Another Bubble, or Bigger Trouble?

24 October 2008

In the last week of September when the I-gaming industry gathered in Barcelona for EiG the mood was upbeat, although with some understandable concerns as to how well the industry would weather the credit crunch.

Just three weeks later the United States House of Representatives had first rejected then approved a $700 billion bailout of America's financial system; the United Kingdom government had injected £37 billion into three British banks as part of a £450 billion support package; global stock markets had plunged; and the International Monetary Fund’s World Economic Outlook talked of "a major downturn" with advanced economies "in or close to recession in the second half of 2008 and early 2009."

The I-gaming industry has been through the shock of a burst economic dot-com bubble and recession between 2000 and 2001, but is the current situation of an altogether different order of magnitude? With the benefit of nearly a decade’s experience, is the sector any better placed to ride out the crisis?

One immediate difference between now and then is that many of the companies currently in Global Betting and Gaming Consultants’ iGBGC Index of I-gaming stocks, like PartyGaming, 888 Holdings and Sportingbet, were not listed in 2001. The industry was, therefore, less exposed to global falls on the stock markets when the dot-com bubble burst.

The iGBGC Index stood at 254.9 at the close of business on Sept. 22. By Oct. 10, the Index had lost almost a quarter of its value closing at 195.9, the first time it had been below the 200 mark since August 2007. Over the same period the GBGC 50 Index was down 28 percent. But since the start of 2008 the online index has fared better in a falling market, down 34 percent compared to the GBGC 50, which was down 61 percent.

The first bets were placed on the Internet back in 1995, so I-gaming was still very much in its infancy at the time of the recession in 2001 and, just as in other industries, the tougher economic climate quickly weeded out the weaker companies that had been riding on the wave of enthusiasm for investing in Internet businesses.

The recession that is predicted for next year will be no different. Those operators whose business models do not stand up to the recession will go to the wall or be forced to consolidate with their competitors. The difference this time might be that those operators who do hit trouble will include bigger, more established brands, whereas previously it was largely unknown startups that disappeared. This could increase the perception that the sector is being hit harder this time around.

Measured by gross gaming yield the global I-gaming industry is more than six times larger now than it was in 2001, but this could simply mean that it has further to fall than it did seven years ago. One worrying aspect of the current crisis is that it appears to be truly global in nature -- from Iceland to Japan.

The economies of several countries were spared from the last recession, which was felt hardest in Western markets like the United States and certain member states of the European Union. Over the last few years the I-gaming industry has been turning its attention to emerging markets in Asia, Eastern Europe and South America. A global recession is certain to slow the economic development of the likes of China and Brazil and has raised the very real prospect that entire countries in the emerging markets could go bankrupt. Without access to the United States market, and with Western European markets increasingly competitive, I-gaming operators need these emerging markets to supply growth in the medium term. If countries in emerging regions are hit worst by the downturn, the knock-on effect to the I-gaming industry will be damaging.

Another cause for concern for the I-gaming industry could be the tighter restrictions on credit that must be on the agenda for the stricter regulation of the banking system that will surely happen in Europe and the United States.

New regulations could mean tighter restrictions are placed on consumers obtaining mortgages and credit cards. Credit cards are the lifeblood of the I-gaming industry in facilitating online payments. If consumers are finding it more difficult to obtain them because banks are more cautious in their lending and the credit-rating checks are more stringent, it could have an impact on the funding of online gambling accounts.

But the passing of the Unlawful Internet Gambling Enforcement Act in the United States in 2006 has shown the I-gaming industry’s resilience and ability to adapt quickly. The online part of the gambling industry certainly has greater flexibility than its land-based counterpart, which has vast casinos to operate or estates of betting shops to maintain. However bad the recession proves to be there will still be opportunities.

If "staying in" becomes the new "going out" for consumers looking to save money during a recession, then online gambling will surely benefit from this trend. In recent years rising fuel costs and the introduction of smoking bans have already seen I-gaming benefit from consumers choosing to stay at home for their entertainment. It presents a good opportunity for those operators that can run the most efficient and effective marketing campaigns to attract these stay-at-home customers.

It is easy to become too obsessed with the impact on our own industry and forget that companies in other sectors will be struggling in the recession too. Companies in non-gambling sectors will be looking for new sources of revenue. In the United Kingdom, television broadcasters have already turned to gambling products as a means of replacing revenues lost from falling advertising sales.

Other sectors will follow suit in an attempt to generate more revenues from their existing customer database. Partnerships and white-label deals between gambling and non-gambling brands will become more widespread.

The best opportunity for the I-gaming industry in bad economic times could lie in the regulation of online gambling. Governments around the world have been borrowing vast amounts of money to support their financial systems and tax revenues will fall as businesses fail and unemployment rises during the recession. In such conditions, opposition to gambling could weaken as regulating online gambling becomes an attractive source of revenues for governments.

On the Las Vegas Strip, for example, monthly gaming win is down every month so far, year on year. The latest figures for August, before much of the recent crisis unfolded, show monthly gaming win was down by 7.44 percent compared to the same month last year. For the year to date the Strip’s revenues are down 6.7 percent.

Another sign of Las Vegas’ woes can be seen in the fact that its main airport, McCarran International Airport, is expected to see no growth in demand for jet fuel in 2008. It brings to an end five years of increasing demand. The lack of demand for fuel is being put down to a reduction in the number of Las Vegas flights being operated by the airlines.

A recent report by the Center on Budget and Policy Priorities has reported that 21 states are facing budget shortfalls. As individual states look to increase tax revenues, could a prolonged recession act as a spur to permitting intrastate online gambling?

In Europe, the United Kingdom government, with the benefit of hindsight, might now be wishing it had set a more attractive tax rate for remote gambling to lure operators onshore from their current jurisdictions.

Of course, those countries with existing, lucrative monopolies could go to the other extreme and become even more protectionist in their stance towards cross-border gambling activities as they seek to hold on to their tax revenues. This would undoubtedly undo much of the progress that has been made by operators in the various legal cases working their way through the European courts. Italy has adopted an approach of trying to ring-fence its online gambling market and such a regulatory regime could look increasingly appealing to the likes of France and Scandinavian markets.

The gambling industry, online or offline, is not recession proof. People can only spend what they have in their pocket and if unemployment rises the amount there is to spend will fall. But the I-gaming sector is leaner and more focused from its experience of UIGEA. It also now has a wider, more developed range of products to offer consumers. It is GBGC’s judgement that this combination should mean that the sector is better placed to deal with a downturn in the global economy that is predicted to be more severe than the one that the fledgling sector faced at the start of this decade.




Lorien is a research analyst with Global Betting and Gaming Consultants, and currently resides on the Isle of Man. Prior to this, he spent three years at a leading United Kingdom gambling firm, providing regulatory and market research for its various international e-gaming ventures.