Analysis: Has Sky Bet peaked?

The story of Sky Betting & Gaming (SBG) to date has been one of almost uninterrupted, unparalleled growth. Even in the most recent financial year (to 30 June) when the operator was already the biggest betting brand in the UK, SBG saw revenues jump 30% to a whopping £670m.

However, there are also some warning signs that this rapid growth is at last beginning to slow. Q1 2018 revenues were up ‘just’ 18% year-on-year, while Q2 slowed further to 15% growth. Staking was also soft, growing 8% in Q1 before dropping to -4% in Q2, while gaming in Q2 was also relatively weak at +8%.

The obvious question then is whether this is a natural slowdown as SBG nears maturity, or whether there are some structural trends that mean SBG is facing serious competition for market share. SBG itself, of course, chose the former, blaming the staking slowdown on dramatically bookmaker-friendly results in Q417, which limited recycling all the way through Q2. Results this year have also been customer-friendly, further impacting revenues.

Not everyone is buying it, however. “I was a little bit surprised when [CEO] Richard [Flint] used bad results in December as an excuse for staking levels in April and May,” says one City analyst, speaking off the record. Meanwhile, Goodbody Stockbrokers points out SBG’s edge in performance is “not as significant as it has been”, and there is evidence other brands are “nipping at its heels in the UK or, in some cases, have overtaken its growth rates more recently”.

The much-maligned and equally large Paddy Power Betfair, for instance, saw sportsbook revenues grow at 23% compared to SBG’s 18% despite facing the same market and sporting results trends. “It appears that other brands are clearly catching up with SBG,” Goodbody says.

If you can’t beat ‘em…

One theory for the slowdown is that Sky Bet’s product and innovation edge has been whittled away by copycats. Industry executive Eoin Ryan points out on Twitter that Q218 saw “almost all their rivals releasing direct (and in many cases superior) products in the RAB [request-a-bet] sphere”.

Ryan adds: “They would surely have felt that competition. Also, their World Cup promotional offering seemed somewhat tame against the likes of Ladbrokes Coral.” Indeed, the Ladbrokes brand also outperformed Sky Bet during the quarter, and while some of that may have been driven by marketing, it would have been unthinkable a year ago.

The copycats are indeed a problem, agrees Investec analyst Alistair Ross. “That’s going to happen more and more,” he warns. “What are the barriers to entry in the gaming market? It’s a very commoditised market.” However, SBG’s Flint plays down the threat of increasing competition on a recent investor call, saying it was “very difficult” to copy the SBG model.

“You’ve seen over many years we’ve managed to grow in this competitive market for really two reasons,” Flint says. “One is the relationship with Sky and, secondly, we are fairly unique in that we are a real digital company that shares information and builds from the bottom up to drive innovation. I see that continuing because those are two things that are very difficult to copy. Sun Bets tried but weren’t able to get traction, and in this environment it’s going to get more difficult for the smaller companies.

“We have also seen some of the larger companies try and imitate us, which is the sincerest form of flattery and I’d see that carrying on – but I think it’s very hard for them to replicate the tech focus and that media relationship, so I’d anticipate us continuing to win in that group.”

Howdy partner

As noted above, the product and innovation of SBG is perhaps replicable, but the media partnership is certainly less so. But is even that edge diminishing? One industry exec, speaking off the record, notes that when Sky Bet launched, Sky Sports had a virtual monopoly on football, which translated to an almost captive audience for Sky Bet. That football monopoly is long gone in 2018, though, with BT Sport taking a large chunk of games and new rivals like Amazon also competing for match rights.

So, could that further blunt SBG’s edge of having a low-cost customer acquisition funnel? Not so, according to Ross. “Sky might be lowering its investment in Sky Sports, but those new customer sign-ups aren’t suddenly going to fall off a cliff,” he says. “Watch out for where these customers are being cross-sold from. Sky News is still massive. [Prediction game] Super 6 is still massive. Not all the customers are coming from Sky Sports.”

Taken altogether then, it seems SBG is no longer a lock to keep taking market share as it has been doing for several years. But The Stars Group acquisition – and the $4.7bn price tag – was never just about the UK. As Regulus Partners notes: “In the context of this noticeable gapping down in growth, Stars’ ability to unlock new markets becomes increasingly important.”

International plans

Indeed, Stars said on the recent investor call it planned to develop a new international sportsbook platform with parts from SBG, CrownBet and its existing tech, which would ultimately be used in Germany, Italy and the US. In the short term, it said it planned to rebrand BetStars in Italy, and make the most of the Sky Bet Italia partnership. The biggest opportunity, however, is the US, where Stars aims to leverage Sky Bet’s “deep expertise on the integration of media and sports”.

The Toronto-listed giant is looking for a media partner in the US which can act as its Sky. It’s a relatively small list to pick from, including the likes of CBS, ESPN and NBC, and comes with two main questions. Firstly, does any media company want to get into the betting business, and secondly, will it even work?

For one, there’s a perceived legal and reputational risk around the nascent US betting market. Some experts aren’t even sure whether interstate betting is legal under the Wire Act. “Does ESPN, for example, want that risk when it’s so uncertain and only 20% of the country is open for betting?” asks US sports law professor John Holden.

Charles Gillespie, CEO of affiliate company Gambling.com Group, agrees that the biggest media brands like ESPN are unlikely to be getting directly involved in betting. “The Americans hold their brands as sacrosanct,” Gillespie says. “They are extraordinarily careful about how they spend those brands and ESPN going to ESPNBet seems like a leap too far for them at the moment.”

Others are more optimistic about finding partners, but it’s not a given that even Sky Bet itself will be able to replicate the its own model that was such a unique confluence of factors. It certainly hasn’t seen similar success in Italy and Germany so far. US analysts Eilers & Krejcik Gaming said in a recent update: “It’s worth noting the Sky Bet model took many years to find cut-through in the UK market and growth internationally has been very slow to-date, so we’d caution over expecting a similar model to be immediately impactful in the US.”

SBG, then, is still a universally admired and formidable business, but it’s no certainty that the next decade will be as plain sailing as the last one.