By Eduardo Morales-Hermo (*)

Regulated online gaming: reflections and expectations

With more than 45 years of experience as businessman and having held various executive positions in corporate management and product development, he spent the last ten years as Advisor and Consultant in the gaming industry, both in-person and by interactive channels. He was CEO, General Director and shareholder of gaming companies in several European countries, and currently carries out his work as Councellor and Advisor in Intelligent Gaming Company, having participated in more than 30 projects.

Spain 
| 14/01/2015

Online gaming is in a process of rapid flux due to regulatory processes, through which various countries must mesh with regulations, the supply and demand of gaming through interactive channels which exist due to the dot com environment.

And with this process of flux towards regulation, I think there is an expectation created about online gaming with neither a realistic nor contrasted analysis, which does not correspond to the real possibilities and perspectives that the interactive game has, once regulated.

Many of them are not accurate when data related to regulated online gaming is valued making comparisons with a gaming volume from the dot com environment -difficult to quantify in the absence of official controls- affirming that they are below anticipated forecasts. However, which are the forecasts and estimates? Normally, it is assumed that when online gaming passes from the dot com environment to dot.country, it must maintain the same volume, a very common belief held among some of the so-called experts on the subject.

That's why it is appropriate to put this aspect in context and weigh the estimates with more realistic value, bringing some of the factors that may have an influence to prevent direct extrapolation of the market volume absorbed when regulations are established.

Considering this, it is convenient to analyze in a fair manner what interactive games mean as an alternative or opportunity for traditional companies for which their nuclear business is and will continue to be, for a long time, traditional gaming.

Traditional gaming companies consider online gaming as a threat, while others understand that it must be part of the gaming selection that it offers. In many cases they have doubts on how to face this challenge, but in the end, most of them, with a relevant position in the market, understand that they must incorporate it into what they offer in the gaming market.

Now it is relevant to assume that online gaming regulations change market scenarios, sometimes with a lack of an analysis of the true dimension and impact that gaming has or may have through new interactive channels.

That's why it is convenient to undertake a proper study of the meaning of online gaming in a regulated scenario, as well as some of its determining factors, to establish a proper strategy and attempt to plan a future scenario determined on the basis of the process already known in various regulated markets.

In is important to consider and take into account what is going on in some already regulated markets, and there are multiple examples. When online gaming is regulated, it ceases to have the same components that gaming has on the dot.com environment from offshore territories, so the composition and configuration of the offer changes, and with it, the customer response is very different.

It is one of the consequences by which the companies offer on the dot com environment change their commercial, investment and marketing strategy, in order to adapt their model into a regulated environment, for the purposes of compliance, the restrictions of conditions and geographical limits, more requirements and more tax rates than actually demanded and enforced by regulation.

Regulation takes online gaming to a market within a controlled scenario of normality, with guarantees and compliance obligations. The player loses intimacy and the perception of identity safe-guarding; his or her  sense of anonymity is lost. That's why players that have access to regulated webs behave in a different way.

That's why much the online gaming offer operates without adjusting to the market regulation where the offer is presented, and some of them apply to players that are not comfortable with the regulated offer, not only due to a wide range of products without limitations, but also due to the privacy situation that dot.com webs imply.

We see that the players are more comfortable without these perceptions of control and rigidity regarding player name registering, with no exposure of their economic transactions, and they also seek the most

aggressive and strongest of the product portfolio and jackpots of offshore websites, while lacking of any guarantees or protection offered by regulated websites. This situation is no different in markets such as Spain, which will hardly improve with the current regulation, because it can only occur if conditions improve for both operators and players.

Among items to improve are the following: that the proposal of the content offer and the gaming conditions meet what other customers want; lack of product or verticals; limitation of liquidity of the gaming community network such as poker; high taxation for operators and players; and expenditure limits and the necessary record keeping and client identification obligations. It is important to be realistic. Many of these issues will not change, at least for some time.

Therefore, the scope of the regulated market will just increase and be closer to the real demand as long as regulation enables a competitive offer which is equal to any offshore proposal, which boosts the absorption of the dot-com demand to dot-country, which also attracts more players that still, as of yet, do not belong to either of these two environments.

Consequently, those “experts” that forecast projections on the value of regulated markets, believe that, once regulation is implemented, they can convert those same numbers that the market had before the regulation, are quite mistaken.

On the other hand, we have to consider another fact. Despite the injection on of energy provided by mobile devices for some verticals such as betting and slots, the evolution of online gaming will keep on growing, but considering on what basis it grows, which, according to specialized analysts, does not reach the ten percent of the gaming total for all the segments and channels.

Many things have to change. Not just in players habits, but also in the structure and constituent elements of the offer against the non-regulated offer; so regulated online gaming is closer to the corresponding figures in which each market offered previous to the regulation.

Under those circumstances, observed with multiple experiences in the different regulated markets until now, and with the importance of the economy of scale to be able to achieve a sustainable business model, the dimension of a regulated market “reduced” to the geographical sphere of each country limits the number of operators that may achieve the aims of leading or controlling a substantial minimum necessary part for the business to be viable.

In any case it limits the number of operating companies that can achieve levels of profitability. In Spain, Italy, France and Denmark, for example, that level of sustainability has not been achieved even when the biggest and most qualified experts in online gaming that had much experience with the dot-com previous with the regulation.

For the new entrants, in particular the brink-and-mortar operators, but not just them, it is convenient to consider other aspects that are crucial to achieve success such as:

 

Be one of the first to enter a market: arriving late or entering a mature market is much more difficult, and, above all, it is much more expensive.

The brand: having a strong and well-known local brand is crucial to make this immediacy a real thing and you don't require more time or investment to achieve recognition.

A suitable investment, commercial and marketing strategy: It is key that a business plan have the necessary components of investment, structure, product, marketing strategy, tools and resources to be competitive.

Knowledge and experience: online gaming is gaming, but its business model is different from brink-and-mortar gaming, so the knowledge and experience to be able to carry on a management according to the business model is essential for online gaming.

Online gaming is for a few winners: simply positioning oneself among the three or four first places of the ranking of the market share, depending on the market, a firm can achieve positive results and the sustainability of an online operation in a regulated market, depending on the competitiveness of the offer as well as direct and indirect taxation.

A brink-and-mortar operator can do it alone or together with an expert: a brink-and-mortar operator can carry out an online gaming proposal if he/she assumes the need to have a development plan, equipment, tools and competitive strategies independently but with a well-defined strategy, adapted to the market in which it will compete, or they can do it through an association with a company that brings knowledge and complements it. So, in the case of having any doubt, it is better to carry it out with a good company.

 

Despite all the commitments and risks involved, a gaming company, in this case dedicated to brink-and-mortar gaming, must incorporate interactive channels to its offer, as part of a whole, although with a specific treatment, so it is key that all the business segments or divisions of the company are committed to the strategy that affects all the products, all the channels and all the markets where it is present.

It is also desirable, and it has to have a person in charge, who is responsible for the management of the whole gaming offer, including all the channels, to guarantee the best use of the sinergies and to optimize the cross-selling strategy that must have the aim of a total gaming offer through all its channels, under the same brand.

On the other hand, a unified regulation for all channels and segments is crucial to implement a strategy involving brink-and-mortar and interactive channels “as a whole”, which facilitates the widest territorial scope possible, both domestic and international.

The immediate future of gaming involves a total or multi-channel proposal, under the same brand, recognized in the markets where companies have a relevant position.

The companies dedicated to brink-and-mortar gaming with the adequate size, market position and strategy have the great opportunity to capitalize their knowledge of the game and the potential of their brink-and-mortar venues to achieve an efficient feedback between both channels.

With regard to the volume and percentage of online gaming share compared to the total gaming, it will continue increasing and becoming a greater percentage on the total, yet in relative terms, and its growth will continue being important and exponential as a supply channel. However, the other games comprising the total of the brink-and-mortar offer will maintain their hegemony, especially in those segments that are developed in specific gaming halls.

It is key to implement the strategy as soon as possible, due to the fact that brink-and-mortar gaming will be incorporated and gradually converge with interactive and mobile channels to add them to their offer.

Many companies are already doing this, which will favor the development and consolidation of the brink-and-mortar offer, turning the interactive channels into a natural business area.

In all cases, depending on the market, the conditions of the regulation and taxation are key elements to configure a “necessary” strategy which combines all the channels, and which may apply all conditions of the business model for its best implementation. In some regulated countries such as Spain or France, these circumstances are not given, and regulators must consider that online and brink-and-mortar gaming are part of a whole business, and, as such, it has to be treated on the regulations, on top of allowing the widest geographic coverage, as it supposed by the economy of scale, for the commercial success of interactive channels, and both together.

False expectations for the online gaming must not be allowed to crop up, either, in the conditions in which it is developed and then regulated, but rather this must be given importance because it gives an added value to brink-and-mortar gaming, and, contrary to those who have fear of possible cannibalization, it is believed that capitalization for a joint gaming offer must prevail as a key factor of the need of its incorporation by the companies with an important dimension and implementation.

In a company dedicated to brink-and-mortar gaming, there are also strategies focused for capitalizing an online gaming operation, such as an important event or particular game on top of brink-and-mortar gaming, and not just a complement. We have to consider the cases of William Hill or Paddy Power, and most recently, the Gala Coral, among others, which face online gaming as a strategic channel on top of its brink-and-mortar offer, combining and integrating both of them, but then that leads to another reflection...