Them and US: two nations divided by wildly different market valuations

George Bernard Shaw described the UK and US as two nations divided by a common language, and this rings true in the baffling world of sports betting. The businesses are the same, they use mostly the same terms, references, data, sports and operate in the same ways, often with the same people, technology and brands and yet…nothing is the same. And for proof you only need to look to the stock market. DraftKings, which announced revenue of $132m for Q3 2020, is worth around $21bn (£16bn), while the grand old man of UK sports betting, William Hill, with H1 2020 revenue of £555m is about to be taken over by Caesars for less than 20% of that. And that £2.9bn takeover deal isn’t even focused on the 97% of the business that operates outside the US, neither in retail or online. William Hill instead looks set to be chopped up and sold off, because when it comes to sports betting the US is reinventing the game and drawing up its own rules for how it is played. The line of success doesn’t extend backwards beyond 2019. There is no proof of concept, there is only the vision of the future. And the valuations are based on what comes next with scant regard to what already exists. This is a sector with its eyes fixed on the horizon and one where Europe only matters in terms of its ability to add value to that vision of the future. The present, like the past, is mostly irrelevant in determining who will be the winners and losers and what the prizes will be. And, mostly, they are right. This is really the first and most important rule. The current state of play only really matters in how it relates to the next stages. In essence, two decades of building up a thriving European online gambling sector has only taken us to half time and what matters now is how you play the second half. Technology platforms, operating models, product innovations and trading expertise are just the base on which to build out the vertical in the US.

Doing things differently

The second big rule is that things will be different, things have to be different. And this necessitates new acquisition models, new approaches to trading, new partnerships and a recognition that the customer and the operating environment in the US is very different to that most operators are used to. There are, of course, many other new rules but those two are possibly the most important for any operator whose eyes have lit up with dollar signs. The conceit that a simple port of the European business to the US would be enough has rapidly fallen away and been replaced by something rather more fundamentally challenging to the European gambling sector. That’s not to say that the port wouldn’t have worked, or wouldn’t still work, but that this is not the game currently being played. Investors and stakeholders are demanding things are reimagined and repositioned for the US. The US market is very different to Europe, even if the basic model looks very similar. The unit economics, the make-up of the key players and market shares as well as the regulatory environment are markedly unalike. And, as a result, money that wants to be invested in the US sports betting and online casino sector has very little interest in RoW revenue or businesses. The money that is piling up stateside looking for a willing home isn’t interested in growth in the Baltics, or the potential of the German market or a channel shift in Italy. It wants home grown success stories and the pure valuation multiple that will come with US-centric revenue.

What’s next for Europe?

While this will continue to mean asset inflation in the US market, it will be unlikely to lead to a surge in valuations for European firms with little to no US exposure. The flood of cash into US online gaming is almost unprecedented in scale, but it will not create a rising tide that lifts all boats. What does that mean for European operators in the short term? Well, there is an argument that any US exposure at all is worth far more than the costs it will incur, not least for suppliers who want to become involved in what is still a very underserved market. Despite the rush of money and operator launches there are only a handful of platform solutions available and a much smaller casino content base than in Europe. Casino suppliers in particular would be well advised to reposition for the US market, not least those with a proven record of making “similar” games to those popular in the land-based sector. Evolution, as is customary, already looks to have the live casino segment locked down but the differing regulatory picture around live casino will also create opportunities for suppliers in states with a monopolistic control on the online gambling market or for local markets with a dominant local land-based casino operator. Within sports betting we’ve seen much more activity in terms of suppliers and operators positioning themselves as B2B firms trying to get themselves to front of mind in the US. Betradar, Betsson and FDJ are just three disparate organisations looking to be big players in sports betting alongside the existing Kambi, GAN, SBTech, Intralot and the US/European hybrids of IGT and SG Digital in the mix. Playtech has yet to play a hand here, and there is potential for suppliers you would not expect to gain traction such as White Hat Gaming’s deal with Penn for its Barstool sportsbook. But naturally any push into the US will come at an opportunity cost to the existing European operations. At such a tumultuous time for the European online gambling sector with ever increasing regulatory pressures, the idea of a big management distraction is not something anyone should take on lightly. A firm that struggles to compete outside its core market trying to take on the largest and arguably hardest to break market in the world is likely to find it comes at the expense of another part of their business. But is it a risk worth taking?

Closer to home

The US is certainly providing some huge near-term opportunities both in terms of exits and capital raising, and there is little doubt the early KPI metrics are stunning in terms of revenue per user and churn levels even if acquisition costs are equally breath-taking. But Europe is far from a dead market. And operators and suppliers alike need to be wary of missing the trees for the wood here. The focus of management can only be so broad, after all. The trouble is Europe is not an easier growth story to sell. The outlook varies wildly from one European nation to the next and there are very few, if any, true pan-European power players. At best firms have a stronghold in two to three territories and are playing catch-up in the rest. Even the might of Flutter and GVC have admitted they need to focus on bolt-on M&A to capture top-tier positions in most new markets they are eyeing up. And this creates both challenges and opportunities at all ends of the scale. The bigger question then is what market presents as big an opportunity as the US? The answer will depend entirely on how the business is set up but will likely come from a mix of the Baltics, Eastern Europe, Germany, Italy, Spain and the UK. But it’s almost certainly not going to be all of those for any operator, with a much more local focus required in future. There is no cohesive European story, but a series of smaller ones that will favour certain operators and operating models far more than others. And that’s a very challenging outlook for the current generation of operators.