2011: An industry awaits PART 2 - consolidation
In a four part special eGaming Review examines what 2011 has in store for online gambling. In part two we examine how consolidation will play a huge part in redefining our industry.
To enter new markets in an increasingly competitive industry where companies are often chasing the same customers, where there is growing pressure to control recruitment costs, retention and servicing of customers, and where differentiating yourself by product will, as Warren Murphy, CEO of Sporting Index, describes it, “trigger others to copy initiatives and perpetuate a differentiation race”, operators, suppliers and affiliates will all need to expand their reach in 2011. The age-old question, however, is how best this can be achieved with existing resources. Scale will inevitably play its part here, but for others one very obvious choice remains: consolidation.
The failure of Unibet and Sportingbet to merge at the end of last year should not serve as a warning, but more as a sign of things to come. Similar sized operators that could not only mutually benefit one another in product, but also crucially in spreading their geographic reach across the globe, will merge or be acquired this year.
“Rising cost bases are ultimately unsustainable and the underlying approach to business operations will have to change,” explains Murphy. “Mergers may happen if enterprise values are attractive and regulatory uncertainties can be overcome; elsewhere specialists will emerge and increasingly sportsbooks will outsource many of their more commoditised services so they can focus on the mission critical parts of the business,” he says.
“The major online gambling companies are facing tough market conditions with a highly competitive poker industry, continued pressure on high-rolling customers especially in casino, and the headwind of a weak economic outlook in key European territories,” adds Hollins. “This situation, compounded by cost and revenue synergies may finally drive industry consolidation.”
Tor Skeie, general manager of start-up New Deal Entertainment, says far more consolidation will take place, but explains he is equally concerned that it could lead to operators “cloning each other’s offerings and approaches”.
Hussein Chahine, chief executive of social casino start-up Yazino, says the industry’s profitability can “only grow through merger-driven synergies”, while analyst Batram adds that many companies are waiting to see how the Bwin/Party merger progresses before making their move. “The [Bwin/Party] merger won’t be straightforward but it will be exciting. I think other companies will be watching with interest and assuming things go well, we could see another bout of industry deals.”
But it will not just be operators that decide to join forces. As the industry becomes more competitive affiliates are also starting to feel the pressure and many believe their pool will shrink as the year progresses.
Dominik Kofert, CEO of PokerStrategy, arguably one of the biggest affiliate portals in the world, believes certain types of affiliates, “those who really contribute towards traffic generation, will gain while more cannibalistic business models will lose”.
Neil Mitchell, managing director of affiliate Soho Rocks, says 2011 will be a year of “massive consolidation” but that many part-time affiliates “won’t be able to carry on”. He explains: “Economic market conditions will dictate player spend as the amount of disposable cash decreases but the number of operators increase, leading to more bonus hunters and less dedicated high rollers. This will knock-on to lower revenue shares and CPAs forcing some affiliates to consolidate via mergers, acquisitions and movement into other verticals to supplement their incomes.
“Consolidation of affiliate sites to form super affiliate networks, an established affiliate buying more portals from people moving out of the industry, will start to dominate the earnings capacity with smaller affiliates extending into different verticals to find traffic. These networks will provide dedicated language sites to reach into different markets and also to penetrate the US.”