The 2009 eGaming Review Power 50

IF A WEEK IS a long time in politics, imagine what a year must feel like to those working in the online gaming sector.

For all the talk of the lightning pace of change in the industry, egaming executives mentioned very similar topics and issues when asked what challenges the industry had to overcome to move forward.

Regulation, best business models, consolidation, product innovation and taking online gaming into the mainstream were the recurring topics mentioned by many of the industry leaders eGaming Review contacted for their views as it was putting together the 2009 Power 50 .

This of course does not mean the sector has not gathered forward momentum in the past 12 months, but it does emphasise the fact that it still has some way to go before it is able to operate in a truly open and legal way in many markets.

For all that, it cannot be denied that hopeful signs of regulation, even if often slanted in favour of the state-licensed operators, are showing in more and more regions. Then again, it is also clear that what is fair and open to those countries’ authorities is protectionist and restrictive to most EU-licensed operators. As the French have shown, European member states will only regulate in a way that suits them.

Mark Davies, managing director of Betfair, echoes some of these feelings. “I think the same issues remain the main issues. Regulation might be on the cards, but whether it is regulation that is sensible to allow for a competitive industry remains to be seen. For example, states introducing turnover taxes instead of gross profits taxes might as well put up an advert for a black market.”

Regulation (or lack thereof) is what keeps the industry moving forward or in its place, but it also leads one to ask if the environment in which operators are now working has really improved or even changed that much.

OPERATIONAL PRACTICALITIES

It seems inevitable the current trend by EU countries to individually regulate their own markets will price many of the smaller operators out of the market while the bigger ones have adapted their models and technologies to fit into the new paradigm.

Having to undertake these operational ‘contortions’ makes life difficult for private operators, but is hardly surprising. The monopolies’ plan to enable an opening that is as costly and restrictive as possible for private operators makes perfect sense from their point of view. The hope (and the belief) is that the major operators will be strong enough to withstand the inauspicious early working conditions in recently regulated countries to become a part of the gaming fabric of those markets.

Having to offer specific egaming products to in- dividual countries will put strong pressure on operators. Bwin co-chief executive Manfred Bodner (pictured right) says “European regulation and its technical and competitive consequences will be the key issues that will affect major operators in the near future with big differences in product scope and taxation models to be expected.”

Bodner says the change from the dot com model to a regional, country-by-country model represents “a technical, operational and marketing challenge that very few companies are prepared for. Bwin is among those few”. To be fair, the likes of Unibet, Mangas Gaming, Bet365, Betsson, William Hill and Ladbrokes will all be thinking along similar lines.

CALIFORNIA DREAMING?

The other major question that remains is what might happen on the other side of the pond. All the major European operators have been over to California and Nevada to talk to potential partners looking to offer online poker in the US. Mitch Garber (pictured below) chief executive of Harrah’s Interactive Entertainment, told eGaming Review the US authorities will realise that a regulated US egaming market would be the best solution.

“I’m very confident legislators will see that this is an industry that can be properly regulated, and that the technology exists to alleviate concerns about money laundering or age verification. It boils down to the activity being properly regulated and properly taxed.” Garber’s firm has been included in this year’s Power 50 at number 21, for the simple reason that it has the potential to hold huge sway over the US market and efforts to regulate the industry there. It is also one of the few major US casino operators to have set up a dedicated online gaming division.

The key issue of course from a legal angle will be whether Barney Frank’s Internet Gambling Regulation and Enforcement Act or California’s (and other states’ equivalent legislative efforts) Online Poker Law Enforcement Compliance and Consumer Protection Act (as it was originally titled) are enacted and made law.

NEW KIDS ON THE BLOCK

For all the talk of egaming operators dominating newly regulated markets, the monopolies in France, Denmark and Sweden will go on being the main players in their home markets. As Italy has shown and William Hill and Ladbrokes have found out to their cost, breaking into a market in which historical operators are strongly implanted is tough. As a result, we have grouped the current French and former Italian state-licensed operators from 14 to 18, as their dominance of their markets is only likely to grow as regulation enables them to offer an expanded product suite.

Commenting on those operators, Nylander (pictured right) says: “It’s likely that (French horseracing tote) Pari Mutuel Urbain will be a more head on competitor to (current sports and lottery monopoly) Francaise des Jeux as it broadens its product portfolio. I also expect to see a lot of discussions similar to the telecom sector, where ‘abuse of dominant position’ could become an issue as the incumbents face more competition.”

This year’s Power 50 has also taken the monopolies as major new players in their egaming markets. Of course, they are not ‘new’ players in the strictest sense of the word, but the private operators and the state-licensed ones will finally get to compete on, if not quite equal, then at least agreed terms.

We have therefore included a Top 5 of monopoly operators to place which state-licensed operator we feel will play a key role in the development of egaming in their market. Our main criteria for picking the operators in this Top 5 was whether those countries’ authorities had announced, or were close to announcing, regulation of their online gaming and betting markets. Hence the reason why the likes of the Hong Kong Jockey Club, Greece’s OPAP or the Japan Racing Association were not included in that list.

ALL CHANGE

Among the new entrants in this year’s Power 50, we have included companies such as Winamax (28) and Chili Gaming (47). The first is the biggest poker site in France and the second will be developing its partnership with Free, the second biggest internet service provider in France. Italian poker site and early mover in the Italian market Gioco Digitale also makes its entry at number 27, reflecting its good position in a regulated market.

Other new Power 50 entries include the Asian sports betting operators 188Bet and SBOBet, at number 25 and 26 respectively. Both companies have been highly active in growing their presence in the UK, getting licensed in the Isle of Man and sponsoring Premier League football clubs. Of course, the key for them is that so many Premier League games are broadcast across south east Asia while they also benefit from the European exposure offered to them by the Premier League’s popularity across many EU countries. Although this might be some way down the line, a float or some sort of exit for the owning shareholders is highly likely.

The highest riser in this year’s Power 50 is not a single operator but a group made up of three strong European brands. Mangas Gaming is made up of Betclik, Expekt and Bet-at-home and has come in at number 7. Chief operating officer Nicolas Beraud is upbeat about its prospects: “The coming years are going to be very exciting. In Europe we will see a new generation of regulation and approval. And in the US we will see the re-opening of the market. Obviously this is going to lead to some consolidation among the major players. But I also feel we will see a heightened sense of professionalism across all aspects of the industry.”

As for the US poker heavyweights PokerStars and Full Tilt Poker, they have been completely excluded from this year’s list. This is because of the liquidity doping they enjoy from the US while their competitors stay out of the market. Including them in the list in any form is basically unfair on the rest of the industry, which competes on different terms from those two operators.

One of the few shocks of this year’s list sees 888 drop out of the Power 50 Top 10 for the first time ever. The company has had a tough time of it recently. Overall group income for the first half of 2009 dropped 13% to US$118m, from US$135m last year, its main bingo licensee Cashcade was recently sold to PartyGaming for around £100m. Even though 888 said it was not willing to pay the price Party paid, it must have been a blow to lose its flagship business-to-business client.

Finally, the company’s lack of clarity over its search for a settlement with the US Department of Justice regarding its US activities prior to the Unlawful Internet Gambling Enforcement Act means there is still a legal cloud hanging over it. This in turn must have a negative impact over any capital 888 might try to access to carry out merger and acquisition activity, despite chief executive Gigi Levy’s claims to the contrary.

MEDIA COMPANIES

The other major players set to join the fray are the media companies. How worried should the leading operators be about these broadcasting houses with huge reach and household programmes?

“Media companies will show very mixed results,” Bodner says. “So far we have only Skybet as a precedent ““ nothing to worry about as we know. It depends on the structure they choose ““ they will fare best in pooling their core competence with that of a gaming operator. We believe our joint venture with Amaury group will demonstrate that.”

Nicolas Beraud (pictured left), chief operating officer of Mangas Gaming, adds: “Media companies are in fact natural partners and allies. However, the web has also shown itself to be able to compete as a medium on its own, traditional media have not always been able to understand and adapt to the different demands of the web audience. Egaming also requires dedicated skills, infrastructure, teams, and experience. I am not sure all media firms will want to invest enough to have a real strong and competitive offer.”

The likelihood of seeing media firms launch their own standalone betting and gaming products in regulated markets does seem remote. Although as Eurosport gears up for next year’s major push in France with its in-house venture SPS Betting, which we have included at number 34, industry observers and other media houses will be watching with heightened interest to see whether the broadcaster makes a success of it.

Sweden’s Bonnier Publishing is one of those and is already one of the most active media houses in egaming. It owns the leading Swedish newspaper Expressen and a host of other consumer magazines and has invested heavily in the sector by setting up Bonnier Gaming. The company makes his entry in the Power 50 at number 44 and has already launched a bingo brand in Spain. The company operates the Bingolotto brand in Sweden and plans to leverage the reach provided by its magazines across Europe as an operator and service provider to the industry.

VERTICALLY CHALLENGED?

Sports, poker and casino have established themselves as the three pillars of the sector for revenue generation and have been discussed at length. For this reason, we have decided to spend a bit more time on online bingo.

Can it finally make a major impact on the egaming market? Cashcade has shown that it was possible to make significant money in the vertical, others though have struggled as their scale and technology have been below par.

Bingo is already well established in Sweden and the UK and is setting itself up for a big push in Spain and France. It will be interesting to see how it deals with offering side games in new markets that will not allow casino games. No doubt operators will be able to find soft gaming equivalents, but it must be an issue for the sub-sector. Or they might favour pure bingo liquidity over the margin-generating side games.

The other key point is how attractive the product will be outside the UK, Spain and Sweden; where the history and tradition of the game are not as strongly rooted.

CONCLUSION

The 2008 Power 50 was described as “positively tame” in these pages last year, as the upheavals that followed the US internet gaming ban of October 2006 made way to more normalised working conditions for egaming executives.

If the stories of arrests and sites being forced to shut down have on the whole been consigned to the history books, the online gaming industry still has major obstacles to overcome before it can say it is a fully paid up member of the mainstream leisure sector.

When it comes to new entrants, the long-predicted involvement of media houses is finally starting to happen. Great things are still being expected of the mobile channel and it must be hoped that the new generation of smartphones deliver on expectations, while a combined offering of web and TV gaming is being developed by firms such as NetPlay and Gaming Media Group. If the past couple of years have seen social media’s profile rise and rise, the operators that are able to harness its reach and power will benefit massively from it.

It would be surprising if the 2010 Power 50 looked very different from this year’s edition, but if more countries decide to regulate their online gaming sectors, then the incumbent monopolies will more than likely find their way onto the list, one of the unintended consequences of progressive regulation.

The online gaming sector has once again pushed at all the boundaries that surrounded it: be they regulatory, technological, marketing or product-led. The model has changed from dot com availability and reach to individual country-specific sites. The licensing costs and framework set up by each market will force operators to think hard about whether to take each of them on. Whoever manages that process best will always be among the front runners in the sector.

To read the Power 50: top 10, click here, or to read the Power 50: 11-40, click here.

This article first appeared in the September issue of eGaming Review.