Analysis: The increasing value of scale

Two small news stories this week revealed more about the sector than they perhaps appeared to at first glance. Small changes that suggest there’s a new direction of trend in the online gambling space that is not particularly good news for the smaller operators.

One of the anomalies of the online gambling sector, in particular the casino market, is how unweighted the sector is towards the big firms. Some of the best performers have and continue to be small start-ups who adapt to changing market conditions and take risks with the product and marketing. While barriers to entry do exist they are relatively low, and are mainly around marketing spend.

A similar model to online casino, where most and even all operational functions can be outsourced at reasonable rates, is beginning to emerge in sports betting too. A wave of new sportsbook suppliers and a deeper understanding of the nature of the sector, or rather a realisation that the depth of knowledge needed is not as big as previously believed, has led several new firms to launch with trading and pricing all managed elsewhere.

But what if the battle is then not just fought on marketing and CRM? What if, as is beginning to appear likely, there are issues around the user experience (UX) and social responsibility that will potentially heavily favour the larger firms in the long-run.

Setting the standard

The larger firms are likely to define what is seen as “the standard” in the regulators’ eyes in terms of baseline social responsibility best practice. And what is affordable and easy to implement for the big firms may not be for those at the lower end of the scale. A series of small social responsibility checks and tools can add a large operational burden and potentially a damaging squeeze on already unpredictable margins.

But it’s also around the margins here that things may once more play into the hands of the big firms. One potential example of this is Kindred Group’s decision to offer its customers new software tool Gamban, which seeks to act as a permanent blocker for all gambling sites on a user’s computer or mobile device. The blocker will be offered to Kindred’s customer base for up to three devices for free from 10 April.

Kindred’s integrity analytics manager Maris Bonello said it was “one of many tools we provide so our customers can remain in control of their gambling.” The implication there is there will be an increasing expectation on operators to provide tools, software and other solutions, including customer support, to potential problem gamblers on an ongoing basis. For a small firm this is not going to be a simple task.

On another different, but connected, note, it was interesting that one of the two start-up projects funded by Sky Betting & Gaming was around frictionless affordability checks. One of the truisms of online gambling, and pretty much any type of online commerce, is the easier you can make the experience for the consumer the more revenue, sign-ups and loyalty you will gain in return.

Rising expectations

In an environment where the minimum regulatory requirements placed on operators are rising, and where more responsibility has to be taken on regular and ongoing checks on customers the barrier to entry appears to rise. While it’s quite feasible that suppliers, particularly those on a white-label or turnkey basis, will integrate these solutions into their platforms there will be a period of adjustment and reasonably a rise in operating costs.

And it’s here where bigger firms could begin to push ahead. It won’t just be at the sign-up process where pain points need to be removed, it will be an ongoing process with the onus now clearly placed on the operators to manage customer social responsibility issues with the risk of failure ever more costly. Will suppliers be willing, or even able, to take on this level of risk and if so at what price?

There are broader issues that come with this new type of approach to customer management too. The volatility that exists by nature in online gambling is more neatly smoothed as firms gain scale and this is as likely to be as true in social responsibility as any other area. Paying high CPAs for “quality” casino customers only to find they fail affordability checks or rapidly self-ban within days is not going to be good for smaller firms trying to establish a steady revenue base.

Margins in a regulated environment, where taxes and marketing costs are high, are already small and when you add in the risk of non-compliance or failing to meet these new regulatory standards it begins to feel like a tough route to market for a start-up.