Tier 1.5: The plight of the Inbetweeners

The Rugby World Cup currently underway in Japan has been a lesson in the impacts of resource disparity on a game. Games between tier 1 and tier 2 nations look more like a battering than a battle, with the big guns having resources beyond the dreams of the smaller nations. As a parallel for online gambling it’s not the worst you could find. But, as with the egaming sector, there are also some sides that sit uncomfortably on the fence between the two tiers.

The tier 1 egaming operators are increasingly looking like intimidating powerhouses. Flutter combining with TSG would create a monster, but in truth we’re already in a scenario where both operators are supersized compared to the competition. GVC’s £1.9bn in 2018 revenues are the only ones at the same level as TSG’s £1.9bn and Flutter’s £1.5bn from online (including Australia and the US). Alongside bet365 with some £2.8bn in annual revenues, this is the true top tier of egaming operators and everyone else is playing a different game.

Behind them we have Kindred with around £900m, William Hill with close to £650m and then a drop to Betsson and 888 in the £400m region. It’s probably accurate to call any firm below £400m in annual revenues tier 2, with roughly the £200m mark the cutoff point for tier 3. Between these points we have a number of other private and public firms including Jackpotjoy, LeoVegas, Betclic, Tipico and Fortuna with a wide mix of markets and operating models between them. But where does that leave the likes of William Hill and Kindred?

They are not true tier 1 players, but they are not tier 2 either. What we arguably have in online gambling is a tier 1.5: companies big enough to look like they can compete with tier 1 but not quite at the scale to really threaten them. And this does have some fairly large implications both for those operators and the rest of the sector.

The road to growth

For the tier 2 operators the road to growth is fairly clear, if not particularly easy. Firms can target specific regional markets or products, take on bolt-on acquisitions and try and be the best in a big niche. This isn’t a limited operating model, but it is a limiting one. Although big market share gains are possible as are top tier positions in major markets, there is only so many worlds that can be conquered. The firms outside tier 1 that have seen the most impressive growth in the past few years are those with a strict local market focus

There are other routes, such as a clear differentiated product proposition with a narrower focus than the tier 1 operators or small-scale M&A. But in general, a local focus is what pays off. Only the UK market can be said to be approaching the scale where a £100m+ marketing budget isn’t sufficient to cut through. Sky Bet built its business with this purity of focus and it is worth noting spent £79m in its FY16 to take significant market share gains in the UK. But to do this in several regulated markets simultaneously is not an option.

Sky Bet spent £79m in its FY16 to take significant market share in the UK

For those operators used to the spotlight, however, and with a large investor base who expects never-ending double-digit growth it can be harder to be more modest in their ambitions. Bigger is better, we are told, and a broad international portfolio is the only true measure of success in the modern online gambling world with even the tier 2 firms buying into this narrative. For the likes of 888, looking at UK, Italy, Spain and the US in casino, sports and poker is probably testing the limits of its reach, but that hasn’t stopped it launching Romania, Sweden and with other markets in its sights. So would it be a lack of ambition or a surfeit of realism if it were to focus more narrowly in its approach to new markets?

The death of dot.com

The old dot.com world is long since dead and many of the economies of scale that existed with it were taken with it. New markets are expensive propositions and even obvious areas like platform contain market-by-market idiosyncrasies that need to be addressed and add to the cost base. But if you are a publicly listed operator with a history of being tier 1 it can be hard to stop, re-assess and downsize your ambitions, even if that is what the market dynamics are perhaps requiring you to do. And that is even more true for the likes of Kindred and William Hill now stuck in tier 1.5.

The question is for these tier 1.5 firms, which way do they look? Do they target becoming a monster tier 2 operator, taking large shares in selected markets and focusing more narrowly on their product proposition? Or do they try and take on the tier 1 operators at their own game with a smaller budget? Can William Hill afford to be in every major market that opens, be that Brazil or the Netherlands or Germany or whatever comes next? Can it afford not to? And is the only realistic solution to engage in its own M&A to try and keep up with the ever-expanding top tier? On such things are CEO’s careers judged.

The obvious answer of course could simply be for one or more of these firms to merge and create the next tier 1 giant, and there will be shortage of commentator and analysts calling for this to happen over the next 12 months. The seemingly endless appetite for scale is writ large in the online gambling industry at the moment and the idea of broad international reach and platform ownership being the only way to win seems just as prevalent. But the question the online gambling sector should be asking itself is whether a model of success formed more than a decade ago when conditions were very different it the best way forward in 2020 and beyond? And it’s a question tier 1.5 needs to answer first.