The online gaming market
Despite the evolving regulatory backdrop, the online gaming industry has grown rapidly since coming into being in the mid-1990s. It is an increasingly popular form of entertainment for millions of adults around the world and independent forecasters predict that the industry will continue to grow over the coming years.
Excluding the US and focusing on the four major product segments of sports betting, poker, casino and bingo, H2GC, a leading independent consultancy estimates that online Gross Gaming Yield (‘GGY’) in 2010 was $21.4 billion, up 12.0% on the previous year. The consultancy also estimates that each of the four major online segments will continue to grow, reaching approximately $30.5 billion by 2015, implying a compound annual growth rate of approximately 7.3%.
Source: H2 Gaming Capital, February 2011
The global online gaming sector, excluding the US can be divided into four prime categories. Excluding lotteries, which in the majority of cases are the preserve of state-controlled entities, sports betting is the largest, estimated to have been worth $10.5 billion of GGY in 2010 (48.1% of the market), followed by casino at $5.1 billion (23.5%), poker at $3.7 billion (17.2%) and bingo at $2.4 billion (11.2%).
In the last few years online gaming’s development has benefited from the roll-out of broadband services; from significant investment by the online gaming industry to promote its services; from increased consumer confidence in effective and low-cost payment mechanisms; and from traditional bricks and mortar businesses making their products available on the internet.
Growth has also been driven by an expanding customer demographic. As the early adopters, who typically were in the 18–25 age-bracket, become older and continue to play, they are being joined by the next generation of gamers, many of whom now choose to enjoy their first gaming experience online rather than in land-based gaming premises. In addition to these factors, regulatory shifts and technological developments such as the introduction of smart phones and computer tablets can also be expected to increase online gaming as a proportion of total gaming revenue.
These forces have resulted in a large and diverse online gaming industry. In February 2011, Casinocity.com, an independent online gaming directory, listed 2,288 online casinos, poker rooms and other gaming sites that were open for business. However, only a small number of these sites have meaningful scale and most of them are small and are unlikely to establish a global footprint that can attract enough customers to generate significant revenues.
While the ready availability of third-party software makes it relatively straightforward for an operator to enter a particular market, the barriers to success are much higher. These include the need to meet increasingly onerous regulatory and technical requirements for licensing; once these have been met operators also need the resources and marketing expertise to promote their services in an already competitive landscape. This combination means that the advantages of scale are very real and we have already seen the emergence of a few large players. Further regulatory shifts and the requirements placed on operators, including the payment of gaming taxes and additional compliance costs all mean that these barriers to entry can be expected to increase.
The result is likely to be further industry consolidation and the emergence of a limited number of international, multi-product operators like bwin.party. As alluded to elsewhere, the online gaming industry is now entering an unprecedented phase of regulatory change. This shift towards regulated markets, especially in Europe, can be expected to be a major factor affecting the evolution and direction of the online gaming industry over the next few years.
All market data supplied by H2GC, February 2011.