband vs Broadband 57 UK consumers purchasing online 59 Internet 59 UK installed base 59 Western Europe (excl UK) Installed base 59 US Installed base 60 Total Installed base 61 Blackmail, extortion and DDOS

3 Online Gambling Interactive Te levision Gambling ( itv Gambling) 61 What is itv gambling? 62 UK itv installed base 65 Connected Mobile devices 66 Can mobile gambling stand alone or is it an extension of online gambling? 66 How do we get to our customers? 67 4 Sports betting company profiles 71 William Hill 71 Ladbrokes 75 Coral Eurobet 78 Victor Chandler 79 Tote Sport 80 Tote ownership and planned sale to the British racing industry 80 Tote Products and Performance 81 ukbetting 83 Paddy Power 85 Rank Group 87 Stanley Leisure 90 Sportech 90 Sportingbet 92 Acquisitions 93 Global reach, local execution 93 Performance 95 Sportingbet enter Paradise 97 Future 99 Skybet 100 Stan James 102 Betonsports 102 Betinternet 107 Bet Gamebookers 108 Unibet Exchange betting company profiles 113 Betfair 113 Introduction 113 Background 113 The effect of Betfair on the wider gambling industry 113 Development 117 Product 117 Performance 118 Poker 120 Expansion: International exchange betting markets 121 The Future 123 Betdaq 123 ibetx 124 Betsson 124 Join the Party? 130 The Future Holdings 133 Background 133 Performance 135 The Future 137 Empire Online 137 Performance 139 Empire: potential bid target? 139 The Gaming Corporation 139 Background 140 Structure 141 Performance 141 Gaming VC 142 Spread Betting Company Profi les 143 Sporting Index 143 IG Index 144 The Future The National Lottery 147 Introduction 147 Products 148 Distribution Future directions for online gambling 151 Regulation: the Gatekeeper 151 UK: 2006 Gambling Act taking shape 151 Impact on online operators 152 itv Gambling 152 Europe: state vs the European market 152 US: regulation largely ineffectual, online gambling flourishing 153 Players and products: the shift from hardcore to casual 154 The importance of scale 160 Industry shakeout: the march of consolidation 161 London Listings 162 Online gambling mergers and acquisitions 162 Growth by acquisition 163 High street operators 166 Glossary Poker and gaming 127 PartyGaming 127 Background 127 Performance 128 Performance screendigest 2006

4 2 Market drivers and barriers to growth Regulation The regulatory regime operators must adhere to is the most powerful factor in determining industry performance. Gambling is a compulsive and potentially addictive activity and societies have traditionally sought to control it proactively, often allowing it only on the basis that the industry contributes to government financially. Thus regulatory environments vary from country to country, largely contingent on entrenched social attitudes towards gambling. There is a widespread recognition that any steps to increase the ease and convenience with which gambling products can be accessed will invariably result in an increase in gambling activity. This has been shown time and time again with the extension of UK shop-owning hours and Sunday trading, the introduction of telephone betting, fruit machines, the introduction of the National Lottery into the UK and most recently with the expansion of remote betting services across digital sales channels such as the Internet, itv and connected mobile devices. All these developments have contributed to an increase in UK consumer spending on gambling over the last 20 years. A social cost arises from sacrificing regulation to the altar of operator profitability. Unfettered access outside licensed premises such as betting shops to the highly compelling FOBT phenomenon would result in larger returns for the industry, but would also result in an increase of gambling-related problems. The experience of Australia in allowing the installation of huge numbers of high stake/ high jackpot gambling machines in bars as well as licensed gambling premises has given rise to one of the highest rates of gambling addiction in the world, at around two per cent of the adult population. Researchers believe that the convenient and easy access the population has to Pokies is a significant contributory factor in the development of widespread gamblingrelated problems. Russia is currently allowing the unrestricted deployment of such machines, and may soon provide another illustration of the effects on society of an unregulated gambling industry. The main ways in which regulation affects the gambling industry are: Tax: both the level of taxation and the way in which it is levied. For example, whether the tax is levied on individual bets or on the gross profits or revenues of the bookmaker. The UK changed from levying tax on individual bets to a Gross Profits tax in 2002, after a number of compnaies established offices outside the UK to offer their customers bets under more favourable fiscal terms. Although they could not match this offer in UK high street betting shops, there was sufficient business over the Internet and telephone to justify the move. The incentive for UK operators to maintain an offshore arm diminished substantially following this change in UK law. Outside tax burdens specific to the gambling industry, there is the wider tax environment to be considered. Established territories like the UK tend to have heavier corporate tax burdens than the gaggle of jurisdictions with offshore financial centres 35

5 Online Gambling clamouring to play host to online gambling operators. Territories such as Malta, Gibraltar, the Netherlands Antilles, Antigua and Costa Rica offer both competitive tax regimes specific to gambling, and the low or no tax benefits of an offshore financial centre. What distinguishes these territories from other offshore states is their amenability to gambling, relative political and legislative stability, and sound telecommunications infrastructures. For Malta and Gibraltar, membership of the European Union in principle provides a base with rights to export goods and services across the 25 member states. An assessment of the relative tax environments of the world s leading jurisdictions for online gambling operators is beyond the scope of this study. However an awareness that the UK is competing with some very low tax environments, regarding both taxes specific to the gambling industry (license fees, gaming duties, betting duties) and those applicable to the general corporate environment is important. Licensing: the permits to enable a business to offer betting and gaming services are accompanied by numerous regulations affecting diverse areas of operation. These will vary from territory to territory but commonly include: fit and proper persons criteria for key personnel; financial probity, capital adequacy checks, perhaps insistence on some form of bond or security deposit; rules on types of products which may be offered e.g. legislation often protects state-owned lottery monopolies from competition. The UK did not allow the operation of online gaming servers until after the 2005 Gambling Act; rules on marketing and advertising: restrictions on the promotion of unlicensed, offshore gambling operators is one of the key weapons regulators use against uncooperative operators; locations and number of betting shops, casinos and bingo halls permitted in a given area; rules regarding operational matters, including which payment methods may be used (for example, credit cards may not be used in fruit machines in the UK), jackpot and stake limits on machines, machine location (the 2005 Gambling Act outlawed fruit machines from unlicensed premises such as minicab offices and fish and chip shops), rules on repeat play and rate of play; restrictions on what may be positioned in licensed premises: number of machines, seats at gaming tables and cooling off zones where no gambling opportunities are available. Regulation in the UK The regulatory regime in the UK underwent its most extensive overhaul for 30 years in The changes were momentous and included the establishment of a new body the Gambling Commission - which has taken up overall responsibility for all regulation of betting and gaming in the UK. A new Act of Parliament, the 2005 Gambling Act, provided the legislative framework to replace or subordinate existing legislation. Existing UK regulatory situation Until the implementation of the 2005 Gambling Act (which will not be completed until the second half of 2007), the UK s gambling industry must operate under the rules laid down in the Betting, Gaming and Lotteries Act 1963; the Gaming Act 1968 and the Lotteries and Amusements Act The restrictions which apply to remote gambling operators include: online gaming cannot be provided by infrastructure situated in the UK because the physical premises where the player for these activities is located during play must hold a gaming license. Naturally licensing the homes of individuals who like to indulge in online gaming is impractical and unfeasible. This encompasses casino gaming; numbers gaming, online slots, poker and bingo. offering incentives, inducements or encouragement in any advertising or promotional activity for gaming products is illegal under the 1968 Gaming Act. This is one area which operators, especially those based abroad, have disregarded to varying extents. Effectively, special offers such as the common deposit matching account opening incentives, or even exhortations to gamble are illegal. UK Gambling Act 2005 The government decided to reform the regime because: Existing legislation has been in operation for over 30 years and does not take into account new technologies or changes in the 36 screendigest 2006

6 1 Coverage of products in more geographically diverse markets than ever before. There are a number of advantages for operators in dealing with their customers remotely. Operators enjoy a much closer relationship with the remote gambler as opposed to the anonymous high street betting shop cash punter. The requirement for all remote gamblers to have an account is one enormous benefit for the operator. In the majority of cases the account is little more than a username, password, contact details, deposit, withdrawal and transaction history but this enables the bookmaker to compile business intelligence data from their customer s behaviour. This gives operators information on which to determine strategy across a number of operational functions. In addition a gambler s transactions form an audit trail which is increasingly being used by regulators to investigate and prosecute fraudulent gambling activity. Single wallets and shared purses Operators were quick to realise that accounts opened to bet via one digital remote sales channel could easily be used to gamble across other channels without the need to open another account. The same concept is applicable to customers of operators with broad product portfolios. For many sports betting operators, a sports betting account can be used to back a dog by telephone, play a Hi-Lo numbers game on a connected mobile device, enter an online poker tournament and indulge in some fixed odds betting terminal ( FOBT ) gaming in a high street shop. All operators have moved towards enabling their customers to use a single account to bet across all product lines and all delivery channels - often dubbed single wallet or shared purse functionality. Between 2003 and 2005, a number of early diversified operators required customers to open a separate account if they wished to use a product line different to the one they had initially registered for. For example, some sports betting operators added casino gaming to their websites during this time. However even if a customer had funds in his account these could not be used for the online casino even though the supplier was the same. To play in the casino required the customer to make a separate deposit and effectively manage two separate accounts with one gambling operator. This was a side effect of third party suppliers supplying off the shelf technology to enable operators to quickly add online gambling products to their website. Initial deployments of third party products often failed to integrate customer account facilities between products until long after the product was launched. Considering the hoops one had to jump through in order to play roulette (say) a decade ago, the ease with which online gamblers can access a wide variety of products across multiple remote sales channels represents a step change in availability, and constitutes a further challenge to regulators. The number of gamblers consistently using more than one sales channel is impossible to quantify on available data. Anecdotal evidence from the largest multichannel operators suggests that the proportion of gamblers regularly transacting across more than one delivery channel is less than one fifth of their active client bases. Territorial coverage UK UK operators cater to a substantial number of foreign gamblers as well as UK-based gamblers. Much of this originates from territories which have legislated against gambling, as it is very difficult to control all the means by which an individual may place a bet remotely. This has presented regulatory authorities with an interesting conundrum: maintain restrictions on gambling in the knowledge that circumventing these is as easy as making a phone call (for players) or setting up an website in a hospitable territory (for operators), or allow gambling in a regulated environment with explicit rules to mitigate the development of gambling problems and bolster tax revenue. However this risks antagonising powerful interest groups which routinely oppose any expansion of the gambling industry. The UK remains a relatively desirable location for gambling businesses because of a number of factors: The historic, cultural acceptability of betting (even the Queen bets). The level of participation in gambling in the UK is very high because of the National Lottery and traditional, entrenched attitudes towards gambling. A survey conducted in February 17

7 4 Sports betting company profi les Online poker has grown rapidly since William Hill launched its poker room in January Poker revenue increased 151 per cent between the first half of 2004 and the first half of Further growth will be driven by the company s efforts to convince more of its sports betting customers to try the game; sponsorship of high profile tournaments such as the William Hill UK Poker Open; and increased public awareness of William Hill sponsored, UK-based poker professionals such as Smokin Steve Vladar. William Hill sent 30 poker players to the World Series Of Poker in 2005, all of whom qualified through William Hill hosted online tournaments. Whether William Hill s future growth will be predominantly organic or generated by acquisition was the subject of intense speculation at the end of Persistent rumours about a bid for the Rank Group (owners of Bluesq) became deafening following Rank s disposal of its only nonleisure oriented asset, the Deluxe film processing arm. As well as Bluesq, Rank would give the operator UK-based assets in the terrestrial casino and bingo markets with significant market share in their respective industries, as well as the breadth and scale to compete with the newly forged Gala Group / Coral Eurobet entity. It would also give the company a range of leisure interests (casinos, hotels and restaurants under the Hard Rock brand). By April 2006, there had been no further developments regarding large scale acquisitions. Ladbrokes Ladbrokes was a part of the Hilton Group PLC which was renamed Ladbrokes PLC at the beginning of In December 2005 the Hilton Group sold its substantial international hotel business to the US-based Hilton Hotels Corporation for 3.3bn. The transaction leaves behind the Ladbrokes betting business and also saw the resignation of Stephen Bollenbach, Chairman of HHC, from the board of the Hilton Group. This is significant as the presence of an American, US-based executive on the board of the Hilton Group was one of the main reasons Ladbrokes did not target US-based gamblers for fear of regulatory action against Bollenbach. Bollenbach was given a seat on the Hilton Group board in a reciprocal arrangement which saw David Michels, Hilton Group Chief Executive, appointed to the Board of HHC following a strategic alliance between the Hilton Group and HHC in Ladbrokes PLC will retain the Hilton Group s listing on the London Stock Exchange. However the operator has received a number of approaches from private equity investors following the separation, and its future ownership structure remains the subject of much speculation. By April 2006 there had been no publicly acknowledged progress towards a change in ownership structure. Given the absence of bid discussions, Ladbrokes forseeable future appears to be as a quoted multichannel gambling operator. A substantial amount of the proceeds from the sale of the hotel division will be returned to Hilton Group shareholders as cash. However, the company has stated that there is flexibility if there are pressing needs for capital, say for a large scale acquisition. Ladbrokes is organised in three divisions: retail, telephone and egaming. The operator is dominated by the high street betting shop network which numbered 2,134 shops at the end of Ladbrokes expanded its estate in July 2005 with the 76m acquisition of the Wales-facing high street operator, Jack Brown, consisting of 141 shops. Hilton Group Financial Summary m Group Turnover 3, , , , , ,354.9 Hotels turnover 1, , , , , ,849.4 Hotels operating profi t Gambling turnover 2, , , , , ,505.5 Gambling operating profi t

8 Online Gambling 1,000m 800m 600m 400m 200m 0m 2000 egaming telephone shops 2001 As with other large high street operators, machine gaming comprising fixed odds betting terminals ( FOBTs ) and amusement with prizes machines (AWPs ) has proved phenomenally successful for Ladbrokes with 7,836 machines in operation at the end of Of these 6,403 were Ladbrokes gross margin by division chart broadband households households 2005 FOBTs and 1,433 were AWPs earning average gross margin of 545 and 232 per week respectively. The introduction of machine gaming into Ladbrokes LBO estate has powered turnover growth to 11.5bn in 2005 from 2.6bn in Machines accounted for 199m of gross margin in 2005, an increase of 12 per cent on 2004 machine margin. Because turnover growth is overwhelmingly attributable to low margin machine gaming retail gross margin has grown at a much slower rate -- from 400m in 2000 to 683.6m in 2005, at a CAGR of per cent compared with 39.4 per cent for retail turnover. The Ladbrokes website initially offered sports betting before launching casino-style gaming at the end of 2000 and poker in Multi-currency capability and foreign language versions of the website have been implemented. Ladbrokes also boasts single wallet functionality across all online product classes and remote and terrestrial sales channels: account holders may deposit, withdraw and bet online, by telephone, itv (Ladbrokes has itv betting services on NTL, Telewest and Sky Digital), mobile device and Ladbrokes gross margin by delivery channel m shops telephone egaming Ladbrokes gross margin by delivery channel percentage split % shops 94.1% 89.6% 85.1% 86.1% 82.2% 82.9% telephone 3.7% 5.1% 5.1% 4.3% 6.1% 2.5% egaming 2.2% 5.3% 9.9% 9.5% 11.7% 14.6% Ladbrokes egaming customer analysis HY 2005 Registered users 111, , , ,500 1,200,500 1,395,500 new registrations 105, , , , , ,000 Active Sportsbook Users 38, , , , , ,000 Active Casino Users 6,000 27,000 46,000 80,000 81,000 46,000 Active Poker Users 0 0 8,500 25,000 64,000 93, screendigest 2006

9 4 Sports betting company profi les 150m 120m 90m 60m 30m 0m over the counter at any Ladbrokes betting shop. Ladbrokes egaming gross margin by product Ladbrokes gross margin split arcade gaming poker casino sports betting 2005 broadband households households m sports betting casino poker arcade gaming egaming gross win Ladbrokes gross margin percentage split m % sports betting 29.7% 26.8% % casino 37.6% 31.8% % poker 25.9% 33.6% % arcade gaming 6.8% 7.8% Ladbrokes egaming split between sports betting margin and other online product classes m sports betting % sports betting 29.7% 26.8% non-sports betting % non-sports betting 70.3% 73.2% Ladbrokes egaming division has experienced considerable growth since its high profile launch in Online sports betting is the key recruiting tool as the Ladbrokes brand has historically been associated with sports betting. New customer recruitment has increased year on year since 2000, from 105,000 in 2000 to 357,000 in The large increase between 2003 and 2004 is largely attributable to the international football tournament, the European Championships. The World Cup will be held in 2006 and offers the potential to drive new registration volume to record levels. As at the beginning of 2006 Ladbrokes egaming division boasted over two million registered customers. egaming turnover and gross margin have eclipsed telephone betting performance since The gross margin rate achieved is higher because the channel is less vulnerable to the margin shifting effects of sporting results, largely because the operator has steadily increased gross margin generated by fixed margin online gaming products. Telephone betting gross margin is volatile relative to egaming because telephone betting transacts sports bets only. In addition Ladbrokes encourages its highest staking sports punters to bet by telephone meaning a bad run of results can severely hamper financial performance. Last year (2005) was such a year. In 2001 telephone betting generated 25.2m in gross margin, rising to 46.1m in In 2005 a poor run of results cut gross margin to 21m leading to the division making a loss of 100,000 over the year. Interactive gambling accounted for 12 per cent of Group gross margin in 2004, rising to 14.6 per cent in egaming growth has been driven by the operator s non-sports betting product range, the most notable of which is its online poker operation. This has grown rapidly. In 2004 active poker players swelled to 64,000, doubling in less than a year and subsequently growing to over 93,000 customers in H Poker margin grew from 23.1m in 2004 to 41.4m in In a wider context the success of poker as well as online gaming has seen Ladbrokes generate over 70 per cent of its online egaming margin from non sports betting products in which it had negligible core expertise before entering online gambling, a quite remarkable progression for an operator historically rooted in sports betting. Ladbrokes has targeted some foreign gambling markets, having applied for local 77

10 Online Gambling gambling permits in a number of EU member states (such as the Netherlands and Sweden), and has been involved in the recent spate of court cases testing the validity of national protectionist gambling legislation and European law (see chapter regarding European regulation). Ladbrokes appears to be positioning itself to exploit the inevitable unravelling of regulatory controls in the national gambling legislation of Europe countries, and one straightforward way to exploit this trend is through localised versions of its website. Ladbrokes currently owns shops in Belgium and the Republic of Ireland. However we anticipate that Ladbrokes would seek to establish retail networks in other European territories, if it can successfully secure regulatory clearance. In early 2006 the operator revealed it had assisted the China Sport Lottery (Beijing) Sales and Marketing Co. in setting up a football pari-mutuel retail soccer betting operation. Having divested Ladbrokes egaming active users by product chart s Active Poker Users Active Casino Users Active Sportsbook Users broadband households households Ladbrokes turnover split between UK and non-uk based gamblers m non-uk egaming turnover UK egaming turnover % egaming turnover from non-uk based clients % egaming turnover from UK based clients 31.7% 34.1% 27.9% 32.4% 68.3% 66.0% 72.1% 67.6% itself of its hotels division, Ladbrokes is looking for opportunities to expand outside the UK. The operator may also bid for the right to manage the UK s National Lottery when the license is up for renewal at the end of Coral Eurobet Coral Eurobet are the third largest high street betting shop operator in the UK with 1,267 shops as at October Its purchase of the Eurobet Internet sports betting operation in 1999 gave it an established (mainly continental European) customer base and a Gibraltarissued betting permit from which to base its international business. The business is made up of two units: the UK-based Coral and Eurobet, based in Gibraltar. Coral Eurobet has changed ownership numerous times since Joe Coral opened his first trackside betting pitch in A proposed acquisition by Ladbrokes in 1998 failed at the hands of the UK competition authorities, who believed that this would concentrate too great a percentage of the UK s high street betting industry under one operator s control. Following confirmation of the Government s stance to consolidation of the largest terrestrial UK gambling businesses, Coral began its current phase of operation under the ownership of a succession of venture capital investors. Morgan Grenfell Private Equity acquired the business from Ladbrokes in 1999, and in 2002 the firm was acquired by Charterhouse Development Capital for 860m. Gala Group In one of the most dramatically transformative deals ever seen in the UK gambling industry, Coral Eurobet was acquired by the Gala Group (itself owned by a consortium of private equity investors: Candover, Cinven and Permira) in October 2005 for 2.18bn (valuing the group at 10 times Coral Eurobet s forecast 2005 EBITDA of 218m, which was in line with wider industry multiples for quoted UK high street gambling operators at the time of the transaction) creating Europe s largest privately owned gambling business with an enterprise value of 4bn. The Gala Group is the UK s largest bingo operator and also operates a UK casino estate, most of which it acquired from Ladbrokes in December The enlarged entity is called the Gala Group, 78 screendigest 2006