Risky business: weighing up the opportunities in Asia

When Flutter withdrew its PokerStars brand from China at the end of August, it was the latest publicly listed operator to take a step away from Asia’s lucrative online gaming market. While Flutter’s Paddy Power and Betfair brands had long taken a conservative approach to the Far East, its merger with The Stars Group (TSG) increased exposure to the region’s grey markets. “As confirmed in our recent interim results statement, we have been reviewing the compliance standards and market exposures of the combined group following our combination with The Stars Group,” a Flutter spokesperson told EGR shortly after the announcement. “While we are yet to fully complete our review, we have identified areas where improvements need to be made. There were a small number of TSG jurisdictions that Flutter had previously determined it would not operate in and in such cases, these markets are being switched off.” Although the company did not single out these jurisdictions by name, it was widely reported that China, Taiwan and Macau were the ones impacted. A publicly listed operator withdrawing from China is nothing new. As far back as 2013, William Hill announced it would no longer take bets from the world’s most populous country for regulatory reasons, adding that it was unlikely to return “for the foreseeable future”. But regulatory uncertainty – the reason traditionally cited for backing away from Asia’s grey markets – is hardly the preserve of markets in the Far East. Operators in the supposedly stable, regulated white markets of Europe have also been stung by sudden changes to licensing, particularly in the UK with FOBT stake cuts and Spain and Italy introducing restrictions to advertising and sponsorship. “I believe it’s got more to do with shareholder leverage. In other words, when the shareholders – not the board – control the valuation of the business, they are, in effect, driving the strategy of the business,” says Julian Buhagiar, co-founder of boutique investment and M&A brokerage RB Capital, which has a focus on the gaming sector and is involved in several Asia-facing projects. “Most of the operators that focus on white markets do so not out of choice, not in 2020 anyway, but because they’re publicly listed companies that face a shareholder backlash if they focus on anything that’s less white than white.” Of course, with many of gaming’s most successful operators deciding to sit out altogether, opportunities are emerging for those willing to find creative solutions to targeting some of the region’s fastest growing markets.

Different approaches

Approaching the high-reward online gaming markets of Asia can be a daunting prospect for European operators. Only a handful have managed to make a lasting impression on a competitive landscape dominated by many of the local brands regularly seen adorning the front of Premier League football shirts. Bet365 is understood to be the most successful in the region, although precisely what share of its £2.98bn annual revenue derive from Asian markets remains a closely guarded secret. Others have taken alternative routes. GVC has 15 years’ experience, dating back through Ladbrokes, in China’s regulated lottery space. “We have been active in China since 2005, initially consulting on the market and later via a joint venture between Ladbrokes and Hong Kong-listed AGTech,” Michael Charlton, Asia-Pacific director at GVC Group, tells EGR. The resulting company, AGT, provides products to China’s state-run Sports Lottery in two of the country’s provinces: a virtual motor racing product in Hunan and a virtual soccer product in Jiangsu. “China’s Sports Lottery and Welfare Lottery are among the biggest in the world, and the virtual sports market continues to be a healthy part of this,” says Charlton. “GVC is always looking to expand into regulated gaming jurisdictions, and the AGT joint venture has provided a fantastic opportunity to be active and compliant within China in a way that most gaming firms simply don’t have access to.” While traditionally an entry into Asia was the preserve of Europe’s largest operators and suppliers, mid-sized firms are now also looking east. “Our success in Europe has helped us launch into Asia,” says Boris Chaikin, CEO of multi-brand operator Soft2Bet. “Nevertheless, it is a completely different territory.” Chaikin singles out Japan and India as the key focuses for Soft2Bet’s Asia push, adding the operator has had to adapt its product significantly to make an impact. “One of the main differences between European and Asian markets is the content. We had to find the providers and games that people prefer. We have already adapted some of our products for Indian players. If we are talking about Japan, it is a completely different market. We need to understand Japanese culture to be successful. For us, it is just the beginning of the Asian path,” he adds.

China crisis?

The biggest prize in Asian online gaming remains China, but the market is an increasingly complicated proposition for operators. Hills’ withdrawal in 2013 coincided with the ascension of Xi Jinping as president. Xi’s presidency has been characterised by an anti-corruption drive, hawkish foreign policy and a more assertive China on the world stage. Coupled with an unambiguous stance on the illegality of non-lottery gaming, it poses a risk many are unwilling to take. Yet the scale of the market is unquestionable. Despite a year-on-year decline, the full-year sales for China’s two state lotteries – the aforementioned Sports Lottery and the Welfare Lottery – topped ¥420bn (roughly £50bn) in 2019. The Sports Lottery interprets the term ‘lottery’ generously and permits various wagering on the results of global sport. Such wagers were widely available online via third-party brokers, until a government crackdown in 2015. Sources inside China tell EGR the country is likely to eventually look at opening the sports betting market, but at its own pace and on its own terms, as we’ve seen with social media over the past decade. The likes of Facebook, Twitter and YouTube have been blocked there since 2009, while local alternatives over which the government can exercise greater control have been nurtured. For now, the focus remains on cracking down on those operating unlicensed products in the country. In June, China’s Ministry of Public Security said more than 11,000 people had been arrested on suspicion of organising cross-border gambling since the end of February. The same ministry has suggested that unlicensed online gaming operations are generating incomes of around ¥1trn (£115bn) per year in China. That puts the Chinese offshore online gaming market at roughly four to five times the size of Europe’s regulated market.

Sticking to POGOs

Many of the operators targeting this lucrative region do so from the Philippines, via the Philippine Offshore Gaming Operator (POGO) licence issued by the country’s gaming regulator, PAGCOR. Although President Rodrigo Duterte has taken a tough stance on gambling within the Philippines, the targeting of other markets has been seen as a welcome source of tax revenue and jobs for the country, with the capital, Manila, assuming a position akin to that of Malta as the continent’s igaming hub. EGR understands that the numerous European operators and suppliers maintain some sort of presence in Manila, although much business is conducted via independent consultants, and few publicly advertise their operations. POGOs have become something of a sensitive issue, particularly in respect to Sino-Filipino relations as China continues its crack down on online gaming. At the time of writing, there are 55 approved POGOs operating in the country, and between them it is understood they employ thousands of Chinese nationals in Manila. In February, the Chinese embassy in the Philippines even revoked passports of those nationals it had confirmed were working for POGOs, alleging they had committed “long-term telecommunication fraud crimes”. President Duterte has so far resisted pressure from China to shutter the POGOs completely, although sources in the Philippines tell EGR that a new 5% turnover tax, signed into law in September under the guise of supporting the sector through the global pandemic, is likely a way for Duterte to appease China while saving face domestically.

Safer bets

Beyond China, Asia offers a range of different market opportunities with lower risk profiles. One of the most appealing currently is Japan, which this publication recently took a closer look at in EGR Intel 194. While online gaming is outlawed in the country, the government has shown little appetite to pursue either operators or players. Several European operators, most notably Gamesys, have enjoyed success in the country. During August’s 2020 half year earnings call, Gamesys CEO Lee Fenton singled out the market, highlighting a 76% increase in FTDs in Japan, while also noting the operator was now multi-brand in the country, with both Vera&John and InterCasino enjoying success. “InterCasino has grown very strongly for us. We’re very pleased with that. But there’s clearly been a lot of growth in Japan, and a lot of that still comes from organic growth from Vera&John,” said Fenton. Another growing market attracting the interest of European operators is India. “[Online gaming in India] is an annual $200bn opportunity,” says Anutosh Chatterjee, a consultant in the region who previously worked for GVC. “With a country like India, the prospect and size are significant, with some fantasy, rummy and poker operators becoming unicorn companies in less than five years.” The current legal situation for egaming remains murky in India, but a growing number of operators are finding ways to increase exposure at an acceptable level of risk. “Fantasy, rummy and poker are the only forms of real-money games which are legal online,” says Chatterjee. “There is no regulatory body, all three formats of the game are riding on court judgements. Within the federal structure, some states have explicitly banned all forms of online real-money games.” While Chatterjee sees no prospect of immediate regulation, he notes that India’s Law Commission recommended regulating gambling and sports betting in the country back in 2018. “But passing bills in both houses of parliament is an extensive and complicated process, which at times takes years, if not decades. The government is aware of this industry, but currently the focus and prioritisation does not exist,” he says. “One thing is for sure: sooner or later the Indian gambling space will be regulated, bringing transparency along with tax revenues. Social outlook towards gaming needs to change, it is still considered taboo in many parts of India. Bringing in social acceptance will motivate lawmakers to move forward quickly.”

‘Buckets of cash’

While greater regulatory oversight and increasing competition in Europe may make a move into Asia’s grey markets more appealing, executing market entries remains a significant operational challenge. And many are falling at the first hurdle. Despite Gamesys’ success story, Buhagiar at RB Capital notes: “Many an operator has been undone by Japan, for the specifically precise content required as well as the exorbitant costs to acquire and retain players.” China poses its own operational challenges, not to mention competition for POGOs and established Asia-facing giants which have been operating in the region for over two decades. “China is way too vast and complex for a single-point-of-entry strategy, requiring a more thought out joint-venture strategy, which takes much longer to yield returns,” says Buhagiar. More broadly, success in Asia will not come by simply translating websites and marketing materials. Buhagiar continues: “The barriers to entry are still very real, namely the need for properly diverse content that converts and retains well, experienced on-the-ground teams that fully understand such markets and are well-immersed in the networks that reach out to the public and buckets of cash. Asian markets are by orders of magnitude larger than their European counterparts.” Not that this should put off potential challengers. “At the moment, it’s safe to say that the established Asian giants are rapidly losing their stronghold due to a number of factors, and it’s tempting to think that the market is all to play for. Witness what’s happening with the recent crackdowns in China, and the shift in risk perception of those that are still left operating. Arguably, it has never been a better time for a European operator to test these markets,” says Buhagiar. Another major operational challenge is hiring the right talent. Simon King, director of Asia-Pacific at recruitment agency Pentasia, says that Asia’s egaming market is increasingly busy. But European companies looking to hire in the region need to adapt their thinking. “The biggest issue is businesses not truly understanding the various Asian markets they are trying to penetrate,” says King. “Companies that have a more process-driven, UK/European pace with regards to interviewing and hiring often miss out on talent due to how competitive the market is. “Due to the nature of the industry in this part of the world, talent is scarce and tends to want to remain anonymous. It is not like recruiting for egaming talent in the UK, Malta or Gibraltar. We rely heavily on a trusted network of referrals and introductions, try to put in as much face time as possible and ultimately build trust and confidence,” King adds.

Understanding players

One of the most common pitfalls for European operators entering Asia has been to work on the false assumption that Asian players are broadly similar in preference to their counterparts in Europe. The difference is perhaps most stark on the sports betting side, where Asia-facing sportsbooks tend to operate on a low-margin, high-volume model that favours handicap markets over the 1×2. “Football leads the way in Asia, with the hottest properties being the leading European competitions,” says Freddie Bowring, sales director for Asia and Pacific at IMG Arena, which works with around 460 sportsbook operators worldwide, including the Hong Kong Jockey Club, Singapore Pools and PAGCOR licensees. “The Asian leagues also perform well, thanks in no small part to the time-zone compatibility, which allows operators to build their 24/7 content service. “Cricket is huge in certain parts of the region – last year we had over 35 million views of our cricket content online. In the LPGA Tour, many of the players are Korean, so there has been widespread interest in our new PGA Tour and European Tour Golf product. Meanwhile, the enduring popularity of tennis and exponential growth of UFC across Asia represents a chance for operators to acquire new customers and increase revenue streams with new sports,” adds Bowring. Outside of sportsbook, casino also poses localisation challenges. Fenton at Gamesys noted during the company’s recent earnings call that the traditional notion that live casino dominates across Asia may not be entirely true. “Interesting that during the period, our product mix has changed slightly in that we’ve seen most growth come from slots rather than live casino,” he said in reference to Japan. “Live casino continues to grow strongly, but slots has very much outstripped it and is quite similar to our live casino revenues now, which is good news for us because we know slots very, very well.”

Supplier wars

Fighting to provide the type of content that will resonate with players across Asia’s key markets are a growing band of suppliers, many of whom are new to the region. In the past two to three years, several mid-sized European suppliers have begun to expand operations across Asia, a market which was previously the preserve of a handful of large, multi-vertical providers. The changing landscape has hit Playtech particularly hard. Its Asian B2B business has been the subject of much scrutiny since it issued a 2018 profit warning with expected revenue from the region €70m lower than original expectations. At the time, it blamed “an increasingly competitive backdrop”, adding that aggressive pricing from new entrants was posing challenges. “Smaller tier-two suppliers have been exploring Asian markets for a good two to three years now,” says Buhagiar at RB Capital. “This trend is actually on the rise and is now being tested by some of the larger [public] suppliers as well; sometimes directly, but sometimes through acquisition.” This could even have an impact on content supply beyond Asia. Buhagiar notes that Asia-focused products do not always perform well in Europe, and vice versa, forcing smaller suppliers to pick a focus dependent on the geographical aspirations of their operator partners. “Expect a gradual shift of supplier content to greyer markets in the coming years as the overseas allure becomes more palatable compared to the downside risk,” he adds.

Asian outlook

The outlook for online gaming in Asia is still very much uncertain. “Online gaming remains highly controversial in this part of the world,” says Ben Lee, managing partner at Macau-based IGamiX Management and Consulting. “The risks are huge; the largest target market, China, has active agents on the ground identifying the people involved in online across almost all of the region. “The market underwent a tremendous explosive growth in the last two to three years. It employs hundreds of thousands and GGR estimates range from $25bn to just over $100bn, but nobody knows the true scale. The reality is the nature of the industry allows the bulk of activities to be hidden away from the authorities.” For Danny Too, an egaming expert predominantly based in Southeast Asia, widespread regulation of key Asian markets is not imminent. “The regulatory outlook is extremely bleak at this moment in time. The negatives outweigh the positives when the word regulation is being bandied about. There are also a lot of transactions being conducted off or under the table and, having said that, European operators have to be extremely flexible in dealing with these sorts of antics,” he added. Even Japan, which is progressing through the lengthy process to introduce land-based, integrated resort casinos for the first time, is unlikely to make similar moves to regulate online gaming. “I would love to get a licence in Japan,” said Gamesys’ Fenton earlier this year. “It’s just not possible at this point in time.” Chaikin at Soft2Bet sums it up more succinctly: regulation in Asia is “complicated”. Ultimately, the size of these markets provides enough allure to persuade operators to assume degrees of risk. One European operator growing quickly across the region told EGR that diversification was the best form of insurance. “The best way to mitigate the risk in these markets is to be active across geographies. When we are live in Vietnam, Thailand, Japan and more, a crackdown in China is not a fatal blow.” Others mention the unique nature of the challenges they face daily operating in the riskier of the continent’s jurisdictions, such as domain blocking and even local competitors rolling out exact mirrors of their brand. And one even warns that anyone offering online casino products to the Chinese market from offshore should think twice before taking a holiday to visit the Great Wall. For now, this high-stakes game of cat and mouse shows no sign of abating.