Rolling with the punches – Italian online sector survives a tough year
If ever a national market has been hit by a triple whammy it is the Italian gaming sector. First a ban on all gambling-related marketing, then the effects of the pandemic and its associated lockdowns and finally to add insult to injury a tax hike even while the virus was raging. Yet, the online sector can be said to have displayed amazing resilience and recent M&A in the space hints at optimism over future prospects at the top of the tree at least. It might seem peculiar that the lyrics of a long dead British music-hall star come to mind when thinking about the state of the Italian online market in the past year. All the same, some lines sung by Gus Elen, a cockney singer and comedian, do appear fitting.
‘Wiv a ladder and some glasses, I could see to ‘Aackney marches, if it wasn’t for the ‘ouses in between,’ goes the song.
Similarly, the gaming sector in Italy might say that if it wasn’t for the pandemic, its associated lockdowns, the gambling marketing ban and the recent tax hikes,..
If ever a national market has been hit by a triple whammy it is the Italian gaming sector. First a ban on all gambling-related marketing, then the effects of the pandemic and its associated lockdowns and finally to add insult to injury a tax hike even while the virus was raging. Yet, the online sector can be said to have displayed amazing resilience and recent M&A in the space hints at optimism over future prospects at the top of the tree at least.
It might seem peculiar that the lyrics of a long dead British music-hall star come to mind when thinking about the state of the Italian online market in the past year. All the same, some lines sung by Gus Elen, a cockney singer and comedian, do appear fitting.
‘Wiv a ladder and some glasses, I could see to ‘Aackney marches, if it wasn’t for the ‘ouses in between,’ goes the song.
Similarly, the gaming sector in Italy might say that if it wasn’t for the pandemic, its associated lockdowns, the gambling marketing ban and the recent tax hikes, it would be doing just fine.
Recent data proves the point. Figures from Ficom Leisure show that revenues from all online verticals rose nearly 95% in February compared to the same month last year, before the first lockdown hit. At over €351m, February’s gross gaming revenue (GGR) figure was just shy of the record €359m set in December. In March, online sports betting was still up more than 160% year-over-year, and online casino posted its second highest total since regulation was implemented.
This confirms the generally positive picture for revenues from both online gaming and, once sports restarted in June last year, online sports. “A number of new players have opened online accounts as effect of the lockdowns,” says Christian Tirabassi, senior partner at Ficom Leisure in Rome. “We believe this increase will stay, as a number of players have (become accustomed to) the online/mobile betting and gaming experience.”
Fabio Schiavolin, chief executive of Snaitech, says 2020 proved once and for all the attractiveness of online gaming to the consumer with Snai’s revenues up 58% on 2019 which itself had been a record-breaking year.
“Snaitech’s 2020 numbers showed a clear evidence of the digitalization process of demand for all products and services, boosted by the retail lockdown with customers experiencing the online offer with increasing confidence,” he says.
Notably among the converted are Snaitech’s betting-shop managers. “For a number of years now, we have been focusing a great deal on the acquisition of online players through our points of sale, sharing the revenues with the shop managers and building a real omni-channel view on the customers,” Schiavolin says.
“Even the more reluctant retailers have experienced the importance of exploiting the digitalisation, which was for them the only income during these recent months. As we always focus on partnerships we have also increased the compensations to allow the retail network to face the crisis and come back stronger when the opening will be allowed.”
The pandemic was one obvious obstacle facing the gaming sector in the past 12 months. In particular, land-based betting and gaming suffered from prolonged lockdowns and, as of the time of writing in mid-April, are still yet to see any sign of a reopening. “Online revenues have been stronger in the last year but could not compensate the industry losses by retail closure,” says Alexander Martin, chief executive at SKS365, the company behind the Planetwin365 brand.
But the omni-channel effort was of central importance to the Italian sector long before Covid-19 first arrived in Italy early in 2020. The passing of the Dignity Decree in 2019 and the subsequent ban on nearly all gambling-related marketing activity was a huge blow to the Italian betting and gaming sectors. But one partial answer to the sudden lack of visibility lay with the betting outlets themselves.
The need to find ways to drive customers online but without the previously available array of advertising prompts led to a more concerted effort to utilise the retail presence as customer acquisition tool. Hence, what would otherwise seem to be a counter-intuitive rise in GGR in Italy even as the new marketing restrictions took hold.
“The land-based network is a crucial asset both in terms of brand awareness and customer protection,” says Martin. “The key to staying ahead of the game is offering an omni-channel experience that allows customers to have both options and therefore to choose which channel best suits them at that particular time.”
Marco Castaldo, chief executive at Microgame, says that omni-channel has been “the main topic” for Italian operators in recent years and while during the pandemic clearly there were issues in maintaining a connection with the audience, those that “worked well on player engagement and retention” will have benefitted the most.
“The healthcare emergency, with the consequent closures, has changed the habits of customers all over the world, accelerating the omni-channel process,” says Schiavolin. “Customers have started to take advantage of different online services and gaming has become part of this trend. In our market, there has been a gradual shift from pure retail to multi-channel.”
One clear effect of the ban on gambling-related marketing would appear to be a market share consolidation among the top half-a-dozen brands. Martin points out, for instance, that SKS365 is now one of six operators in sports-betting with more than 10% market share and which account for nearly three-quarters of all GGR. “I think that we are in a position that will allow us to further consolidate our business regardless of the competitors moves,” he suggests.
The latest data shows on sports-betting – both in online and land-based combined –shows the degree of concentration at the top. The situation in February and March, as detailed by the analysts at Ficom Leisure, shows a broadly even six-way tie for market leadership between Snai, Eurobet, Planetwin365, Sisal, Goldbet and bet365.
Source: Ficom Leisure
However, the sports-betting picture changes slightly when the most recent Italian sector M&A is considered. The big news in this regard came from Gamenet when it announced in December it had bought IGT’s Italian online sports-betting and land-based gaming machine business which was previously under then Lottomatica banner for €950m.
Combining with Gamenet’s existing Goldbet brand presence, the move creates a new market leader with pre-forma revenues for 2019 of around €1.6bn and an EBITDA of circa €370m. Backed by Gamenet’s private equity owners Apollo Management International, the deal was hailed at the time as being “transformational” by Guglielmo Angelozzi, chief executive officer of Gamenet.
Certainly, on March’s figures the combined sports betting business would leap to the top of the tree with a combined percentage of around 18.1%.
The less concentrated nature of the online casino market means Gamenet’s combined market share is less striking, although at around 12.1% in March it would still – just – take market leadership from Flutter Entertainment’s PokerStars business.
Source: Ficom Leisure
Schiavolin sees the significance of his rival’s acquisition. “It confirms the extent of the market changes underway,” he says. “On the one hand, the trend is evidence of a tendency to pursue increasingly greater specialisation to improve business competitiveness in specific segments. On the other hand, there is a pursuit of growth through acquisitions in order to capture market share.”
Martin, meanwhile, foresees trouble for the market minnows. The acquisition is “part of the trend for the top gambling operators in the world to merge operations and create a market force that is able to wipe out most of the smaller operators and have complete market dominance.”
Tirabassi agrees that the current trajectory of the market is dictating the consolidation trend “both horizontal and vertical”. “The acquisition by Gamenet of IGT betting and gaming assets is pushing the competition to react in order to consolidate a position,” he adds.
Death and taxes
Consolidation is a centrifugal influence within any given market so it is hard to ascribe this move specifically to the gambling marketing ban. But a clearer link can arguably be drawn between the legislative actions and a rise in black market activity.
Ekaterina Hartmann, director of legal and regulatory affairs at the European Betting and Gaming Association (EGBA), points out that the evidence suggests illicit activity is on the rise. “Italy needs to find the right balance between proper regulation that protects the customer and a sufficiently attractive offer,” she says.
“Channeling is ultimately the figure that says whether regulation is successful or not. An advertising ban is not the way to ensure an attractive market exists, on the contrary it is very harmful as it does not allow the consumer to be informed of who the regulated operators are. Sadly, an advertising ban does not strike the right balance.”
The ad ban, according to Schiavolin, is “conceptually wrong” and has the perverse effect of actively favouring the illegal operators. “The Dignity Decree penalises the entire legal gaming chain, which is the one that actually carries out the control and management of the market, ensuring revenue for the Treasury and protection of players,” he says. “How can customers distinguish between illegal operators and legal gaming licensees, if the latter are denied the right to promote their brand?”
To compound the problems for the sector when it comes to black market activity, the gambling sector – uniquely in Italy – was hit by a tax hike even as it was struggling with the effects of the pandemic.
The move in May last year on the part of the authorities to impose a 0.5% turnover tax (the ‘salva sport’ tax) on all forms of sports-betting was intended to raise over €40m a year for sport. But Castaldo says the biggest effect of the new tax will be to funnel further players towards the black market. “I think the hikes in tax rates over the last few years have been a bigger favor to the black market than the advertising ban,” he suggests. “The lockdown has done the rest.”
The new tax is “something that is really killing the business,” says Hartmann. “Being able to offer attractive odds is what keeps players on the regulated market. From our point of view the advertising ban and the new sports tax are very problematic.
“So we are expecting that the channeling rate in Italy will be falling further than the already high 20 % estimated by Copenhagen economics and 23% estimated recently by PWC. A fundamental rethink about the substantial effects of both these measures is urgently necessary.”
For Schiavolin this balance is clearly not being hit right now. “Despite the fact that Italy is, for many years now, along a path aimed at promoting legal gaming, protecting the consumer and recovering resources from actions to fight illegal gambling, the policies implemented in recent years have proved restrictive, limiting and highly penalising for the success of the above mentioned goals,” he says.
The widespread worry is that the authorities – having singled the sector out even during the pandemic – now appears to view the gambling sector as, in the words of Martin, a “cash cow.” He suggests the tax hike was “not very rational” and suggest the support for the sector in the past year has been minimal compared to other areas of the economy.
For the sector to move forward there needs to be better dialogue with both the legislators and the regulators. “We expect to have a constructive dialogue involving all the actors in order to harmonise the legislation, to balance the protection needs of order and public health with the necessary survival of the Italian gaming sector and the need of tax revenue,” Martin says.
Gaming’s contribution to the Italian economy is large enough that its suggestions for how the sector should be legislated and taxed should at least be heard. As Martin points out, it employs around 150,000 people across betting shops, slot halls and bingo clubs and produces tax revenues of circa €7bn a year.
“We invest and educate in digitalisation and build leading technologies other industries can learn from,” he says. “The whole gaming industry would appreciate the governmental support and respect as given to other industries.”
For now, what will really give the gaming sector a boost will be a post-pandemic reopening. Dates are yet to be set, other than the hope that, as Schiavolin says, it will be “as soon as possible.”
He adds: “Since March 2020, gaming outlets have observed more than 250 days of closure, and shutters are currently down since last October. Retailers need to restart, and have already invested in equipping stores with all the prevention and safety tools necessary to ensure the health protection of employees and customers.”
Martin agrees that there is every to suspect that retail operators will adapt to the new circumstances and can expect to see their audience return. “With the end of the lockdown many customers will come back to the shops under the given safety measures,” he adds.
Castaldo also believes the rebound will be robust but he adds that the experience of the past year might have changed the shape of the market as it moves ahead. “How it shakes out remains to be seen, but I think the balance will continue to tilt towards online,” he suggests.