How the Italian market finally came of age in 2020

With all eyes trained on the US market and Germany looming in the peripheral vision, it’s easy to overlook the fact the Italian market singularly outperformed in 2020. You could be forgiven for doing so as Italy is a country that has been the next big thing for over a decade now, but this was arguably the year when it came of age despite some significant growing pains in the period. A total ban on gambling advertising and the brunt of the Covid-19 pandemic in the spring were dual forces that acted as competing pressures over the year but the net impact was very positive for online gambling.

Italian online gambling revenue for the full year looks set to top €2bn (£1.8bn) for the first time and is likely to be closer to €2.4bn with growth north of 30% for the year, and even higher in casino. All sectors of the online market have shown double-digit growth with online sports betting batting away a tough second quarter to finish the year stronger than ever with record revenue in Q4, while online casino was up 42% through the first 11 months of the year with growth peaking at 52% in Q2 2020. Online poker came and went with lockdown growth quickly falling away, but generally the market is in rude health.

Online casino alone is now worth more than €1bn a year in GGR, and more importantly there remains a lot of headroom for growth. Italy’s land-based gaming sector is the largest in Europe with machine gaming north of €11bn in revenue in 2019, and even assuming all of the growth in 2020 was land-based migration it represents just a tiny portion of the overall bigger spending picture. While it’s unrealistic to expect the majority or even the large minority of the machine revenue to move online, there is clearly no shortage of potential for the sector to continue to grow as players experience the significantly improved user experience available online.

Machine gaming in Italy is heavily restricted with very high tax rates on turnover mitigated by enforced maximum RTPs of 83% on VLTs and 65% on the more numerous AWPs. Online slots with RTPs of 95% or higher are clearly a more compelling experience for most players, and operators anecdotally are reporting player retention being strong on those who have moved from land based.
“Casino had a great year obviously and I think these revenue levels are sustainable,” Marco Trucco, head of international for GGPoker and an expert on the Italian market, says. “From a player perspective, this is a monster +EV benefit and I think players will stay.”

The poker problem

Poker holds a unique position in Italy. The vertical was the first gaming product in the regulated market and was a huge revenue driver initially before fading as casino became more widespread and faltering in the face of larger international liquidity pools. Revenue for the vertical was up around 50% year-on-year (YoY) and looks sure to generate more than €200m for the full year, which would be the most since 2013 when the online casino market really began to take off. Online bingo was also up a similar amount at around 50% YoY, once more benefiting from land-based closures, but poker is the more interesting and much larger revenue story in the period.

Online poker revenue was up around 50% year-on-year and looks sure to generate more than €200m for the full year

The brief resurgence in the face of a cancelled sporting calendar in Q2 2020 ran out of steam in Italy as quickly as most other European markets, but Trucco thinks this is an even bigger problem for Italy than most markets.

“I expect poker to quickly return to pre-Covid levels unless the regulator wakes up and approves international liquidity, and once they are at it, instead of opting for the Spanish-French liquidity, decide to go with global poker liquidity.

“As an Italian working with GGPoker, it is really sad to see my country at the bottom of our priorities but that’s just a reflection of how unwelcoming Italy is at the moment. With the flip of a switch, ADM [Agenzia delle Dogane e dei Monopoli] could save poker in Italy and attract new operators but I’m not too optimistic about that,” Trucco added.

But beyond poker’s sad but predictable decline, how much of this short-term impact from the Covid-19 restrictions will stick for the future? This is a much harder question to answer.

On the one hand, you have the continued societal shifts towards online that has been accelerated by the pandemic and the clear benefits of gambling online for consumers, but on the other you have some huge cultural norms to break. Machine gambling, and particularly cash-based machine gambling, should not be seen as directly fungible with other forms of gaming for a variety of reasons it’s probably unwise to go into in full.

What is perhaps illustrative of this is the level of spend that did move over during lockdown. If we call the land-based gaming market approximately €1bn a month, then the circa €50m of additional online revenue gained per month represents just 5% of this spend. This is obviously a very crude equation and there are a number of other moving parts that also come into play, but no matter what adjustments you make it’s a long, long way from a majority of spend, even under the most restrictive conditions imaginable for land-based gambling. But this is not to underplay the growth in Italy during the year.

The growth stories

While the market was clearly favoured by some significant tailwinds in terms of the lockdown and the closure of Italy’s mammoth land-based gambling sector, it did face some headwinds in the shape of a ban on gambling advertising, so this should be seen not just as picking up money in the street. Trucco says the effect of the ad ban in 2020 was hard to gauge due to most of the dynamics in place, but he notes operators have not been silent during the period and, as with the old grey market, they are finding innovative ways to get the brand across to new consumers.

“Online operators maintained some visibility with pitch ads and other formats promoting proxy brands, most of them disguised as news sites,” he says. “It’s hard to tell what their contribution was in such a noisy 2020. All I know is that it is really depressing when you have to bastardise your brand to place an ad.”

It does appear to be working, however, and even with the decimated sports betting calendar, the sports betting market performed well due to its ability to tap into this news-led marketing and access to ‘informative’ advertising. “For sportsbook, the decline of land-based was compensated by the migration to online and overall there was a small growth of circa 3.5% year-on-year,” Trucco notes.

But this is a good performance, and the total market size looks set to be around €1.7bn for the full year with over half of this coming from online for the first time. And it’s likely much of this revenue will be sticky with the land-based betting market not as firmly established in the culture as in some other markets and, more importantly, the major retail players making huge efforts to shift its player base to online where cross-sell is much easier, and player spend levels can be increased.

One of the more interesting dynamics during the period has been the shift in power in sports betting towards the land-based operators, with bet365 losing its automatic position at the top during the year. This is not a sea change, but more an acceleration of the existing trend with land-based operators becoming more adept at using their huge natural advantages in brand and customer acquisition to shift some of the land-based spend online. With Italy’s thousands of betting shops closed for much of the year, it was inevitable the high-street brands would feel more of the benefit of spend migration, but it should be noted this was an area they were already making great strides with.

Outside of bet365, the top five betting brands in Italy are dominated by the land-based brands, with some of the European online giants barely getting a look-in despite throwing resources at the Italian market over the years. Entain’s Eurobet is a top-five player, but this is due to its retail presence more than the might of the Entain technology and marketing machine, and the other major power players are Snai, Sisal and SKS365.

Trucco notes the longtail of smaller retail operators were forced into competing in an online market they were not prepared for. It’s likely some of those players found their way to the larger rivals in a manner seen in the UK some years back. And this growth cycle is likely to continue into 2021 for the land-based players with the ad ban acting as an inherent brand marketing and player acquisition advantage for them.

The longer-term outlook

Trucco still thinks the international online brands retain advantages in this new online-first market, however. “I see international brands and a few strong omni-channel local players emerging as long-term winners here as increased online penetration plays into their hands.”

Online firms in casino are certainly well placed, but it feels like a big ask for those without much of an on-the-ground, historic brand presence in Italy to get the cut-through needed to take on the leaders in sports betting. And as with other markets, sports acting as the core acquisition channel for gaming could see a shift in power in gaming in relatively short order also, not least with Playtech running Snai and Entain running Eurobet.

So, who will be the big winners from the Italian market in 2021? Assuming a relatively straightforward route out of the current pandemic, we should see most of the market forces remaining in place for most of the year, with increased online spend. There will likely not be any change to the marketing environment and operators with a creative digital strategy and/or a strong retail presence should continue to take on share.

Trucco highlights one downside of the Italian model proving successful, however, with the lack of any court challenge to the ban leading to other nations feeling emboldened to put in place advertising bans of their own. The ban on gambling advertising is feeling a little like the new normal and that’s not a great place for the industry to be in.

He also notes that Italian gambling spend levels in 2021 will be influenced by how the Italian government allocates the European Covid recovery funds. “A part of these will likely be spent in welfare bonuses, which is logical, but in the hands of a populist government these may come in a form of helicopter money. That would trickle down to the bottom line of operators pretty quickly. Another part (hopefully) will be invested in infrastructures and healthcare – it will create jobs and the effect on gambling spend will be way more gradual,” he says.

But this short-term impact on revenue is small compared to the bigger prize that exists in the continued online migration story. Italy has come a long way since it first began the regulation process in 2008, and after a few false starts finally feels like a market nobody can afford to ignore. It also is a market with increasingly high barriers to entry in sports betting, and for the likes of Flutter, Kindred and William Hill you feel it will be tough going.

In gaming, however, the gambling ban does permit some skilled, digitally led online gaming brands to steal some share if they are willing to push the boundaries. But they will continue to butt heads with the land-based operators which have a lot of value to protect. The ultimate prize, though, is far bigger for those who can find a way to navigate around this challenging but potentially very rewarding landscape.