PoC was predicted to have dire effects but UK igaming has enjoyed phenomenal growth since. However can it continue in 2017 or have we now entered bubble territory?
The introduction of the Point of Consumption (PoC) tax regime in late 2014 had been expected to hinder further growth in the UK market, but the coinciding marketing push from operators led to the opposite effect and since then the market has surged ahead of all expectations.
As discussed in the latest iGaming Business Market Monitor published in December, the UK market could reach a high of about £4.8 billion in 2016, a huge jump from the £3.5 billion estimated to be the yearly figure as recently as March 2015.
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In November, the Gambling Commission published figures relating to the first full year since the PoC tax was introduced. The figures showed that online gambling now represents 33% of the total UK gambling market, with the combined online products producing revenues in the 12 months to March 2016 of £4.5bn.
This was a big jump from the £3.48 billion we estimated the market was worth after the publication of the Commission’s figures for the period ending in March 2015 (see table below).
But in 2017 the UK market is facing a number of headwinds and many are now questioning whether it has now entered bubble territory.
As discussed in our report, the UK market in all probability has had a compound annual growth rate (CAGR) for the past three or four years of circa 20%, and it seems unlikely growth can continue at this level.
Challenges on the horizon
There are a number of challenges on the horizon that could severely affect UK operators. These include several government inquiries, which could lead to regulatory changes that are unfavourable to UK operators.
Such a ban would most obviously affect those brands that focus on advertising gambling around live TV football and the bingo sector, which has to date been treated as soft gaming and has been liberally advertising during the daytime TV schedule.
The PoC tax regime is also due to be expanded to casino and bingo bonus and sign-up offers, the Competition and Markets Authority (CMA) has launched an inquiry into the advertising of promotions and offers, and the Information Commissioner’s Office (ICO) is cracking down on the use of personal information used by gambling affiliates.
There is also a growing fear among executives within the gambling space that although the UK government’s Triennial Review has thus far set its sights mainly on fixed-odds betting terminals (FOBTs), at some point they may turn their attentions to online slots.
If we look at just how much of the industry’s revenues are made up of slots, it’s easy to see why they are concerned. Slots are by far the most popular product in the igaming operator’s range, accounting for £1.75 billion of the yearly total (see chart below).
As the above chart shows, online slots are worth almost three times the size of the next biggest product, football betting (at £580.6m), followed by table games, horseracing, card games and bingo.
Online slots regulation would hurt industry
Even bingo operators are largely reliant on slots (side games), with operators using bingo as a loss leader for their side games products such as blackjack, roulette or slots.
Although we can’t be sure of the degree to which each individual operator is reliant on slots revenues, a fair guess is that industrywide the ratio of bingo to slots/games is likely 30/70.
From the public companies, operators such as Stride Gaming, Intertain and Gala Bingo have certainly continued to see growth, though Rank’s Mecca offering has somewhat suffered of late as a result of the switch to the Bede platform.
Tombola, which previously was genuinely a bingo-only offering with no slots or side games available, recently switched strategy with the launch in August of the Tombola Arcade site. It’s clear from the figures that any crackdown on online slots would have a dramatic impact on the igaming industry overall.
Regulatory issues aside, there are also other factors that point towards a lower level of growth going forward. First, there’s no major Summer football tournament to drive signups and volumes this year – last year’s Euro 2016 provided a big boost to sportsbooks, with many citing it as a contributing factor in better-than-expected results for the period.
Another factor which points to the market being at the peak of its growth is the relatively high degree of churn in terms of account numbers displayed in the numbers. In the year to March 2016 the number of new accounts outpaced the overall accounts figure by 24.7 million to 22.9 million. The figure for spend per active account is £195.
Obviously, gamblers are notoriously disloyal and this not only leads to high churn rates, it also leads to many punters having multiple accounts, so it’s difficult to ascertain the true numbers of online gamblers. Although churn itself may not be an indicator of a bubble, when considered along with the overall GGR figure, it does suggest a degree of frothiness.
The high churn level also suggests the industry is still struggling with its customer retention rates.
This is despite an avowed concentration on the issue from the leading operators, and it suggests a number of conclusions:
- first, that despite their best efforts, the leading operators are still finding it hard to produce offerings that can hold on to their customer bases for long;
- second, it means new entrants will continue to be encouraged they can make in-roads in the market and;
- third, that bonusing and sign-up offers are likely to remain a mainstay of marketing efforts despite coming under pressure from the recently-announced CMA inquiry.
It’s clear that the UK’s igaming market faces a number of challenges in the year ahead, but although there are signs it is now in bubble territory, we should not underestimate the creativity of those working in the sector.
After all, not many would have predicted that the market would not only adapt to the PoC regime, but soar in spite of it.