The end of the beginning for affiliates?

After months of pressure building in the online gambling affiliate sector there was a minor explosion in September. Sky Betting & Gaming’s (SB&G) decision to close its affiliate programme was not the first of its type, but it’s probably the most significant. While previous closures have been placed in a purely commercial context, here was a top-tier UK operator saying the rewards of keeping its affiliate programme open no longer merited the risks.

SB&G said it was closing the programme in response to “changing regulatory requirements”, which was a somewhat oblique reference to the rising number of complaints made against some affiliate marketing carried out on behalf of gambling brands. The one in the headlines is the relatively new practice of advertorials created to look like real news stories selling outlandish tales of success, which have taken a hammering from the ASA and twice put SB&G in trouble. But it goes far beyond this.

Operators have reported complaints over a number of issues from adverts placed on illegal streaming sites to misleading offers and promotions, and we understand the reputational and business risks were the core driver of SB&G’s decision. To be clear, the large majority of affiliates do not engage in any of these practices, and it would be foolish to discount the margin benefit the removal of affiliate payments will have for SB&G, but it seems as if there was a genuine belief this was an area that could be damaging to SB&G’s image, relationship with Sky and the Gambling Commission.

And they are not alone. Since the third quarter of 2016 LeoVegas reports have contained an additional paragraph under “risks” covering the conduct of their affiliates. The timing is notable as the firm was subject to an ad ban in the UK in July 2016 over a misleading affiliate editorial claiming there was a “glitch” on the site allowing people to win. “Part of LeoVegas’ marketing entails collaborating with affiliates in advertising networks. In connection with this, it may happen that the LeoVegas brand is exposed in contexts that are not desirable,” the statement reads.

It’s been notable that two other major operators have taken similar, albeit far less drastic, steps in recent months in response to these growing concerns. Ladbrokes Coral, another firm hit with ASA censure over the actions of an affiliate, said it would be taking “stricter oversight” of its affiliates and Paddy Power Betfair issued affiliates with a “one strike and you’re out” ultimatum. The tide it seems is turning and the large majority of good affiliate businesses are starting to wonder if they could get washed away by the actions of a minority.

A changing relationship

Because it’s also about the money. Many operators, including LCL, PPB and SB&G, have been taking a more aggressive stance with affiliate management in recent years with new clauses introduced to force affiliates to keep hitting monthly targets in order to maintain revenue share deals. Affiliate forums are full of reports of affiliate accounts being closed for “inactivity” and tales of lost revenue. Some affiliate forums have gone as far as to blacklist LCL and PPB. It’s a far cry from the golden days of the early part of the decade, where operators were falling over themselves to get affiliates to work with them. So what’s changed?

“The tightening of operator margins has led to a desire to revisit affiliate deals set up pre-regulation, pre-tax. Affiliates have been somewhat reticent to engage in renegotiation” – Tom Galanis, TAG Media

The most obvious change is the scale and operating environment of the UK online gambling industry in 2017. At close to £5bn in annual revenues this is now a mainstream business, with nine-figure marketing spends at the major operators covering TV, Google, Facebook, Twitter and any other major marketing channel you can mention. The brand reach of the likes of PPB and SB&G is huge and operators can find themselves competing with affiliates for players in SEO, social and PPC. But it’s the increase in costs that has been the biggest factor.

Tom Galanis, affiliate marketing specialist and owner of TAG Media, describes the current relationship as being overstretched. “The tightening of operator margins has led to an inevitable desire to revisit long-standing affiliate deals set up pre-regulation, pre-tax. Affiliates, understandably, have been somewhat reticent to engage in a renegotiation and one possible – drastic – culmination of this is closure of an affiliate programme altogether. Add to this the media hype surrounding certain channels of affiliate marketing and you have more tension.”

Since the introduction of the UK Point of Consumption tax operator costs have jumped significantly and there has been an effort to claw back some of the revenue from a number of areas. In a low-to-no tax grey market affiliates can look a lot more friendly on the balance sheet, but in a market where operators are being squeezed on all sides it can look like an easy option to scale back costs on. And it would be naive to suggest this is not a factor in the current repositioning of the operator-affiliate relationship.

For affiliates, however, it looks very different and the reaction to the SB&G news from the affiliate sector can be summed up in one word: anger. With the exception of a few retained “media partners”, affiliates large and small have been furious at the sudden and clinical removal of a major revenue stream. One well-known affiliate stormed down to the Sky offices in Hammersmith for a confrontation that ended with the police being called, but most have resorted to social media and forums to express their disgust and disappointment with the decision.

Galanis sums up the general mood well. “While Sky Bet cites regulatory concerns, it’s impossible to imagine that the true reasons for shutting the affiliate programme lie anywhere other than in CVC’s budget planning. Of all the leading UK bookmakers, Sky Bet, blessed with a default array of ‘in-house’ television and digital media to call upon, have relied least on affiliates for new custom,” he says.

The cost of doing business

The size of the affiliate sector in the online gambling industry is hard to define. For one thing it’s incredibly varied depending on the type of business and market, but the Nordic sector gives some type of insight. Kindred and Betsson are two of the firms that directly disclose affiliate payments and it’s a differing but similar story at both firms. At Kindred “revenue share” costs remained fairly flat at around 5.5% of revenues, while at Betsson they fell from 4.5% to 4% in the second quarter.

UK operators’ affiliate spend, particularly in sports betting, is usually lower, but the 5% number is not an unreasonable one. This equates to around 20% of total marketing budgets assuming an average of 25% of net gaming revenue marketing spend. And if you can add a couple of percent to your revenue line while retaining the customers the affiliates have brought in it’s a compelling case for many operators. So will we see more operators joining SB&G is shuttering their programmes? Galanis is not so sure.

“At this stage, I can only see improved auditing and subsequent streamlining of affiliates among other operators – they rely on affiliates far too much to close off the channel altogether, particularly those with Scandinavian ambition. Affiliates remains the most plentiful source of new customers for operators in regulated markets, and provide a vital reference point for players to compare and select suitable products. There is also a continued role beyond this as advocate for some,” he says.

One other key point to note from the SB&G decision is that while they have ended their affiliate programme they have not ended their use of affiliates. SB&G owns Oddschecker and a number of sports media brands including Sporting Life so it’s no surprise to see it continue to maintain a presence on those, but it’s understood to be also establishing newly structured deals with some key “media partners”. It’s not quite the end of the affiliate relationship, it’s a fundamental change of the nature of it.

The make-up of the affiliate sector is one in flux. Operators are increasingly acquiring in-house affiliate business, particularly in the Nordics, and we’re seeing the rise of the mega-affiliate with publicly listed firms acquiring affiliates on a huge scale that makes the super-affiliates of old look underweight in comparison. Elsewhere we are seeing some larger affiliates moving towards a more traditional media company model and others establishing themselves as third-party media buyers for some bigger brands.

The case for regulation

The rise of consolidating forces such as XLMedia and Catena Media mean this is becoming a rather more serious business than in the past. These types of firms allow operators to build relationships similar to those they would have with other major media brands. Neither XL nor Catena’s share price was impacted by the SB&G announcement and Galanis feels this is a good news story for them, although he offers a note of caution.

“Where Catena and XLMedia have changed the affiliate game is through the power and corporate structure provided by being a plc entity. This has given them a position of strength with regards operator dealings, but it’s vital for everyone concerned that they adopt common sense with regards realistic, sustainable deals and lead the way for other affiliates,” he says. And this surely means moving towards more of a directly regulated model for the affiliate sector as it relates to gambling.

While there may be a case for a light-touch approach to a series of small businesses run by a handful of internet entrepreneurs it’s tougher to make one for a PLC buying media on an industrial scale. At the other end of the scale we still have the continued development of the “one man band” style affiliate that has been transformed by social media with Twitter and YouTube flooded with tipsters, reviewers and other “helpful” voices looking to guide players to their carefully chosen site of choice. Frankly it’s a bit of a mess.

“Catena and XLMedia have changed the affiliate game through the power and corporate structure provided by being a plc entity” – Tom Galanis, TAG Media

In regulated markets there has been huge changes for all segments of the industry in adapting to the increased costs and oversights, but affiliates are for a large part relatively unaffected. On the one hand we have operators tightly bounded by how they can advertise, particularly in the casino sector, and on the other hand we have affiliates operating with somewhat less of a regulatory guiding hand. And as the market gets more competitive some affiliates are becoming more aggressive and it’s no surprise to see some pushing too far, too hard.

What happens next?

So where next for affiliates and the online gambling industry? One thing we can likely dismiss out of hand is the death of affiliates. Affiliates can, and still do, have a vital role to play in the future of the sector. They have innovated around acquisition and CRM marketing in the past and will continue to push boundaries and develop new solutions for the sector around media buying, SEO and content marketing. What they need to do, however, is reimagine their relationship to both the consumer and the operator for a modern regulated mainstream gambling sector.

It was also instructive to see SB&G said their decision would only apply to the UK market and they would still be pursuing affiliate relationships internationally as they look to scale up their Italian and German businesses. How keen affiliates will be to work with them will be another matter, but the intent was clear. Where markets are more immature and they lack market share, then affiliates still have a role. For operators focused on gaining early life market share or those operating primarily in grey markets the death of the affiliate sector is all but inconceivable.

But in regulated mature markets where all advertising channels are open to them and there is a considerable spend on brand advertising it’s a tougher business case to make. Operators are eternally keen to work with affiliates in the early part of their lifecycle but as they grow long-term affiliate deals become just another downward pressure on margin. And the addition of regulatory oversight may be a catalyst that forces the hand of other operators into taking similar actions to SB&G.

The consequences of a “rogue” affiliate can be dire, with large fines now commonplace in the UK and even the possibility of a licence suspension or revocation for continued infractions. And if the Gambling Commission remains reluctant to regulate the affiliates directly and continues to pass the responsibility back through the chain to the operators themselves it’s not a great position to be in long-term. Regulation, either mandatory or self-regulation, would seem to offer an opportunity to minimise these risks and build a more sustainable working relationship for the future, particularly as more major international markets move towards the regulated model.

The alternative seems a more uncertain and increasingly adversarial future that becomes ever more dependent on grey market revenues. Regulation would benefit both consumers and the industry, while the alternative is an increasingly messy operating environment where the fate of affiliates is increasingly taken out of their hands. The affiliate sector is long overdue for regulation and operators and mainstream affiliates alike should be calling for it now.