The future of the British remote betting and gaming industry Adapting to a changing landscape To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. Contents Foreword 1 Executive summary 2 Current state of play 4 The future of the British remote 9 betting and gaming industry Strategic drivers of success 12 The Deloitte point of view 17 Notes 20 Contacts 22 To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. Foreword Welcome to this Deloitte report on the changing The Future of the British remote betting and gaming landscape of the British remote betting and gaming industry identifies issues the industry may face in the industry. next five years and how it might respond to those challenges. It is based on interviews Deloitte LLP Adoption of and engagement with digital technology carried out with 16 industry leaders and observers from have fundamentally changed the structure of consumer betting and gaming companies, the regulator, a trade markets over the last ten years. The betting and gaming association as well as other organisations with specialist industry has been transformed, first with online and knowledge in the industry. more recently, mobile driving growth. These changes have challenged national governments in Europe and We hope this report gives you the insight you need to elsewhere to identify efficient and appropriate ways enhance your understanding of the changing landscape of regulating and taxing the growing remote betting for the British remote betting and gaming industry, and and gaming industry. The current UK regulatory and we welcome your feedback. taxation framework, which has come under some criticism for failing to adapt to the evolution of the Simon Oaten industry, will change significantly in the next year. Partner, Betting and Gaming Deloitte LLP We believe that in the medium term, the industry is likely to experience market share consolidation as taxation and the related compliance costs put pressure on operators’ margins. As competition intensifies further and the take up of mobile betting and gaming grows exponentially, the ability to provide high quality mobile propositions becomes a key determinant of success. The future of the British remote betting and gaming industry Adapting to a changing landscape 1 To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. Executive summary The British remote betting and gaming industry is likely Mobile betting and gaming will continue to be a to experience substantial change in the next five years, significant growth area for the industry, with many due to growth in mobile betting and gaming, and seeing the growth to date as just the beginning. current Government plans to introduce a new approach Therefore, the quality of mobile propositions for both to taxation and industry regulation. smartphones and tablets will become a key driver of success in the next five years, if not the main driver. Industry leaders and observers agree that the introduction of a ’place of consumption’ (POC) tax Operators that continue to invest in product combined with changes in the regulatory environment development will be in a better position to compete will increase the cost of operating in the British against possible new entrants that are attracted by market. While larger operators may have the necessary the growth potential in the British mobile betting and financial flexibility to cope with this, smaller operators gaming market. They could be new operators that, with tighter margins and less operational scale could either on their own or with partners, develop mobile struggle. Consequently, there is likely to be market share propositions that are very attractive to consumers and consolidation. overcome the functionality and customer interface issues that encumber many current products. Operators are unlikely to pass on the full cost of the tax directly to consumers, if any. Some operators may try to The next six to 12 months will see increased levels compensate for increasing operational costs by reducing of marketing spending as operators prepare for the discretionary expenditures such as marketing and player introduction of the POC tax. After that, marketing promotions. Others might look for greater synergies spending is expected to reduce as smaller operators between their British and offshore operations. cannot sustain it and bigger brands benefit from significant critical mass and economies of scale in Industry leaders are still unsure to what extent illegal, relation to marketing. unlicensed operators will try to enter the British market. Experience in other markets shows that the emergence Retail outlets continue to be important in the betting of unlicensed competitors is likely to be determined by and gaming sector. They increase brand awareness consumer perceptions of the value they are offered and among consumers and play a key role in the the extent to which the new regulations are actively development of the multichannel model. With betting enforced. in the retail environment unlikely to see much growth in the next five years, mobile betting is expected to be increasingly integrated into the betting shop experience. 2 To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. As mobile propositions develop, consumers are likely To prepare for the future, operators should explore how to start choosing their favourites and gravitate towards they can get their social media channels to generate fewer operators. In addition to creating attractive and continuous revenue. While real money gambling on user friendly propositions, operators need to prepare social media might not take off on a large scale in strategies to encourage loyalty. Because of the pressure the next five years, operators should look to develop on reducing discretionary spending, operators have capability in this area and prepare strategies for the to become more strategic in targeting their player longer term. promotions so they not only lead to greater customer retention, but also increase spending per active player. The success of operators in the future depends largely on their ability to offer high quality, innovative mobile Many industry leaders believe that in the medium term propositions, which, by driving customer acquisition, operators will need to become more strategic about retention and loyalty, will help operators cope with their partnerships. They are also likely to require their increasing pressure on margins. suppliers to share the competitive pressures they face, including demanding higher quality, faster development and lower costs. The future of the British remote betting and gaming industry Adapting to a changing landscape 3 To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. Current state of play The British remote betting and gaming industry continues to evolve as it faces regulatory changes, a new approach to taxation and the emergence of the mobile consumer. Defining the scope of the UK remote betting and Figure 1. Net revenues for global online betting and gaming, 2012 gaming industry United States 3% The real money betting and gaming industry globally 10% was estimated to be worth $417 billion in 2012, with North America (excl. US) online channels contributing $33.8 billion, or eight 32% 10% Rest of the World per cent of total net revenue.1 The UK market is often described as one of the most developed Western Europe (excl. UK) markets for remote betting and gaming due to its size UK and maturity (see Figure 1).2 3 8% Asia In 2013, total consumer expenditure in the UK market 37% was expected to exceed £2.5 billion.4 With an annual growth rate of 12 per cent, the industry could reach 100% = $33.8 billion (£21 billion) nearly £4.4 billion by 2018.5 Source: H2 Gambling Capital Estimates The supply side of the market is intensely competitive, with the five largest operators together covering half of Figure 2. UK online segments – gross gambling yields the market.6 While the majority of operators are present in other international markets, inside and outside % change in Europe, the UK represents a significant part of their 2009 2013 market size Segment (£ million) (£ million) (2009-2013) revenues and is, in many cases, their ‘anchor’ market. Poker 287 329 14.6% Betting accounts for 45 per cent of the remote betting Bingo 242 380 57.0% and gaming gross gambling yields and the market has Casino games 347 683 96.8% grown considerably in the past few years.7 Similarly, some remote games have nearly doubled in gross Sports betting 634 1,138 79.5% gambling yields since 2009 (see Figure 2). Total 1,510 2,530 67.5% Source: Mintel, October 2013 4 To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. Currently online sports betting makes up a third of Figure 3. UK sports betting industry revenues UK betting revenues with the majority of betting still 3.0 35% taking place in betting shops. However, in the next few 30% years most of the growth is expected to be in betting 2.5 8 on mobile devices, such as smartphones and tablets. 25% Some analysts believe this is because mobile betting has 2.0 reached a tipping point where it begins to cannibalise 20% 1.5 9 £ billion retail betting (see Figure 3). 15% 1.0 With smartphone penetration growing fastest among 10% the C2DE socio-economic groups who make up the 0.5 5% largest proportion of betting shop visitors, it is possible that in the next five years retail betting operators see 0.0 0% more customers take up mobile betting (see Figure 4).10 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013e2014e2015e2016e2017e Offline Online Online as % total Current regulatory landscape Source: H2 Gambling Capital Estimates Between the 1960s and the new millennium the industry experienced policy changes that, taken together, Figure 4.