gaming sector: who will be the winners? - home - ey - united states

Gaming sectorWho will be the winners?

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Gaming sectorWho will be the

winners?

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Introduction

With 2012 seeing a squeeze on consumer spending and rising costs of sales, EY looks forward to the remainder of 2013 and beyond to highlight some of the key issues facing companies who seek to grow and maintain or improve current margins.

The thinking that the industry is “recession proof” has been challenged over the last few years. 2012 has seen a decline in UK and Eurozone GDP and a subsequent dip in consumer spending. While pre recessionary levels of economic activity may still be some time off, opportunities exist for growth and expansion within the betting and gaming industries.

In light of the future economic forecast, we will take a more in depth look at the following key industry areas for those companies who seek to grow, maintain margins and keep ahead of the competition:

With the long-awaited regulation of online in the US underway, what are the next steps for companies seeking to grow their footprint or seek entry to the US market?

Regulation: issues or opportunities within the social gaming market.

About usEY is a global leader in assurance, tax, transaction and advisory services. Within the betting and gaming industry we have market leading credentials. Centered in Las Vegas, our global team are supported by an established network of EY professionals throughout Europe.

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Industry and economyEY UK and Eurozone forecast

was widely seen as disappointing. We have seen the trend continue for

throughout the remainder of the year, a similar decline of 0.6% 1 is forecast for 2013.

Of the key betting and gaming jurisdictions within the Eurozone, core countries, including Germany and France, saw GDP contract in 2012. This represents a marked difference in performance for these countries which had previously been thought of as relatively robust.

Economic growth across the UK and Eurozone is expected from mid-2013, albeit slowly, with growth of only 1.4% 2 forecast for 2014.

Sources: “World Economic Outlook Database April 2013”, International Monetary Fund, http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx, accessed 24 May 2013,” The World Bank | Indicators | Data”, The World Bank, http://data.worldbank.org/indicator, accessed 3 June 2013.

Sources: “World Economic Outlook Database April 2013”, International Monetary Fund, http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx, accessed 24 May 2013,” The World Bank | Indicators | Data”, The World Bank, http://data.worldbank.org/indicator, accessed 3 June 2013.

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1997 2002 2007 2012 2017

Euro area (17 countries) Germany UK Italy Spain France

1997 2002 2007 2011

GDP

US$ billion US$ billion

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1 http://www.ey.com/Publication/vwLUAssets/Eurozone-Forecast-summer-2013/$FILE/Eurozone-Forecast-summer-2013.pdf

2 http://www.ey.com/Publication/vwLUAssets/Eurozone-Forecast-summer-2013/$FILE/Eurozone-Forecast-summer-2013.pdf

3

Personal disposable income 2010–14(e)

Germany

2012 2013e 2014e

France

20112010

Italy 400

US$ billion

Spain

UK800

0

1,200

1,600

Source: EY research and analysis, Oxford Economics (2012)

Within the Eurozone, consumer spending is expected to fall again during 2013 by 0.7% 3 before beginning to climb again from 2014–17 at a rate of just over 1% 4 a year.

While UK recovery has been slow, there were encouraging signs of life from UK consumers in 2012, as spending rose by 1.2% 5 and exceeded expectations.

However, growth in this area is forecast to be sluggish. The EY ITEM Club special forecast on consumer spending anticipates further increases in unemployment, a factor which typically affects levels of spending, especially non-essentials such as gaming and dining out.

Traditionally, casinos and other gambling companies have been thought of as being relatively insulated from the troughs of the economic cycle. However, with the credit crunch at the end of 2007 leading to one of the most severe economic recessions in recent history, the idea that the industry is “recession proof” has been challenged and may no longer hold true.

3 http://www.ey.com/Publication/vwLUAssets/EEF_Spring_2013_Main_report/$FILE/EEF_Spring_2013_Main_report.pdf

4 http://www.ey.com/Publication/vwLUAssets/EEF_Spring_2013_Main_report/$FILE/EEF_Spring_2013_Main_report.pdf

5 EY ITEM Club Special report on consumer spendingJune 2013

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We saw that the share prices of betting and gaming companies in both the UK and US fell similarly to those of companies in the hospitality and leisure sector during the recession period.

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EY UK Betting and Gaming (B&G) Index vs. FTSE 350 Travel and Leisure (T&L) Index

FTSE 350 T&L Index EY UK B&G Index

%

Source: Thomson ONE/EY research. Index price data is as of the end of the last trading day of every week. Index prices are rebased to chart comparative performance of the indices over the last six and a half years.

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EY Fortune 1000 T&L Index EY US B&G Index

EY US Betting and Gaming (B&G) Index vs. EY Fortune 1000 Travel and Leisure (T&L) Index%

Source: Thomson ONE/EY research. Index price data is as of the end of the last trading day of every week. Index prices are rebased to chart comparative performance of the indices over the last six and a half years.

These trends have caused many industry analysts to evaluate the notion that consumer spending on gambling is inelastic compared with their income.

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6 Source: “Gambling Review — UK, April 2013,” via Mintel Oxygen, ©2013 Mintel Group Limited.

7 Source: “Gambling Review — UK, April 2013,” via Mintel Oxygen, ©2013 Mintel Group Limited.

A survey conducted by Mintel and GMI in September 2012 of 1,060 internet gamblers in the UK over the age of 18 showed that 32% of respondents had reduced their gambling spend in the proceeding year. 6 This is in comparison with 42% of diners and drinkers who said they had reduced their consumption spending in that market segment. 7 The gap between these two groups gives an indication that while the gambling industry has been experiencing less of a downturn compared with that of other consumer industries, it has still been adversely affected by diminished consumer spending.

I have cut back 32%

I have spent more 9%

I have not changed my

spending 59%

Source: “Gambling Review — UK, April 2013,” via Mintel Oxygen, ©2013 Mintel Group Limited

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Social gaming opportunitiesSocial gaming is forecast to be a US$2.5b business by 2015, making this an attractive market for real money online gaming companies to exploit.8 This has led to a blurring of the distinction between online and social gaming companies, as the same games are offered on multiple platforms to drive customer loyalty and cross-over of spend. This presents a growth opportunity for the revenue generated on both platforms.

However, this blurring of the line between online and social also exacerbates the risk of increased regulation of the social gaming space. The pressure for governments and associated regulators to prevent problem gambling means that the social gaming sphere is rife with speculation about future regulation. We believe that in the short term regulation is unlikely. The regulatory authorities currently want to see to what extent the industry self-regulates. However, we believe that regulation is likely at some point in the future due to the aforementioned need for social responsibility, especially the focus on the protection of minors.

Those companies who succeed in building a platform of continued growth will remain attractive acquisition targets. We have already witnessed several acquisitions and strategic mergers within the social gaming space as more established businesses seek to position themselves as early leaders in the shifting landscape. Despite the potential of legalization, we believe that these successful companies will continue to generate a premium on acquisition, as it is these companies that will most easily be able to cope with the cost of regulation, and therefore grow market share.

Cameron Cartmell, EY EMEIA Gaming Leader comments: “We view social gaming regulation as likely in the long term. Companies that position themselves strongly prior to regulation will dominate the market once this regulation is in place.”

Current state of the American market

started to occur, albeit purely at a state level, with Delaware, Nevada and New Jersey having legalized the provision of online poker. Federal legalization in the US remains a possibility, with Representative Peter King introducing new legislation in June 2013. We view the potential regulation at a federal level as remote. The political environment necessary to push this legislation through in the US does not appear to exist, which is why the legislation has failed to pass.

Up to this point, the state regulation that has been put in place is limited by the liquidity in those states due to relatively small populations and player bases. The need for cross-state agreements to pool player liquidity is therefore key to these states. We expect legalization at a state level to continue to move quickly in all but the most conservative opposed states. The ongoing drive for tax revenues, and the ability to leverage the regulation put in place by neighboring states, will help to accelerate this process. This presents an opportunity for both the established US casinos and the overseas companies who are able to provide the required software, as demonstrated by the numerous partnership or supply agreements already signed in both the regulated and un-regulated states.

Tom Roche, EY Global Director of Gaming comments: “While the US online gaming market has

opportunities remain for operators and suppliers to grow their footprint in this market. States with large populations such as California await regulation, and reciprocal agreements between regulated states will greatly increase the liquidity of consumers.”

8 “GamblingData Social Gaming White Paper 2012” October 2012, ©2012 GamblingData

Key industry developments

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Cost leadershipWith customers facing a contraction in discretionary spending and minimal growth forecast across Europe, the successful operators will be

From the early 2000’s up until 2009, most betting and gaming organizations spent lavishly in one key area, focusing on integrating numerous betting products and virtual games for a wide variety of customer tastes.

ensure that their product portfolio consisted of enough games and betting products to appeal to a wide variety of customers. With a view to ensuring virtual games and online betting products were available, multiple solutions (games, betting products, etc.) from numerous vendors were bolted onto one another, with little regard for a well-designed information technology (IT) landscape. Many operators now

high due to poorly designed systems lacking well-designed technology architecture. These large operators have operating expenses which are well above the industry benchmark, and spend a large portion of the IT budget on just running the existing systems.

Grow existing products in the UK or Global market

Move from product sale to providing services to Operators

Gro

w m

arke

t foo

tprint Move up the value chain

Cost Leadership

Partner with Operators to

product/service risk/reward

model

Optimize operating cost base

From a technology viewpoint, operators face a number of key challenges, including:

1. Managing the technology ecosystem as the environment becomes more complex.

2. Integrating additional products and services into an already complex architecture.

3. Supporting technical integration of new payment service providers.

need to review their existing enterprise architecture and enhance (or redesign) their technology landscape. Monolithic architecture designs which are widely prevalent and costly to maintain (resulting in high operating costs) will need to be replaced with service-oriented architectures (SOAs). Transforming the IT environment to an SOA model will not only make the systems easily scalable and adaptable to accommodate the needs of tomorrow, but will also help reduce maintenance costs and complexity in integrating additional products.

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Other Betting & Gaming Thought Leadership prepared by EY:

UK Betting and Gaming UpdateMonthly newsletter which provides a summary

Transfer pricing global reference guideThe EY Transfer pricing global reference guide is a tool designed to help international tax executives to quickly identify the transfer pricing rules, practices and approaches that have been adopted by more than 70 countries and territories.

Biannual survey of senior executives from large companies around the world conducted by the Economist Intelligence Unit.

EY Eurozone ForecastEconomic forecast for the countries within the Eurozone.

EY

June 2013Ernst & Young Eurozone ForecastEurozone

Issue 5 June 2013

Real Estate, Hospitality and Construction

Global Capital

Howard Roth, Global Real Estate Leader

Sustainable growth

and between

About this survey

is

The Capital Agenda

1. Preserving capital:and capital base

2.

3. Raising capital: assessing future capital

4. Investing capital:appraisal and transaction execution

Transfer pricing global reference guide

February 2013February 2013

Hospitality and Leisure

Listed betting and gaming company share information ............. 2

Betting and gaming index ....................................................... 2

Company and industry news ................................................... 3

Betting and Gaming update is produced and distributed by Ernst & Young every month. It is a digest of current news articles about the UK betting and gaming industry.

We hope you find it both interesting and informative and we would welcome your feedback. If you would like any further information or would like to be included on our mailing list please let us know.

Please contact: Grant Humphrey Assistant Director Hospitality and Leisure +44 (0)1582 643182 [email protected] Cameron Cartmell Partner Hospitality and Leisure +44 (0)20 7951 5942 [email protected]

Contacts

Rick SinkulerGlobal Real Estate Market LeaderChicago

T: + 1 312 879 6516E: [email protected]

Vinay SheoranLondon


Jose Julio PisharelloGibraltar

T: + 3 505 758 7000

Ryan Cupersmith Las Vegas

T: + 1 702 267 9098

E: [email protected]

Pat PruittPhiladelphia


Tom RocheGlobal Director of GamingLas Vegas


Cameron CartmellLondon


Iain WilkieLondon


Howard RothGlobal Real Estate LeaderNew York


Grant HumphreyLondon


Gavin WestNottingham


Global

Americas

Europe

Jon KillingleyLondon


Brett KallioMelbourne


Asia

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EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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About EY’s Global Real Estate Center Today’s real estate sector must adopt new approaches to address regulatory requirements and financial risks, while meeting the challenges of expanding globally and achieving sustainable growth. EY’s Global Real Estate Center brings together a worldwide team of professionals to help you succeed — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant sector issues. Ultimately it enables us to help you meet your goals and compete more effectively.

© 2013 EYGM Limited. All Rights Reserved.

EYG No. DF0160

1371421.indd (UK) 07/13. Artwork by Creative Services Group Design.

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In line with EY’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content.

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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