Where will growth come from?

Dermot Desmond’s coruscating attack on the Ladbrokes Gala Coral merger has sparked discussion not just on the value of the deal in question but the wider rush for scale. Mergers won’t by themselves bring growth, so the question is will they act as a catalyst to the factors likely to lead to a positive 2016 in egaming.

Looking at the key drivers of growth in the sector from the major operators it’s a mix of international expansion, product and marketing spend and in some ways that’s the same as it ever was. But looking a little deeper the sector has changed considerably on each of those three main strategic points.

During 2015 we’ve seen major operators reassess their approach to international growth, with profits proving tough to come by even in Europe’s most established regulated markets. Paddy Power invested heavily in its Italian operation, but has had to slash costs to remain competitive and position the business for the long-term.

It’s a similar story across the sector as the increasingly fragmented European market hikes up costs and places additional burden on technology teams and stretches marketing resources. It was notable that bwin.party, arguably the flag bearer for pan-European operations, stated they would focus on fewer markets in its H1 results.

Growing at cost

The move towards more widespread international regulation is a long-term benefit for the sector with the creation of sustainable business models but it comes with some short-term pain. We’ve also seen recent moves in Romania prove that local regulators and governments can be capricious in their approach to online gambling regulation and hitting operators with a sizeable back tax bill seems de rigeur.

Any major regulatory reform in the Russian, German and Brazilian markets is also unlikely to be a huge boon to short-term profits. Germany in particular looks set to give with one hand and take away with another, with any regulation likely to focus on sports betting first and not the huge online casino market. Russia and Brazil are also likely to act to protect local interests first and foremost and anyone entering the market should expect to pay a premium for a restricted product set.

The ability to absorb these costs and invest at scale is what’s driving many of the merger deals, but international expansion is at best likely to provide a top line boost in the short-term. For bottom line growth operators will need to look elsewhere and one key area will remain the expansion of omni-channel and incremental growth through mobile, not least in gaming.

Product is key

What is a clear lesson from sports betting is despite over 10 years of mobile availability the punters only made the move when the product was up to standard. With consumer expectations rising all the time “good enough” is no longer, well, good enough. What we will undoubtedly see in 2016 is those operators investing more in mobile gaming products beginning to feel the benefits and outgrowing the wider market.

Paddy Power has historically been weak in casino relative to its peers, but its egaming revenue grew by 6% in Q3 2015 and said this was driven by proprietary content. “We expect our new app launches to accelerate this growth, underpinned by well-coordinated and targeted promotions,” the firm added. And this is an area where increased scale can be a major catalyst with higher investment in centralised technology hubs.

Amaya recently noted it was working on a unique bonus engine for its casino product as well as new mobile-focused games and its far from alone in its efforts to stand-out in a crowded sector. Hills have had a tough end to 2015, but its new HTML5 front-end, in-house bonus engine and games, as well as its priority access card are exactly the kind of innovations that could see it really push ahead in the year to come.

Finders keepers

Anecdotal evidence from the sector suggests a great deal is also being invested in personalisation both on the front-end product and on retention marketing tools. While we’re also seeing firms spending more time on modelling and data analysis of marketing campaigns than before with every penny spent carefully tracked and optimised. Although there is no sign of any major cutbacks in marketing costs.

Marketing spend varied wildly among the major UK-based operators in the Q3 results with Hills questioned over reducing its spend during the period and Ladbrokes pledging to increase it to 30% of net revenue as it looks to boost growth. But across the board operators are still spending heavily on TV and digital media with the maxim of “if you spend it they will come” showing no signs of losing its validity.

Bwin.party said back in August it would move money from more obvious branding and acquisition focused sponsorships to CRM in the months ahead and this is indicative of a wider trend. There will be no dramatic scaling back of acquisition marketing, although there may be a cut back on affiliate spending as non-regulated markets decline in importance. But it will be online and mobile CRM that is the key battleground in the most established markets.

A subtle shift from acquisition to retention is likely to be the difference between the winners and losers in 2016. The land-grab days are not over, but operators need to look towards the customers they already have to make the difference in the next 12 months.