In many respects we are in unchartered water when it comes to analysing online gambling’s performance in a recession because we have no historic data with which to compare this segment of the gambling industry.

 

GBGC has run some numbers for the land-based betting industry in the UK going back to 1990 and it appears at first glance that betting in particular did eventually follow GDP into recession. GDP recovered quite quickly but betting was slower to recover, which shows that gambling is a laggard in economic terms.

 

Each recession, however, is different. In 1972 we saw a 400% overnight increase in the price of oil. In the UK we had a secondary banking crisis following a property collapse but the primary banks were safe.

 

In 1982 there was high inflation and very high unemployment. In 1992 inflation was still high at 9% and there was a property market crash but the banks were safe.

 

At GBGC we note that inflation is not good for the gambling industry. Expenses rise much faster than revenue and margins get squeezed. The industry has done much better when inflation is low.

 

This leads us to believe that this recession may be good for the online gambling business, at least for the next 18 months.

 

The reasons are:

 

·         Inflation is falling and interest rates are coming down.

·         Broadband continues to roll out globally and there is pent up demand for people to gamble with bona fide operators who offer exceptional value for money.

·         The global smoking ban for land-based premises continues to keep people at home to gamble.

·         High energy costs make destination and resort gambling expensive. For example, in the UK to play Bingo at a club costs £60 for one person. You can play online all night for £25 at home!

·         Internet offers much more choice, value and information.

·         Computers are being handed on from children to their parents enabling them to go online.

·         Necessity is the mother of invention - GBGC expect the industry to produce something dynamic before the next upswing. It has done so in all of the previous recessions.

 

All of which is quite positive. Gambling can be a small ticket item for most people so as they prioritise their spending, moving away from big purchases such as exotic holidays, new cars, etc., more cash is available for small pleasures such as confectionary, alcohol, and gambling. 

 

Most people will not be seriously affected by the recession. It is forecast that 3 million people in the UK will be unemployed and, whist that is 10% of the workforce, it also tells us that 9 in 10 will keep their jobs.

 

But no one will actually feel good. There will be this prevailing sense of fear that you may be next to lose your job.  Even though the odds are in your favour to keep your job, the sense that it could be you will stop people spending.

 

We also ran some numbers to see if unemployment affected land-based betting and casinos in the 1990s and found no correlation. So we are quietly optimistic but you never know. I have lived through three recessions, all were different and this one seems very different.

 

One of the main investment banks issued a letter of apology to its customers in November 2008 saying these were exceptional times and they had been forced to update their economic forecasts three times in four weeks!

 

 

Graph One shows that betting in the UK followed GDP down so went into the recession later than most but flat-lined before moving toward the GDP trend. This graph takes account of inflation and shows that margins become squeezed when inflation is high with little demand - commonly known as ‘stagflation’. Graph Two (below), however, shows that actual betting stakes did hold up quite well.

 

GBGC tracks the 50 largest gambling stocks by market capitalisation in an index called GBGC 50 and at the same time we monitor the 10 largest internet gambling stocks. The graph of the indices shows the Internet stocks are outperforming the traditional land-based business.

 

 

At present it remains closed to the listed companies and will continue to be so for some time to come. Negotiations for a settlement with the Department of Justice are continuing with the major companies but there are a few sticking points, not least of which is that the DoJ would like someone to go to gaol.  For some of the founding operators it is a question of parting with a huge capital sum, serving time, and having the freedom to travel in the USA. If the US is the country of your birth it becomes a bigger issue than if you were from Israel or Europe.

 

Either way, it all adds up to being a nuisance because until all this is settled we doubt that progress will be made on the USA legislating for Internet gambling. Theoretically, it should not make a difference, because the two issues are not linked but in practice the DoJ dispute is holding back regulatory progress.

 

In the meantime Internet gambling in the USA continues to take place with private, non-listed companies making hay while the sun shines. They are building cash reserves on their balance sheets that will enable them to become consolidators when the appropriate time comes.

 

We must also not forget the Las Vegas boys. They have been ex-growth now for nearly two years and they need a new story to reassure investors. While being opposed to Internet for many years we are told that MGM and Harrah’s are coming round to the idea. They have fantastic databases of customers to farm and would be up and running in no time were legislation to be passed.

 

The UK is still both the most competitive market and the easiest market to enter. But the UK economy has serious problems in the medium term. The UK’s government debt is rising thanks to bail out of the banks but of most concern is the private debt. On credit cards alone it equates to £5,129 per person. The credit card is the oxygen of life to the Internet business and customers losing access to credit cards must be seen as the most important negative for the online betting sector.

 

Ladbrokes have introduced, with some success, their own account payment cards in betting shops, so with a spread of over 2,000 shops in the UK they will be partially insulated from the credit card bust when it happens in late 2009.

 

Eastern Europe has attractive long term growth prospects. The new countries admitted to the EC will benefit from the injection of funds and capital. Ireland has taken full advantage of EC membership and we doubt others will be able to exploit the EC as well as Ireland has done.  In any case, all countries that enter the EC experience growth per capita. So those gambling companies who establish themselves in this region early will reap the benefits later.

 

 

 

 

 

The regulatory environment in Europe continues to unfold albeit at a slow pace. GBGC had thought that EU Commissioner Charlie McCreevy would have had a greater impact but sadly he did not have time to finish what had been started. His replacement will be watched with great interest but the industry will probably see a negative tone being set if the replacement is anyone other than a politician from the UK, Ireland, Spain or Italy. 

GBGC’s view is that while we are encouraged by Italy and Spain we think that in the present economic climate countries such as France are unlikely to want to risk the €7 billion it gains in taxation from gambling each year.

 

We had thought that a timeframe of 3 to 5 years would see an open market in gambling across Europe but now we believe we are looking at a 5 to 7 year time frame. 

 

We expect there will be some move toward liberalisation but in practice it will be fudge. Economic events are taking us to a place we have not seen for 60 years and events rather than theoretical ideas on how the industry should be run are likely to have the biggest influence.

 

For those who say ‘can’t happen’, ‘won’t happen’ I point to the Berlin Wall.

 

For the time being we see greater potential in the long term growth prospects in Eastern Europe markets.

Asia is the great unknown Internet gambling continent. We look at the phenomenal growth of Macau and the web sites of Hong Kong Jockey Club and know that the market is potentially huge. But it is shrouded in secrecy and few Asian operators are going to give their business models to their Western competitors.

 

Western operators are hampered by the differences in culture and language and this can make it very difficult to get the feel for both markets and customers. Yet the potential rewards are worth the effort and challenge.

 

Perhaps more information will emerge as Asian operators start to operate in Europe. Already SBO Bet has taken up a licence in the Isle of Man and they have become sponsors of West Ham FC.

 

 

 

 

Horse racing continues to dominate the markets in the UK, France, Ireland, Australia, Japan, Hong Kong and the USA but it is losing market share in all of those markets. With so much activity offshore it is questionable whether this expensive product will be continued to be financed as it has in the past.

 

Football has less churn but continues to grow. It benefits from phenomenal media interest but again this is a business that could face financial trouble. Some have said that there is the possibility of one or more top club going into liquidation. Would that effect sport betting revenues? We doubt that it would.

 

We were heartened by Sportingbet’s results for three months to the end of October 2008, which reported 34% growth in sports betting net revenue YoY. Sports betting accounted for 64% of the company’s total net gaming revenues. Also, in-running betting now represents almost half of all sports bets placed and this innovation is a credit to the online industry’s skill at developing new products when they are needed.

 

There is no doubt in our minds that sports betting will continue to be the driver of gambling businesses for many years to come. It provides such a wide variety of betting opportunities that can align with individual taste like no other product. Sports betting challenges the consumer to think.

 

Our own observations of sports bettors over the years tell us that they are more lucid in later yearsthan non-gamblers.GBGCwould like to prove this point if someone would fund the research.

 

Financial and sports spread betting popular with workers in the financial centres could face losing business through job losses. They will not necessarily stop betting but will not be in the melting pot of the trading room along with the banter amongst their colleagues that feeds the opportunity to gamble.

 

Integrity in sports betting markets has become a focus in recent years and all of the major companies have entered into arrangements with the authorities to swap information on unusual and irregular betting patterns. This now places an obligation on the sports to make sure that they pursue the culprits and bring them to justice otherwise the incentive to report will be lost.

 

Betting margins continue to be tight throughout the expanding sports betting market. The margin is one of the principal drivers for sports betting as punters the world over flock to take the exceptional value they are denied in their own countries.

 

The land-based betting business could not trade on such margins so the attraction of Internet over the land-based business is all too obvious. Better choice, more information, higher payouts, all made easy so long as the consumer has access to a payment solution and broadband.

 

 

 

 

You can access the Internet without broadband and you can place a sports bet without broadband but it is so much slower. To take part in the other online gambling activities, to look for value, and to access the many games that are available, the use of broadband is a pre-requisite to the customer’s fun and enjoyment. In many markets around the world the broadband penetration rates compared to the US and Western Europe are currently low and is why GBGC has confidence in the online industry in the future. As can be seen from the UK experience, the roll out of broadband globally will be one of the main drivers for new online markets.

 

 

The Internet’s greatest asset is the choice and value that it offers. From home a consumer can access 2,800 gambling websites, play one website’s offer against another. The industry has a number of names for these savvy customers: “Bonus tarts” or “Promotion flirts”. The traditional land based industry can respond with free drinks in casinos and various free bets for sports betting but nothing compares with the instant gratification offered by the Internet offers.

 

That is not all. The display of information on websites from horse race form to soccer tables and latest scores plus in play betting have enabled websites to take the lead in providing a service that cannot be matched offline.

 

 

It was so easy in the bull market to predict the future with some reasonable accuracy but today as we enter unchartered territory we at GBGC have had to go back to the drawing board and re-build our economic model country by country. We are producing a new Internet report that will be available in February 2009 that will take account of 14 economic indicators so that we can redefine our forecasts.

 

Even then they will have to be adjusted as events unfold. While much is made of the potential towards deregulation and the opening up of markets it should be noted that the current co-operation between countries brought about by necessity rather than choice may have an effect for the online business. We saw after 9/11 countries come together to introduce laws that would have previously been unthinkable. Many of those laws were there to protect the citizen but others were nothing short of preventing tax avoidance under the scam of money laundering.

 

Governments hate E-commerce and in particular Internet gambling because it is a sector they cannot control. The new economic crisis is bringing governments together just like 9/11 did for security.

 

There will be a price to pay for gambling deregulation and our theory is that the gambler will be taxed where he resides. All that would be required for this to happen is for all countries within Europe to agree the protocols.

 

I have to say, however, we at GBGC remain as confident about online gambling as we ever have.