LOOK BEFORE YOU LEAP!

As the remote gaming market continues to mature, there is an increasing interest amongst potential investors looking for a “piece of the action”.  Clearly any potential increase in available capital is (potentially) good news for the sector , but what are the potential pitfalls that an investor should  consider?

Richard White, a partner in Baker Tilly, looks at some o the issues potential investors should bear in

AUTHOR PROFILE:

RICHARD WHITE is partner in Baker Tilly and head of the firm’s iGaming business unit.  Richard and his team act for a number of the major players in the iGaming sector and have assisted in various of the recent AIM flotation of the last 3 years.  Baker Tilly has been voted AIM Accountant of the year of last three years.
      Baker Tilly are sponsoring the key Performance indicators Seminar to be held at the London Stock exchange.

Licence dependency

In the remote gaming industry the ability the to show a “base” territory with a licence is undoubtedly a key generator for new customers.  With the rapid changes taking place in governmental regulation, especially in Europe, the ability of management to keep abreast with the often strick requirements can make opportunities; these new measures can include simultaneous recording of wagers with governmental treasury departments through which gaming is monitored and taxed.  If an operator cannot demonstrate a valid licence from a recognized territory, their customer base – their principle asset – is likely to steadily decline as members move to more acceptable sites.

The attitude of the USA

Us citizens continue to make up a very large proportion of the worldwide online gaming population.  Yet as is well known, the attitude of the US authorities to remote gaming continues to be, may I say, hostile?  This degree of uncertainty is a challenge to any potential investor.
      In the USA, the quite regular pattern of action by the Department of Justice, Senators and certain states, adds to the constantly moving picture there.
      Different authorities and advisers are often at odds on the interpretation of legal and illegal aspects and the WTO decision in favour of Antigua last year, which swayed the balance against the USA.  Meantime, renewed moves to progress new Bills in the US in more recent months has the potential of swinging the pendulum the other way.

Third party software

By its very nature, remote gaming is dependent on the quality of its IT systems and software.  Not unreasonably, the majority of sites rely on third party applications.  Apart from the obvious question that it is up to the job, there are also a number of other areas that need to be considered.  Does the site have proper licenses for the software?  Has the software been modified by the site?  If so, were they entitled to do so?  There are a number of potentially costly legal remedies available to a software house that considers it has been “short changed”.
      Then again, what about the future?  What level of software support is in place?  Will the product continue to be developed?  Members will readily change their allegiance to other sites as they see new games and services being made available.

      Lastly, how is the application supported?  Frequently larger operators ensure staff from the software developer are permanently based in their offices.  But how quickly can the systems be made operations in the event of a failure of some description? Of equal importance is the financial and operational health of the developer.  Many good applications have been lost to the world as a result of the financial failure of the software house that developed them in the first place.

Payment processing challenges

Whilst headline income is good, cash is even better! Payment processing is a constant and many in the area would say an increasingly difficult challenge.  The key issues have, for the past 5 or 6 years, been to overcome the restrictions of the use of credit card payments for gaming in the US in particular.  Most sites will offer a range of payment solutions to their members.  Additionally gaming houses are looking to lower costs, faster remittance and reduced chargeback mechanisms; the last of these can dramatically hit margins if not controlled and latest techniques of risk assessment can substantially reduce write-off levels.
      A number of payment channels have been created over the period of overcome the hurdles of remitting funds, and the importance of selecting sound intermediaries is fundamental.  The more complex the channel, the longer it takes to get the funds to your bank account.  So where are the funds in the intervening period?  All gaming houses will be familiar with the risk of funds going “missing”.  However, reliability of the service  provided is also crucial.  A high decline rate when taking credit or debit card payments is very bad for relations with players.  They will quite simply go elsewhere.  The message is very clear, select your payment channels with great care and work very closely with them at all stages of the process.

The effect of sporting results on the gaming industry performance

Sporting results of course can impact the bottom line especially when the favorites “come in”; the ability to balance the book in many cases is restricted due to competition , but customer wins do generate more interest.  Increasingly as odds-checking by the customer becomes a more common practice, the ability to provide esoteric become increasingly specialist areas.

The challenges of seasonality

Seasonality, especially in relations to US facing sports books, give rise to low performance summer months, to which is added the massive marketing build-up at there beginning of the season thereafter.  The pre-season commitment to advertising spend is difficult to pull or re-direct: thus there must be the ability to assess and respond rapidly to ineffective marketing channels or changes in customer preferences and evolution.
      The ability to cross market different sports in different continents can assist in evening our some seasonality, but some zones are presently very fixed on preferences and some, especially Asia, are adept in keeping to sports and casino games with lower” house” margins.

Customer acquisition costs

To have more than one key promotional channel is vital to create options together with generating traffic by targeting appropriate and not just short term affiliations.  It is generally accepted that customer acquisition costs will escalate and thus retention rates will be perceived to playpoker an increasingly important aspect of the “business model”.  And the age of massive marketing spend through billboards and other media (restricted or prohibited in a number of countries) is on the decline as the first in the market and established brands have gained market awareness which may be nigh impossible to penetrate with an effective cost/payback.
      The understanding of customer desires and frustration can greatly add to the retention rates. Ideally, there should be a separate team to concentrate on the area of the customer development, not only to mitigate erosion but also to cross promote products,  (without unacceptable levels of lost revenue previously generated in successful areas through cannibalization).  Very often bonuses in various guises are used, possibly randomly in many cases where the competition is seen to be giving away “fistfuls of dollars”, without a particular strategy or measuring of success in place.

Conclusion

In brief the ability of the management to know, monitor and control all the margins and cost s in about 10 key areas has a major impact on the bottom line in an industry with increasing competition through transparency;

and an industry where the margins can be further squeezed through increasing costs in absolute and relative terms, such as customer acquisition.