The opportunity cost

The shock announcement from Amaya that CEO David Baazov is attempting to take PokerStars private once again raises some challenging questions for the egaming industry. After a game-changing acquisition that forced everyone to think bigger and the successful repositioning of PokerStars as a transparent regulated market leader, it suggests the current perceived wisdom needs a rethink.

We were told Amaya’s access to the public markets, institutional funding and a focus on regulated markets would allow it to mature into the gambling business of the future. This may still be the plan with the acquisition a response to a rapidly declining share price rather than any structural issues, but it hints at other factors.

Public reporting pressures means any listed online gambling company has to tread a very careful but unrelentingly growth-driven path. Firms can be forced out of markets that would be immediately bottom line enhancing and into markets that come at considerable cost.

A long-term focus on building a sustainable and profitable business is clearly a sensible objective, but in egaming this can mean passing up big opportunities in the interim. Five years is a very short time in the financial sector, but it can be a lifetime in online gambling. Entire sectors can fade away and the market leaders can drop by the wayside as new giants emerge.

Learning from history

PokerStars itself throws up arguably the most compelling example of what can happen when an operator is forced to tread water. When UIGEA was enacted in 2006 it was a private company to an almost exhaustive degree. While its rivals pivoted, panicked and dumped their US-facing businesses it quietly took stock and considered its position.

The end result was it felt there was an honest battle to be fought in terms of the application of the law to its business and a risk worth taking in remaining. While Black Friday is often used as a frame to showcase how this was a reckless or risky decision, it’s hard to argue it was the wrong one.

In that five-year time frame PokerStars grew from a very profitable, but largely mid-tier operator, to become one of the key power players in online gambling. Even after its settlement with the DoJ it remained a dominant player in Europe and the effective owner of an entire vertical.

For investors looking for long-term returns, the stability and allure of regulated markets is tough to resist, but the speed of movement here can be glacial. The Netherlands is a good example of a major market that has appeared tantalizingly on the horizon for a number of years while it’s launch date gets pushed further and further back.

The US is another example of a market that was supposed to grow rapidly following the opening of the first regulated markets. But just over two years later we seem no nearer a single additional state entering the fray and, if anything, the environment seems more hostile to egaming than before.

Reacting to conditions

It is notable that one of the strategic objectives from the recent GVC acquisition of bwin.party appeared to be a larger focus on grey market revenues. GVC has built a substantial and very profitable business by focusing on markets other operators had turned away from by refusing to buy into the prevailing wisdom that a regulated-only approach is the only sustainable one.

The industry’s leading operator bet365 doesn’t have the black and white perspective of some competitors (and critics). It is active in almost all regulated markets with more licences than most of the listed sector, but it also doesn’t fear the grey markets and has confidence in its legal status in those markets it operates in.

This, of course, was once the PokerStars approach and a large reason behind its current $1bn+ revenues. There is barely a market it isn’t active in from Russia to China to Brazil and it must be frustrating to see the potential revenues from extending its poker product into casino and sports betting in those regions remaining theoretical.

Two of the key strengths of the PokerStars operation are its customer service and payment processing, with the latter a key barrier to entry for most operators in Asia and Latin America. Perhaps being private would free it up to extend its product set in regions where public companies are still squeamish.

White or grey?

The long-term play of positioning yourself as a whiter-than-white operator in advance of widespread regulation in the US, Chinese and Russian markets is frequently cited as a reason for caution. But the history of online gambling so far has not really borne out that narrative.

Those who act responsibly and with caution have not been excluded en masse from new regulating markets so far. As can be seen in any other commercial sector, once you reach a certain scale it’s easier to have you inside the tent pissing out than outside the tent pissing in.

Has Paddy Power really benefited more than its newly merged partner by refusing to operate in some of the grey market territories Betfair has quietly managed ongoing revenues from? The time for aggressive marketing in non-regulated regions may be over, but the potential for massive revenues from them is not.

The cost of missing out on the opportunities currently presented by the global egaming markets are not just financial. The size of revenues that can be generated outside of regulated Europe are achingly apparent, but its the scale it gives firms that can set them up for the next phase of their and the industry’s development.

Regulated markets are the present and future of this industry, but they are not all that exists. There is an opportunity cost in ignoring them completely that perhaps some companies cannot afford to pay.