Getting Ready to Fly! Commercial opportunities in the USA, the world’s biggest online gaming market. Scenarios. Forecasts. Milestones. Enter Executive Market Forecasts – How will Business Models Key Industry & Contacts Summary Size the Market Evolve? and Value Chains Market themes Contents Section One: Executive Summary . 3 Section Four: Business Models and Value Chains . 26 Market Barriers. 26 Section Two: Market Size . 8 Cannibalisation. 29 By State. By Population. 9 Strategic Models. 32 Land-Based. 9 KPIs . 39 Mobile/Tablet. 15 Social Gaming . 39 Product. 16 Land-based. 43 Section Three: Forecasts – How will the Market Evolve? 17. Section Five: Key Industry & Market themes . 47 New Jersey. 17 State-by-State. 47 Nevada. 18 Geo-location. 53 Delaware . 19 Compacts. 53 Federal. 20 Federal Law . 55 The Axes of Uncertainty. 22 Mobile/Tablet. 25 Section Six: Contacts . 58 2 Executive Market Forecasts – How will Business Models Key Industry & Contacts Summary Size the Market Evolve? and Value Chains Market themes Section One: Executive Summary Forecasts Exhibit 1: New Jersey Forecasts GGY licensed online gaming 334 The U.S. licensed online gaming market will be worth $285m GGY in 2014, significantly higher should compacts be created. The New Jersey licensed online gaming market will be worth $186m GGY in 2014, significantly lower than official 0 State forecasts. This will rise to around $214m if interstate 2014 2015 2016 2017 2018 compacts are created. n GGY ($Ms) n With Compacts ($Ms) The licensed U.S. online gaming market will require California 2014 186 214 to push through proposed poker regulations and roll-out licensed web-sites to push through the $1bn GGR barrier. 2015 212 244 Regulation should occur by end 2014 with licensed operators 2016 241 277 dealing their first online poker hands by end 2H 2015. 2017 264 304 2018 290 334 The U.S. licensed online gaming market will be worth around Source: Clarion Events. Forecast modelling factors included in $3bn GGR in the next five years providing the State-by-State Section Three model is rolled out and significantly more should a Federal ruling prevail. The roll-out of online gaming in the U.S. will be slower than Exhibit 2: Delaware Forecasts GGY licensed online gaming predicted in most cases. Even where legislation permits, 40.2 technical requirements specific to one State yet complying with interstate compacts will hinder growth. Delivery of online gaming products that conform to all 0 minimum standards set by stringent U.S. regulations will take 2014 2015 2016 2017 2018 longer than expected. The USA’s first-ever online licensed poker bet (via Ultimate Poker) launched without players using n n Verizon – the country’s largest wireless provider – with Virgin GGY ($Ms) With Compacts ($Ms) Mobile and Cricket Wireless networks able to complete the 2014 22.4 28 registration process before Verizon eventually came on-board 2015 26.4 33 in May 2013. Equally, Nevada-licensed South Point Poker is at 2016 28.1 35 least six months behind schedule as its proprietary poker client 2017 30 38 is independently tested. 2018 32.1 40.2 The U.S. will be the first major online gambling territory to Source: Clarion Events. Forecast modelling factors included in be driven through mobile/hand-held/2nd-device platforms. Section Three Until now, all other major gaming markets have been driven through desktop PC Internet platforms. While the online gaming industry has pioneered many creative routes-to-market worldwide, particularly for payment processing, in the U.S. transparency will absolutely be key. Anything else may result in a revoke of license. The licensing and due diligence process in the U.S. is particularly thorough. Those operators with large scalable IT infrastructures enabling rapid distribution on a mass scale to new platforms including iPad, social media and, in particular, via mobile will win through. 3 Executive Market Forecasts – How will Business Models Key Industry & Contacts Summary Size the Market Evolve? and Value Chains Market themes State-by-State online poker will not negatively impact on Exhibit 3: Nevada Forecasts GGY licensed online gaming the revenues of land-based operators. Pre-UIGEA land- 144 based poker revenues rose sharply alongside the growth of online poker. However, a Federal law or strong multi-State compacts could have a negative impact given that liquidity and jackpot pools would be bigger and more players would migrate online. This scenario threatens not just the core 0 2014 2015 2016 2017 2018 casino businesses but their adjacent resorts, hotels, shops and restaurants – which rely on a constant influx of gaming n GGY ($Ms) n With Compacts ($Ms) customers. 2014 77 96.25 New Jersey will be a significantly more valuable market than 2015 88 110 Delaware or Nevada, not just because of its larger population 2016 96 120 but because online slots and online casino is permitted 2017 107 134 alongside poker (as does Delaware). Online casino and slots 2018 115 144 generates significantly greater revenues for online gaming Source: Clarion Events. Forecast modelling factors included in operators than online poker on a per-player basis. Section Three Some Americans will continue to gamble with offshore companies even should State licensing or a Federal ruling occur as there are greater opportunities including wider sports betting markets. The U.S. is losing hundreds of millions of dollars in tax every year through unlawful online gambling. Exhibit 4: Total U .S . licensed market value 3.06bn 0 2014 2015 2016 2017 2018 n GGY ($Ms) n With Compacts ($Ms) 2014 285.4 338.25 2015 (5 States inc California poker) 810 972 2016 (7 States) 1.3bn 1.56bn 2017 (9 States) 1.9bn 2.28bn 2018 (11 States) 2.55bn 3.06bn Source: Clarion Events. Forecast modelling factors included in Section Three 4 Executive Market Forecasts – How will Business Models Key Industry & Contacts Summary Size the Market Evolve? and Value Chains Market themes Regulation Product More U.S. States will drive through regulations and join Online Online Online Exchange Delaware, Nevada and New Jersey as the U.S online gaming State poker casino sports wagering industry rolls out on a State-by-State basis. Licensing models California will vary. Delaware President Obama’s term ends in 2016. It is unlikely a Federal law will be passed by then. Longer term it seems inevitable Illinois that federal legislation will be introduced – particularly as Louisiana States push forward with regulation. There may be a ‘tipping point’ where enough licensed States forces a Federal ruling. Mississippi Federal legislation on online gambling cannot pass as a Nevada* stand-alone Bill, it will need to be attached to something New Jersey else. Individual States and the greater online gambling industry in the U.S. is sending mixed messages to the Federal New York government about the type of regulation it wants. Pennsylvania Compacts between some U.S. States will almost certainly occur. Larger States such as California stand to gain less from * Some, limited online sports such agreements and will either abstain or demand more Source: Clarion Events aggressive commercial terms. International compacts with other countries is a more complicated issue and consequently much further away. Most States will tie any future online gaming license to land- based licensed operators. This creates greater protection for the State and the customers because if online regulations are breached a Company’s core land-based license is threatened. Monopoly online gaming operators in Europe have largely not been successful (relatively), are not commercially competitive and do not draw players as well as independent operators. U.S. States will not adopt this model. Regulation must create a regulatory environment that encourages competition and therefore ultimately serves consumers best. Application fees or deposits from regulators will be revised. California has demanded a (refundable) bond of up to $30m from license applicants. Unregulated States are increasingly having their hand forced by those States that are legalising online gambling. Most States are keen to shore up short falls in budgets. The U.S. online gaming market remains unstable. An online gambling scandal could set back the market by years. Another UIGEA style prohibition can never be totally ruled out. 5 Executive Market Forecasts – How will Business Models Key Industry & Contacts Summary Size the Market Evolve? and Value Chains Market themes OPPORTUNITIES Exhibit 5 . Which will be the next U .S . State to follow the lead set by Nevada, Delaware and New Jersey? Up to three-quarters of land-based operators have yet to choose suppliers. Opportunities still exist in the U.S. for international gaming and gambling operators, game developers and publishers, venture capitalists and equipment and technology suppliers. Further international gaming entrants to the U.S. market will need to buy-in at higher costs than the early movers. % Poker will be the driving product in most U.S. States, although n Colorado 0 online casino and slots games will also gain some traction. n Mississippi 4 Opportunities for the growth of online sports wagering will be more limited. n Massachusetts 5 n Other 5 U.S. land-based entities still hold the power. In particular brick- n Illinois 16 and-mortar casinos and Tribal entities will be best placed. In n Pennsylvania 23 States without these entities, lottery providers, racetracks, n California 47 card rooms and gaming equipment suppliers will prevail. Source: Clarion Events 2013 California is expected to become the most powerful U.S. State for online gaming and poker will be the online route. Tribes and card rooms will be the chief beneficiaries. Sports wagering is also unlikely to gain traction in California (outside Exhibit 6 . What’s the optimal market-entry strategy for the U .S .? exchange wagering).