Analysis: What the UK revenue data isn’t telling you

If the first UK data release came with a bang then the recent update from the Gambling Commission arrived with more of a whimper. Revenues for the 12 months to March 2017 were £4.68bn, up 10% on the prior year but only 4% on the previous figures for the year to September 2016 and it was not a surprise the mainstream media treated them with a shrug. But behind these apparently anodyne looking figures there are a few interesting tales to tell.

Headline numbers suggested not a great deal had changed in the six-month period. Online gambling nudged up slightly to 34% of the total UK gambling industry, and by far the most important growth sector. Of its land-based cousins the lottery industry was the next largest at 25% with the high-street betting sector on 24%. But there was only one hot product with the lottery sector showing 10% decline and the high-street up a modest 1% year-on-year.

In this context the online sector growth of 10% looks very healthy indeed. And on the face of it, these are a solid set of numbers for the UK market. Double-digit growth, just, in one of the largest regulated online markets in the world is no small feat and more importantly, it’s the type of growth that seems eminently sustainable.

Sports-led growth

Growth as always was led by sports betting. The fixed odds betting sector grew the fastest, up nearly 12% year-on-year to £1.7bn on the back of 14% turnover growth. The betting exchange sector in contrast fell 15% to £129m, while pool betting was up a surprising 25% albeit from a very low base. But in summary the sports betting sector appeared to be performing well. There is a proviso to this, however, as what is easy to miss due to the unusual reporting period is this 12-month cycle contained the entirety of the Euro 2016 championships. Against a prior period with no major summer football tournament, it begins to look slightly less impressive.

One of the more interesting data points from the sports betting vertical was the breakdown of revenues by sport. It should be noted that £601m of the £1.9bn total was attributed to “unallocated revenue share”, or in other words revenue already reported by third-parties, but the numbers are still illustrative of some trends we’re seeing in the UK sector.

As you would expect, football was by far the largest contributor at roughly half the total “proprietary” revenue for the year but was up just 2.6% year-on-year despite a 28% rise in turnover. While some variance in results is a big factor here, this is arguably the clearest evidence yet of the downward margin pressure from the price wars we’ve seen in the UK.

Operators are often working with wafer thin margins when it comes to football betting after you take out the free bets, enhanced odds and other customer friendly offerings slapped onto the top of markets with less than 10% overround built in. And the data from the Gambling Commission shows the gross margin was 7.9% in the period down from 9.9% in the previous 12 months. While there is a danger in reading too much into this with so many moving variables and an entirely different sports calendar, as a directional trend it’s one worth noting.

Operators it seems are adding turnover at a healthy rate but this is not dropping to the bottom line. Partly this will be a factor of a shift towards the lower margin and higher turnover in-play product, but it’s tough to dismiss the slew of enhancements, bet clubs and price boosts as having no impact here. Perhaps on the same theme there was a decline in golf betting revenue year-on-year following a period of increasingly aggressive pricing around the sport in the UK. Gross revenue from golf was down 5.7% despite a 2% increase in turnover. Tennis posted the reverse pattern with revenues up 7% and turnover down 3% as several operators looked to cut back on unprofitable customers in the sport.

Racing, bingo and poker

One sport that showed a more consistent performance was horseracing where revenues were up 9% on the back of a 10.9% rise in turnover with margins broadly stable at around 6.5%. This was somewhat surprising bearing in mind the aggressive offers and pricing we’ve seen around the sport, and the increased costs of operation, but suggests a more healthy future for racing than some doomsayers in the industry would lead you to believe. It was also by some distance the second largest betting sport in the period, responsible for £373m of the £1.29bn proprietary revenues or around 29%. To suggest the industry could easily replace or do without this seems somewhat disingenuous.

Another maligned sector, online bingo, continued its decline, with revenues down 7% year-on-year to £162m, and the introduction of the bonus tax after the period means this number is only likely to drop further in the next set of results. As always, however, the bingo numbers only present a part of the picture with revenues from bingo players more than ever derived from slots and mini-games with mobile exacerbating this trend. The value of the “bingo” sector then is clearly far more than the £162m quoted and is likely more in the region of £600-700m.

But there is no denying online bingo looks like a vertical struggling to find growth. And market conditions are not going to help it a great deal in the short-term. The egaming industry’s other perpetual underperformer, online poker, posted a slightly rosier looking picture with 2% year-on-year growth to £105m.

While it’s not exactly time to break out the bunting it does show the efforts from PokerStars in particular to breathe life back into the market are having some impact. Although just as is the case at The Stars Group, it was the casino vertical where the real action was once more.

The casino sector

Online casino revenues were £2.5bn for the 12-month period, up 11% year-on-year with slots £1.7bn of that amount. But while slots remains by far the dominant product in the vertical, it was not the fastest growing with revenues up just 7.7% year-on-year and table and card games growth outstripping it at 8.0% and 12.3% respectively. Growth in live casino as well as the introduction of casino games into poker and an increased cross-sell generally through more male-oriented gambling products are likely factors for this. But it’s a trend to keep an eye on.

Before we start talking of the rebirth of table games, however, it should be noted that table and card games combined still represent just under 25% of all casino revenues with slots 67% of the pie. Slots remain by some distance the most important gambling product, arguably more than sports betting, and will form the basis of most acquisition and cross-sell campaigns over the next 12 months. And this alone should be a cause for concern for the online gambling sector as a whole because these games are the most potentially problematic and likely to raise increased regulatory scrutiny.

In the most recent Health Survey, online slots had one of the highest problem gambling rates at 11.4%, only just behind FOBTs at 11.8%, and was one of the most heavily slanted towards the under 34 age groups in terms of participation. As a new target for the anti-gambling lobby then online slots appear to fit the bill perfectly and it is hugely important operators have firm responsible gambling policies around their marketing here. Because there were other data points that should cause operators to begin to plan for a future where there is an even greater spotlight on this area than now.

Self-exclusion concerns

Perhaps the most troubling detail from the latest data was the jump in self-exclusion numbers from just over 600,000 to nearly 1.2 million. The 86% rise can be presented as a positive or a negative for the sector depending on your perspective, but it was surprising to see it receive so little comment, or perhaps not with the self-exclusion data still so frustratingly vague and with so much room for interpretation. With the data only referring to accounts and not people there’s sufficient wiggle room to not treat 1.2 million self-excluded accounts as a major issue.

There is also the assumption that problem gamblers will tend to have considerably more accounts than the average online customer and operators have gone to great lengths to improve access and awareness of self-exclusion tools over the past 12 months. Anecdotal reports suggest a number of players have voluntarily self-excluded on receipt of emails informing them of the option and it’s likely this increased effort from operators has played a large role in the increase. But it would take an extreme optimist to not see some danger signs here.

The total number of self-exclusions represented 4% of all active accounts in the period, up from 2.7% of active accounts in the previous year. This is not out of line with accepted rates of problem gambling nor is it a particularly troubling statistic, but it certainly raises questions on what additional impact the GAMSTOP system will have and what impact the unreported responsible gambling measures are also having. If simply making the self-exclusion tools more visible and informing customers about them better leads to an 80% uptick then have we seen similar in deposit limits, time-outs and other features?

There is a clear positive slant to this too, in that customers are learning how to gamble responsibly and this, should, be good for the industry in the long-term. But it is certainly likely to hit revenues in the short-term. The question, however, is more how should the industry look to reposition itself in response to this in order to continue to drive growth and sustainable revenues in the long-term. What looks like a negative can actually be a real positive for the industry if handled correctly.

The squeezed middle

The data set also revealed year-on-year numbers for the B2B sector in online gambling, with software revenues up 4% year-on-year to £632m. There was no detailed breakdown of the software supply sector, but revenue share was up 7.8% year-on-year to £383m and “sales” was up 3.6% to £186m. As a combined total the software sector was equivalent to 13.5% of the remote gambling sector with the revenue share component equal to 8.2%. What is interesting to note is growth was below that of the wider market suggesting rates are being squeezed in response to rising regulatory costs.

The theme of the squeezed middle is one that comes across in many of the underlying trends from the data set. Funds held in customer accounts rose at roughly the same rate as revenues (up 9.7% year-on-year) and while this is not the same as deposits it does hint at no major shift in yields from customers. What is perhaps more reflective of this is the 25.2% jump in the number of active accounts and the 28.7% rise in new accounts during the period.

Clearly this remains a hugely competitive market where new operators are emerging all the time and the battle for new accounts is fierce. The corollary to this is increasing yield and share of wallet becomes a bigger challenge for all. And this is perhaps the most interesting aspect of all about the UK market in 2017. For all the talk of the PoC tax wiping out the smaller operators and leading to a period of substantial consolidation this is not quite what has emerged.

There has been no shortage of consolidating pressure at the very top end of the market but smaller operators show no signs of throwing in the towel just yet. There are markets with faster growth rates, and many with more greenfield opportunities, but there is no doubt that the UK remains the one market nobody can afford to do without. How that changes as regulatory pressure and tax levels increase and some of the more old-fashioned operating models become less profitable is what everyone will be watching over the next 12 months.

Another year of growth at 10% would add nearly £500m to the total, more than the entire regulated Spanish market, but changes to operating conditions has the potential to limit this. And the change in the tax treatment of bonuses mean less is now dropping to the bottom line for many.

How this impacts the smaller operators in 2018 may be the biggest story of the year and could, finally, cause more closures and acquisitions in a market where, despite the picture painted by the latest data, there is a lot changing under the surface.