Scott Longley looks back over the past 20 years and chronicles the most defining developments in the short but tumultuous history of online gambling.
When it comes to selecting a Greatest Hits, it is notoriously difficult for the compilers and audience to agree on a definitive list.
The format is necessarily subjective and the final list will always be the subject of furious debate. So it is with our top 10 of seminal moments in the history of online gambling, chosen to celebrate the 100th issue of iGaming Business.
Nevertheless, the aim of the top 10 is to look forward. It is often said about the online gambling industry that the rate of change within the sector is phenomenal. 'It's never dull' is the oft-repeated phrase and we certainly concur with that.
No one can predict what will happen in the sector other than that it will continue to be unpredictable. But that won’t stop us attempting to divine long-term trends. One hundred issues clearly can’t be distilled to 10 moments in time, but nevertheless here are our seminal events.
March 2011 — bwin.party ushers in the era of the mega-merger
We start with perhaps the most controversial choice of our 10. But we haven't chosen bwin.party as an example of how not to do it — despite the experience proving how mergers can go wrong and the best efforts of those involved.
Rather, we chose this deal because it was the first of the mega-mergers. bwin.party marks the point where the trend towards major consolidation began to gain momentum. As Jim Ryan, then chief executive at PartyGaming and subsequently co-chief executive at the merged entity, says, “the logic of the deal was phenomenal”.
All the arguments that have been given an airing in subsequent merger announcements were indeed present and correct when Party and Bwin tied the knot. The deal was about gaining scale in an environment where regulating markets were making it more expensive to operate.
The shared technology and services would generate huge cost synergies while the pair would enjoy the benefits from cross-sell into new verticals. As with all M&A, it looked great on paper.
But as Ryan admits, he was soon disabused of the notion. “Just try and put together an Austrian development team and one based in India,” he laments.
But the logic of large-scale mergers remains. “Major consolidation was I think inevitable given the stage the industry was at in its life cycle,” says Nigel Birrell, previously in charge of M&A at PartyGaming and bwin.party and now chief executive at Lottoland. “Many predicted that once the first mega deal was completed others would follow as operators fought to make sure they did not fall behind. That has proved to be very much the case.”
December 2014 — the introduction of point of consumption (PoC) in the UK spells the end of the tax-free lifestyle
Who remembers the White List? At one point in the history of online gambling in the UK, it was all any regulator talked about. Which jurisdictions would gain a free pass into the UK? Which would be deemed to be beyond the pale?
The White List came into force following the passing of the Gambling Act 2007, but after a number of not-entirely-unsuccessful years of operation it was replaced in November 2014 by the all-new PoC regulation and tax regime.
PoC literally brought home the reality of higher costs to many UK-focused companies and the full influence of its imposition is still playing out. Yet, as much as the UK developments are a major driver behind the regulated markets focus of many operators, a counter current is investors now being more willing to listen to companies with some grey markets exposure due to the greater rewards of untaxed revenues.
As Kenny Alexander, chief executive at GVC Holdings says: “Investors are looking for two things; first, geographical diversification and second, stable revenue streams.”
But for Simon Collins, ex-founder of Cashcade and now founder and director at Gaming Realms, the UK tax regime has also led to a flowering of innovation. “Daniel Defoe’s The Political History of the Devil first mentioned the connection between death and taxes being inevitable,” he says. “I figure PoC just brings out the need for better operational and product offerings. Harder for sure but in some ways exhilarating when you hit the targeted numbers.”
2001 — Four numbers — 7995
As much as Jim Ryan says the passing of UIGEA defined his career, he goes back further into online gaming history for another significant moment which influenced the subsequent path of the industry, the institution of the 7995 merchant category code for gambling transactions.
The move made transactions more difficult for online gambling, particularly in the US. It was a blow for the industry – and a sign of things to come. But it also acted as a catalyst for the alternative payments industry, which in the following years has truly flourished.
“Gambling and payments were following similar paths,” says Sarah Francis, a payments adviser at Polymath Consulting and previously group fraud manager at Sportingbet from 2003 to 2006, who points out that the rise of alternative payments providers is inextricably linked with online gambling in grey markets.
“Alternative payment providers grew out of the need for systems that could work with countries that were not card-friendly,” she says.
First PayPal – before it was bought by eBay – then FirePay and the original Neteller (now part of the UK-listed payments giant Paysafe) took up the challenge with their payment wallets, an invention which was particularly suited to the unique pattern of gaming transactions.
Post-UIGEA it was a solution unavailable in the US – anybody want to buy some flowers? – but the e-wallet was vital to the global spread of online gambling.
November 2006 — Playtech buys Tribeca Tables — the birth of a giant
Just look at the timing. The Tribeca Tables acquisition was a brave move; the US market had just been shut down and the price tag of $75m was a lot for a business which had just seen its main market all but disappear.
To be clear, buying Tribeca Tables didn’t make Playtech – the company had already floated on London’ s junior market AIM, raising £175m and valuing the firm at £550m. But it did give it a huge leg-up in a vertical where it was deemed sub-scale, and it set the pattern for what was to follow.
According to analysis by Morgan Stanley, since the joint venture with William Hill to buy the Uniplay assets in October 2008 through to the most recent acquisition of Best Gaming Technology (BGT) in July this year, Playtech spent over £1.2bn on 15 deals, ranging in size from £5m for the Nation Traffic in August 2013 to the £208m TradeFX deal.
Three of the deals have been related-party transactions (i.e. majority shareholder Teddy Sagi has been the major beneficiary), but what is truly impressive is that each deal has either substantially enhanced or launched Playtech into a different vertical.
“It’ s all about growth,” says Mor Weizer, chief executive at Playtech since May 2007. “It’ s one of our most important strategies. That is what directs our attention. That’s the strategy. It’ s very simple. The M&A must support all the other pillars of our business. This is how we started building the company right from the start.”
Weizer says it is the people on both sides of the deal that make the difference. “What’s the most important driver?” he asks. “The people. Commentators and analysts talk about the IMS or the product. But all that is the result of the people who work at the company.”
May 2010 — David Baazov floats a poker table manufacturing company: to greatness and back again
You would have had to be a true seer to buy into Amaya’s initial public offering in 2010 when the company raised C$5m on the Toronto stock exchange. True, it was involved in providing poker. But it was in the form of electronic poker tables, a product which launched Amaya back in 2004.
In a succession of stepping-stone acquisitions, Amaya built its way all the way up to the big one, the $4.9bn Rational Group/PokerStars buyout, vaulting chief executive David Baazov to the status of “the King of online gambling”, as one fulsome profile memorably phrased it.
That the King has since lost his throne is immaterial to his admirers. “He is the greatest salesman I have ever known,” says Tom Hall, who, to be fair, has known a few in his career.
As much as Hall believes the insider trading allegations will prove to be false, he goes on to suggest that regardless of circumstance Baazov got out at the right time. “The smartest people in the room are no longer sitting at the table,” he says of the selling Scheinbergs and the ongoing secular decline of poker.
But what is important about Amaya and Baazov is what it says about the ability of online gambling to attract backing from financial institutions – in the case of the ‘Stars buyout, Blackstone’s credit division GSO Capital Partners, Deutsche Bank, Macquarie and Barclays.
This is what made the deal exceptional (alongside the sheer chutzpah). “Amaya showed the art of the possible in terms of industry consolidation,” says Nick Batram, former analyst at Peel Hunt and now head of strategy and investor relations at GVC. “Although there have been some subsequent bumps in the road, a legacy of the Amaya PokerStars deal is that there are now many more financiers prepared to look at the online gaming sector.”
October 2006 — Five letters — UIGEA
The passing of UIGEA in 2006 utterly transformed the online gambling landscape.
“It changed the market completely,” says Jim Ryan, who was the chief executive of the briefly UK-listed Excapsa at the time. “The new guard suddenly became the old guard overnight. It was a catastrophic event, and you knew the extent of its impact as it was happening.”
PartyGaming, which Ryan joined in June 2008, “never got over it,” he says. The story of PartyGaming still stands out.
As John O’ Reilly, ex-online chief at both Ladbrokes and Coral, remembers, “that day after it floated it was worth more than Rolls Royce — its market cap was something north of £5bn”. The company was on its way to making $750m in EBITDA but after the US exit, “its earnings were eviscerated”, says Ryan.
But UIGEA isn’t just a story about corporate hubris and utterly predictable black swans. It’ s also a tale of resilience, says Stephen Ketteley, experienced gaming legal expert and partner at Wiggin. The listed operators that exited the US survived – while those that took up the poker slack post-2006 thrived.
Meanwhile, the audience mutated from poker to sport. A notable carve-out from UIGEA was granted to what was then season-long fantasy sports. Daily fantasy was born out of that regulatory loophole — and is now threatened with strangulation by it.
Hopes for US online gambling rest on the tortoise-like progress of state-by-state regulation (there is unfortunately no hare in this particular analogy) and the slim possibility that all the chatter around DFS might re-ignite hopes for more widespread regulation of sports betting.
Very slim, according to O’ Reilly. “For sports betting to ever happen you would need a triumvirate of things to come together. You would need the political weight, the leagues would all have to support it, and the land-based industry would also have to agree. Without those three things, the opposition is just too great.”
2006 — Gambling is not included in the EU Services Directive
The EU Services Directive could have given online gambling what it desired; passporting across borders and the ability to offer online gambling services within the EU’s 28 states.
That it wasn’t included said everything about the politicised nature of gambling legislation in every country in the Union. The industry continued to lobby for the ability to offer dot.com across borders, but as Stephen Ketteley points out, the game was effectively up in 2004 when the ECJ found in relation to the Gambelli case that restrictions on the provision of gambling services or the freedom of establishment were permissible in certain circumstances.
The nail in the coffin was the 2009 Santa Casa ECJ ruling in favour of Portugal’ s monopoly provider. “There was never a danger of harmonisation,” says Ketteley, who points out that the patchwork of a regulated Europe was inevitable, with all the variances in regulations and tax rates that have come with it.
A final irony, perhaps, came this summer with the Brexit vote. As Mark Davies, ex-managing director at Betfair, points out many UK-based operators have been saved the “scramble to get multiple licences” as the country faces up to the prospect of leaving the Union.
“Because of the way it turned out, with them getting the individual licences, the Brexit vote had no impact on bookmaker share prices,” Davies adds. “But had it been the other way around, their prices would have taken a big hit.”
2002 — Denise Coates persuades her family to invest in online gambling
Not many remember the name of the Coates family’ s first venture in gambling – a small chain of betting shops based in Staffordshire and Warwickshire called Provincial Racing.
The company changed its name to bet365 in 2002 after Denise Coates persuaded her father Peter and brother John that they should be investing in this new thing called the internet.
In 2004, the family sold the 59 shops to Coral. It was the beginning of a new era and the rise of bet365 since has been nothing short of phenomenal.
According to its most recent results, in the year to March 2015 it made net gaming revenue of £1.47bn and an operating profit of £406.4m, a figure which dwarfs the total gaming revenue figures for some of even its biggest competitors. It is a wall of cash that makes it hard to compete.
“Bet365 is very straightforward,” says John O’ Reilly. “Because of the amount of money it is making in grey markets, it can afford to outspend everyone back in the UK. They have a unique rationale in spending their money. It works for them. It’s about promoting the message of being a big brand, with a big personality fronting the ads. They do a good job, but I fear others follow them down the same path without the same logical rationale.”
Part of that logic for bet365 lies in the private nature of the company. It’s a status which accounts for much of its success, according to Tom Hall. “If you operate in grey markets, and you don’t need cash, it is far, far easier being a private company,” he says. “If you want to re-invest in technology, you can do it. But you can’t make that kind of decision if you are public. You can’t make decisions that are actually best for the company. We (at AsianLogic) do the right things for the business, not for the shareholders. We can grow faster and adjust faster. There is a reason why some of the most successful companies are private because they remain so much more agile.”
December 2008 — SBObet becomes the first Asian-facing bookie to sign a shirt sponsorship deal with a Premier League football club
The collapse of a travel firm is the unlikely trigger for one of the most significant and high-profile developments in online gambling over the past 10 years. When XL Holidays bit the dust in December 2008, it was the then little-known (for UK punters) Asian-facing bookmaker SBObet which stepped into the breach.
Thus began the era of high-profile sponsorships and betting partnerships between English football clubs and Asian-facing bookmakers. It’s one of the few visible signs we have of the size and scale of the Asian business.
Not that SBObet saw itself as some kind of trailblazer. According to Bill Mummery, executive director at SBObet, the deal with West Ham was merely a good “launch vehicle” for its Isle of Man-licensed UK business.
Since then, though, the Asian-facing brands have latched on to the global footprint of English football, particularly the electronic signage at the grounds. “It is supply-constrained with circa 1,000 minutes per week, but it is very effective,” he says. “It is a real driver for in-play.”
July 2016 — Caesars sells Playtika but social is still a thing
Because of its cash-generative nature, the online gambling industry has to date avoided discussions about unsupportable debt loads and impenetrable arguments between first and second lien bondholders.
Those following the travails of the US land-based casino giant Caesars Entertainment Corporation have not been so lucky.
However, one slither of more clearly understandable news came earlier this year when the company had sold its Playtika social casino arm for $4.4bn, this netting a huge profit on a business it had originally bought for comparative buttons (circa $80m) in 2011.
But this deal is clearly more indicative of the parent company’s need for cash than any signal regarding the gambling sector’ s involvement with social.
Indeed, a matter of days after the Playtika sale was announced, Penn National Gaming became the latest gambling entity to buy its way into the space with the acquisition of Rocket Games for $170m, following IGT, SciGames, Aristocrat, Churchill Downs and others down a well-trodden path.
Social casino certainly has multi-channel appeal. “I am certain we will see more land-based gaming operators make further investments in this model as it is such a great way to engage with customers beyond the casino floor,” says Chris Sheffield, online managing director at Penn National.
Further developments in the social space – notably Pokemon Go and its utilisation of augmented reality via mobile — is also exciting much speculation among online gambling executives.
“The mobile games market is huge and getting bigger,” says Simon Collins. “Most of the revenues from so-called social game companies now come from mobile devices; the Facebook platform which gives most games their social dimension is no longer so important. I think we are merely at the dawn with mobile devices. Think Pokemon Go combined with a real treasure hunt for a progressively sized jackpot.” Maybe 888sport's Pokemon Go-inspired Free Bet Hunt app may yet come to be seen as a seminal moment as online gambling takes to the AR and VR waters.