Gambling industry online – Web proves a sure bet

Within six years the UK gambling industry has grown from a traditional retail operation into a fully-fledged online business. Alun Bowden explains how the transition occurred.

When William Hill recently announced its annual results it was clear the gambling industry had fallen in love with the Internet.

In a trading update the FTSE 100 bookmaker admitted 2006 had started off badly, but profits would be cushioned by continued growth in its online division – where operating profits were £61 million last year. Analysts breathed a sigh of relief, investors were satisfied and the share price survived unscathed. Once again the Internet had saved the day.

In fact, it has become such an integral part of future growth plans for the major UK gambling brands, it’s hard to believe it was not love at first sight. Indeed, if it wasn’t for the Government, the big three bookmakers Ladbrokes, William Hill and Coral, it may have taken a lot longer.

Back in the late 1990s all UK bettors had to pay a tax of 9% on either their initial stake or their winnings. It was a situation neither the punters nor the bookmakers were happy with, and one enterprising firm soon spotted an alternative solution.

Victor Chandler, the UK bookmaking firm established in the 1940s, moved its entire operations to Gibraltar in late 1999 where it began offering tax-free bets over the Internet. It was a big success, and the big high-street brands began to feel the impact on their business.

Lee Richardson, chief executive of Internet gaming software firm Chartwell Games, was working for Coral at the time and remembers the period well.

“Telephone bettors would tend to be higher-staking clients and many of them voted with their feet very quickly, purely and simply as a way of betting tax-free,” he says. “The bookmakers saw that this was a significant amount of business walking out the door.”

By the turn of the new millennium Ladbrokes and William Hill set up their own ‘international’ sites offering tax-free betting to customers around the world. Coral joined the fray a few months earlier when it acquired Gibraltar-based Internet bookmaker Eurobet.

The firms lured a good portion of UK customers on to the web, but at the time the move was seen more as part of a lobbying effort to get the betting tax changed into a tax on bookmaker’s profits. It worked. The 9% tax was dropped in favour of a gross profits tax and the UK celebrated as tax-free betting became the norm.

“And as soon as that happened, what became apparent was that a lot of the people who had walked away came back,” Richardson says. “But by then the bookmakers had realised this was a completely new market. They were different punters from those you saw over the phone and certainly in the shops. They were younger, they betted more frequently, they betted at least three to four times the level than in the shops.”

It was also the perfect business model: extremely cost-effective in its scalability; and with the opportunity to expand into territories previously off limits – such as Europe and even Asia.
What the Internet also allowed the high-street bookmakers to do was expand their offering to include casino games and latterly even poker. While the Competition Commission may prevent Ladbrokes or William Hill from becoming a major casino owner in the UK, there is little they can do about an online casino with its servers in Gibraltar.

The bookmakers signed deals with software firms where they would share a portion of the revenue in exchange for the technology to run the online casinos, which opened at roughly the same time as the sports-betting sites. “Now of course, most of the profits are coming from gaming,” Richardson says.

But it was a sharp learning curve, dealing with consumers who could change their allegiance at the click of a mouse. Online gambling consultant Oscar Nieboer, who has worked as managing director for MGM Mirage and Virgin’s online gaming offshoots, says it takes an entirely new skill set to cope with the rise of Internet competitors.

“The assumption that land-based core competence automatically translates to the online environment is one of the great industry myths,” he explains.

For the land-based firms the rapid fire, affiliate marketing, instant feedback, banner advertising world was something entirely new. And the web specialists, particularly in the online casino sector, initially grew at a far faster rate.

One of the earliest, and most skilful to exploit this new environment, was 888.com, now a £600 million listed firm. Similarly, when poker exploded on to the web at the turn of the millennium it took the established brands some time to catch up and the early movers were able to grow very big, very fast – as evidenced by the FTSE 100 poker operator Party Gaming.

But the land-based firms were quick to adapt, taking on specialist staff and throwing funding at the new growth sector when they began to see how strong a source of revenue it could be.

They had a key advantage up their sleeves – Internet-only online casinos and poker rooms had to advertise to find new customers, but Ladbrokes and William Hill could simply convert existing sports betting customers into roulette players.

In many respects the sports-betting service now serves as a conduit to the casino and poker sites. In an environment where costs per acquisition can exceed £200 per player it’s a powerful tool. In fact, this one-stop-shop model has become the industry paradigm.

“If you look at the biggest names on the high street, Hill and Ladbrokes, you’d have to say they coped really well,” says John Coates, chief executive of leading Internet bookmaker Bet365. “Their biggest growth areas are online. You’d have to say they are among the leaders within that sector.”

Bet365, a privately owned firm based in Stoke, began as a land-based and telephone betting firm, but recently took the decision to sell its high-street stores.

“We launched our online service in March 2001 and by the time we came to dispose of the shops, 90% of our turnover was coming from online,” Coates explains. “We got to a stage where it was so much that we had to decide as a company what the right strategy for us was. We had 50 shops, Ladbrokes and Hill had 2,000 each – we were never going to be a serious competitor – whereas online we clearly are.”

Bet365, along with other online specialists such as 888.com and Party Gaming, present a obvious challenge to the likes of Ladbrokes and Hill.

With no land-based operations, the new players are able to funnel resources back into the Internet business without the expense of maintaining a retail business.

Nonetheless, Richardson feels the clicks and mortar firms still have some keen competitive advantages. “There are occasions when the most convenient thing is to walk off the street into a shop, or you may be at home where you have a PC with broadband and other times it’s easier to pick up your phone,” he says.

“Bookmakers offer that repertoire of channels and they are very good at making sure those channels are available whenever the punter needs them.”


Antipost: What’s around the corner?

Barely had the gambling world made its first move online than it was beginning to look elsewhere for the ‘new Internet’.

And right now, the one thing people can’t stop talking about is mobile. Mobile casino games are already beginning to take off, and both William Hill and Ladbrokes have scaled down versions of their online software available for Java-compatible mobile phones. And there has been some research published predicting $2.2 billion in global revenue from mobile casino games by 2010.

But Internet gambling consultant Oscar Nieboer is less convinced. He believes the growth area will be geographic rather than technological. And with Eastern Europe and Southeast Asia showing a huge appetite for gambling and growing Internet infrastructure, firms are throwing resources at these new areas.

It could be the Internet is the new Internet after all.

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