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GB Gambling Statistics: the remote tipping point has now been reached
The changing shape of the GB gambling sector has been revealed in the most comprehensive of Gambling Commission official statistics to date. On an annualised basis (remote data is only 11 months), the GB commercial gambling sector YT September 2015 was worth £9.24bn (ex lottery), with remote taking a 43% share (£3.97bn). Given that this data is already over nine months old, and factoring in current trends, it is now reasonable to assume that remote gambling will overtake land-based gambling in revenue terms within the next c. 18 months. This has significant implications for the forward shape of the sector and for policy making.

Sports betting
Sports betting is the most easily segmented product within the industry. Overall, it generated £2.7bn revenue, accounting for 29% of the commercial sector (interestingly the mix is broadly similar land-based vs. online, despite significant regulatory constraints to land-based). Land-based (LBOs) represented 50.3% of this revenue and continues to decline (-3.8%), led by football down 9% (19% mix), albeit after a strong (World Cup) comparison period (underlying LBO football growth appears to be c. 3%). Football was outperformed by both racing (down 5%, 45% mix) and dogs (down 2%, 16% mix) in a (YoY) statistical narrative that runs cross-grain to most commentators’ views and beliefs. Online does not yet have official growth comps, but the fact that half of all betting revenue is now remote tells its own growth story. In remote channels (NB, including telephone), it is football which has 45% share, though horseracing is still a highly significant 32%. Indeed, the fact that an implied £430m horseracing revenue ‘officially’ occurs remotely (vs. £605m LBO) should now silence the poorly informed “racing is in decline” mantra, as well as reinforcing the urgency of Levy replacement (GB horseracing is likely to represent c. 80% of these totals).

It is telling that the Gambling Commission has included a tab on gaming machines overall, improving segmental clarity. If we take an onmi-channel approach, ‘slots’ is an even more important product group. Across the industry, gaming machines (inc B2) and online slots generated £4.1bn in revenue, or 45% of total GB commercial revenue. In LBOs, gaming machines represented 55.6% of revenue; in remote, slots represented 39.0% of total revenue: the biggest single remote segment, bigger even that betting (34%). However, ‘slots’ is still a largely land-based product, with only 38% occurring online (we accept that the treatment of roulette is confused here). When the cost of delivering slots vs. other (especially betting) products is considered, it becomes difficult to understate the critical importance of this product to the GB gambling industry, hitherto more-or-less masked through disaggregation by licence-based reporting.

Land-based casino fell 14% to £993m, largely due to well reported issues with the London High Roller segment (Chinese crackdown). Omni-channel casino (ex slots and poker) represented revenue of £1.43bn, with land-based falling 20% but still representing 53% of the total. In a figure that is perhaps incongruous to the poor remote market share of land-based operators (but does speak to geographical licensing constraints), that means that 47% of ‘traditional’ casino revenue is transacted online: this is very likely to be over 50% this year, even with London performance stabilising.

Poker continues to be much smaller in reality than its (now largely faded) hype would have suggested. Overall, the product is worth £163m in GB (1.8% total), 62% of which is now online. From a purely remote perspective, poker represents just 2.6% of total revenue.

Bingo is another product which optically defies channel-shift patterns. Overall land-based bingo saw revenue increase by 3% to £691m. Within this, the product of bingo grew by 5% to £387m, while remote bingo was £140m - suggesting an overall bingo product share of 5.7% and an online mix of only 26%. However, these statistics disguise an underlying bingo-slot mix of c. 66% (or more), meaning that the implied bingo-brand revenue is c. £570m. This suggests that ‘bingo-led’ brands have a 14% omni-channel share of the UK market, with a remote mix of 45%. When re-stated for brand rather than product therefore, the 'tipping point' is also looking close for bingo. 

Lottery added a further £3.65bn of gambling spend (90% NL), taking total GB revenue to £12.89bn.

What does the tipping point mean?
There are three key points to make with regard to the remote tipping point now being upon us: they may seem obvious, but we would question whether the industry is ready for the implications. First, the vast majority of land-based operators (and suppliers) have nowhere near the levels of remote exposure required to balance growth and risk in a remote-led environment: with remote dominant, channel shift is likely to accelerate and (even greater) structural pressures will be placed on land-based supply. Second, Gambling Act 2005 devoted nearly all of its legislative framework to a land-based environment, with online still relatively nascent in the drafting stages: this no longer looks logical or even (arguably) fit for purpose. Finally, remote currently pays a revenue-based duty of c. 18% (factoring in the forthcoming change to gaming free bets treatment), vs, a blended average land-based duty of c. 22%: HM Treasury is starting to lose out because of channel shift and may choose to close the gap (casino has the biggest difference, albeit for some good reasons; slots is next; betting is neutral, and; land-based bingo currently benefits).

UK: In Parliament: out of the Shadows?
Among the more immediate impacts on gambling from the Brexit vote were the resignations of Maria Eagle and Clive Efford from Jeremy Corbyn’s Shadow Cabinet this week. Kelvin Hopkins (Lab, Luton North) becomes the third Shadow Secretary of State for Culture Media and Sport (so far) this year. His track record on gambling (and FOBTs in particular) suggests that his policy perspective may be closer to the critical stance of Maria Eagle than the measured support of Michael Dugher.

The resignation of Clive Efford may be more significant. Efford (Lab, Eltham) had held the brief since 2011, providing a rare continuity of tenure on gambling. An outspoken critic of FOBTs, he nevertheless had distanced himself from a policy of stake reduction, preferring opening hour curtailment and mandatory card-based play.

Meanwhile, sports and gambling minister, Tracey Crouch (Cons, Chatham & Aylesford) is believed to be preparing for a return to full-time duty. Crouch managed to avoid pinning her colours to the mast on Brexit and has backed front-runner Teresa May in the Conservative leadership race. Given her clear passion for certain elements of the Sport brief, she may bring a level of continuity of a Westminster turned upside down; however, she has also made her concerns on FOBTs clear, so this continuity might not be welcomed by all.

Where all this leaves the Triennial Review is anyone’s guess. At times like this, matters of gambling regulation pale into insignificance and regardless of who occupies Number 10, the Government may be reluctant to expend energy and political capital on slots limits. On the other hand, it does seem to be an area of business that is fairly insensitive to Brexit.

More prosaically, the act of gambling has been invoked repeatedly in Parliament over the last week – generally in relation to the constitutional gamble of opening up the UK’s EU membership to referendum. More relevantly for Winning Post, a small number of gambling mentions actually related to the industry.
  • Jim Shannon (DUP, Strangford), one of this Parliament’s more active Members on gambling regulation probed the Government on the progress of a national self-exclusion scheme for remote gambling.
  • Ronnie Clyde (SNP, Inverclyde), expressed concern that the gambling industry was not providing sufficient funding to understand, prevent and treat gambling addiction.
  • Lisa Cameron (SNP, East Kilbride, Strathaven and Lesmaghow) claimed during a Westminster Hall Debate on dog-fighting that the practice underpinned a substantial illegal betting market.

UK: Novelty Betting: Gambling Commission warning
The UK Gambling Commission has this week sent a letter to all of its licensees warning against offering markets on pre-recorded TV shows, citing issues of integrity. There have been multiple cases over recent years where such markets have been offered by an operator, followed by quotes from that operator in the press, stating the size of exposure on a particular contestant:

 “There have been repeated instances of operators offering markets on pre-recorded television programmes such as the Great British Bake Off, Strictly Come Dancing and other novelty markets, following which media reports emerge that suggest there are issues of integrity.”

“In a world of social media and rapid communication, the outcome of these markets is likely to be known to an ever-expanding group of consumers before the result is formally announced. We therefore require operators of these markets to demonstrate a robust management of the associated risks in order to ensure they uphold the licensing objectives.”

Furthermore, to the immediate integrity concerns, GC also stated concern regarding the broader issue of: “the wider perception of gambling in Great Britain.”
It is important to draw a distinction between the two different types of ‘TV show’ market.
  • When a show is pre-recorded, hence the result is definitively known at the time of broadcast (such as The Apprentice)
  • When a show is broadcast live, and while the producers have access to current and historical voting data, the result is not yet definite (such as The X Factor)
The GC’s letter is more concerned with the former.

We believe that GC’s warning is a fair and logical one (and should have been obvious to operators). While TV show production teams and indeed the contestants are bound by confidentiality agreements, it is unrealistic to assume that information won’t “leak,” especially given there is a route to profit from it. By nature, markets like this attract very little staking from customers who are not ‘in the know,’ therefore we can assume that regardless of the over-round offered on the markets, they will not be a significant profit contributor overall (they certainly aren’t big enough to feature in official statistics; falling within a very broad other’ category which accounts for 11% of betting).

Therefore, the biggest reason for operators to offer such markets, is for PR: as with other PR-led betting activities, the short-term gain can often be outweighed by the longer-term impact.

Result ‘Fixing’ is arguably no bigger an issue on pre-recorded shows than on live shows; however, it does still exist as an issue, and will only take one high profile incident of a result being influenced for betting profit, to have a major negative impact on the industry as a whole.

We would therefore recommend that all operators use a similar rule for novelty betting, as they would in sports: ‘If the result is known, then no market will be offered.’

US: eSports: Valve in hot water 
A CS:GO player has brought a class action against the Washington DC based games developer Valve Corporation, on allegations of allowing and supporting illegal gambling activity through its third-party websites.

Valve operates the games platform ‘Steam Community’, which allows the purchase and trading of in-game items known as skins. It also powers a number of third-party sites, which allow betting using skins as currency; these sites are unregulated and many do not have age restriction or verification. The allegation is that as these skins can be purchased, traded, and used as collateral for placing bets, they have a monetary value and therefore by facilitating this, Valve is complicit in the promotion and operation of illegal gambling.

No stranger to litigation, Valve Corporation is also in the process of being prosecuted by the Australian Competition Commission for failure to comply with consumer regulation, for which a court case is scheduled for later this year.

If this class action is a success, then the precedent could be set that this form of betting using skins as currency to be classed as illegal gambling; allowing for further claims to be brought not only against Valve but other operators of skins betting sites. These sites also run the risk of federal prosecution for the operation of illegal gambling as a negative civil result may tempt Attorneys General.

More broadly, this case further highlights the need for regulatory intervention within the entire eSports community worldwide, with the need to look at many aspects within this growing area, including the organisation of competitions, betting markets, age of participation, rights holders, and integrity - to name but a few. Operators who are keen to tap into this new market (especially with any US exposure) are advised to do so with caution, given the increasing levels of regulatory uncertainty.
Financial updates: Betfred: FY2015 accounts
Betfred published its accounts to 27 September 2015 with UK Companies House. Turnover (ie, bets placed) increased 18.0% to £10.4bn, driven by an increase in customers and stake size. However, gross win increased by a lower 8.2% to £526.1m due less favourable results impacting margin, and gross profit by 6.4% to £420.5m (largely tax causing the lower growth than revenue). EBITDA fell 16.8% to £56.5m, while an £83.2m impairment (mostly online and tote) led to a £76.7m operating loss.

From a cash flow perspective, capex was £7.3m, however this is still relatively low and suggests strong underlying cash flow (c. £50m). Net Debt of £99m has been reduced by £46m, which is manageable in a stable operating and regulatory environment (neither of which can be taken for granted).

The number of LBOs operated in the period increased by 4 (net) to 1,402, reinforcing the view that the overall expansionary period for LBOs is over, a degree of resilience (from some operators) notwithstanding.

The group reported £56.2m of MGD paid, which implies a machine revenue of £250m (25% duty came in half way through the period), or c. £890 MWA (up an implied 11%), which suggests a degree of OTC pressure. If machines represented 55% of LBO revenue, this would imply a revenue per LBO of c. £320k pa: still materially below the ‘big brand’ average of c. £380k.

Racing contributions were £13.3m (£10.2m of which Levy), a 4.5% increase, suggesting racing revenue continues to be resilient within the group, albeit underperforming overall growth.

Since period end, Betfred has taken the bold decision to outsource its online backend to GVC, which brings considerable remote and technological expertise; for Betfred to reverse its remote issues it must bring considerable UK market knowledge and project management skills to bear: this is not trivial but could be transformational.

(NB, the comps are from an annualised 78 week period so not LfL)

Corporate updates: Tatts sale of Talarius to Novomatic –slotting in another acquisition
Tatts Group announced that it has sold Talarius, its UK AGC business to Novomatic for £111m. The business operates c. 160 AGCs across GB (11% market share by licence) mainly under the Quicksilver brand, including in motorway service stations. YT June 2015, it generated revenue of £60.8m (+6.5%); EBITDA of £9.0m (+11.1%) and EBIT of £3.3m (+27%) [figures for RAL ltd]. Tatts stated that the proceeds would principally pay down UK debt, which judging from European Gaming accounts (another Tatts subsidiary, used to buy Talarius in 2007), still stands at £190.1m. 

Tatts bought Talarius in February 2007 with Macquarie (exited), just months before the global financial crash (unfortunate) and the UK smoking ban (predictable), paying £142m in a competitive bid. The deal was consequently over priced, over leveraged and carrying significant but glibly dismissed regulatory risk. While the ownership period cannot be considered to be in any way value creative, that a stable and profitable business is being sold at an attractive multiple (12x headline historical EBITDA), is testament to Talarius's operations management and Tatts's patience. In terms of Tatts's trading in Australia, while lottery performance looks impressive (+8.7%), wagering volumes were a more lacklustre +4.2% on a materially reduced gross margin (down 1.2ppts to 14.8%); FY NPAT guidance is therefore to come in at the bottom end of analysts expectations (AUS$255-265m).

Novomatic has further strengthened its UK presence, which accounted for 8.7% of total revenue in 2015 (€182m of €2,086m), including from 80 AGCs - Novomatic's GB AGC share therefore increases to 16% by licence. The overall sector should probably also take heart that a UK deal by a very much pan-European business was not derailed by Brexit. Separately, Novomatic has very much parked a tank on Tatts lawn, with the AUS$500m (£280m) acquisition of 53% of Ainsworh now very much likely to go through (shareholders approved on Monday, regulatory approvals pending). 

Financial updates: Nektan: trading update – the price of progress
Nektan is a London-listed developer of international B2B mobile gaming content. In addition to the content, the business has developed its own back office called Evolve 2. All customers of Nektan have migrated to the new platform. The company also provides an end-to-end service managing customer experience and back office operations. The business has a joint venture in the US with Spin Games LLC. Spin Games LLC develops content for providers of content casinos. The joint venture, Respin LLC, provides an innovative way of providing new content to end-of-life cabinets in the US casino market.

The company provide a trading update to the market on 1 July 2016. The company announced that NGR generated in H2 increased by 160% to £4.2m, with first time depositors increasing by 77% to 31,000, driven by the launch of 29 partners. 

The directors of the business have taken action to reduce monthly fixed operating costs significantly from £0.49m per month to £0.34m per month. The Company also announced that while it continues to grow the underlying cash generated by the business, significant outflows of gaming taxes and interest have impacted cash levels. The business is exploring all options to raise addition funding. These options include new investors, debt funding, strategic partners or disposal of assets. 

The share price declined over 20% today to 48p. This is significantly down from the listing price on the 3 November 2014 of 236p.

Leigh Nissim is joining the business on the 25 July 2016 from IGT. He is joining a business with clear strategic growth potential but with tough operational and financial problems to solve.
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Disclaimer; The analysis provided in this report represents the opinions of the authors. Any assessment of trends and change is necessarily subjective. The information and opinions provided herein are not intended to provide legal, accounting, investment or policy advice, nor should they be used as a forecast. 
Regulus Partners may act, or have acted, for any of the companies and other stakeholders mentioned in this report.
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