Diminishing Returns? The Real State of the Gambling Market in the UK

Posted by Harry Kane on Monday, April 6, 2020

In general terms, the iGaming market in the UK has been considered as something a growth market since 2010.

However, the gambling industry as a whole has faced rather more mixed fortunes during the same period, thanks to issues such as falling demand, the closure of outlets and the implementation of stringent legislation such as the £2 FOBT cap.

According to the most recent figures, even the total GGY for the iGaming market has experienced a marginal decline, with some suggesting that this trend could also continue against an increasingly restrictive legislative and regulatory backdrop.

In this post, we’ll appraise the true performance of the market in recent times, while asking what the next five years holds for the industry?

Beyond the Facts and Figures – Then and Now in the Gambling Market

The state of the gambling industry has certainly come under the spotlight of late, following the collation and release of key datasets by GoldenCasinoNews.com.

According to the detailed report, the overall gambling industry has been largely in a state of marginal decline since 2012, apart from a small and ultimately temporary peak in growth during 2017.

Even more alarmingly, the report predicted that the total gambling revenue in the UK would sink by a whopping 17% over the course of the next five years, sinking to a relatively paltry $72.12 billion (£55.8 billion) by the end of 2023 (and $70.5 billion 12 months later).

By the end of this year, the total revenue will be an estimated $79.83 billion, with this expected to fall by 3.7% to $76.98 billion over the course of the following 12 months.

Once 2022 has drawn to a close, the sector’s turnover will be around $74.42 billion, with a further decline of 3.1% forecast for the following 12-month period.

While these losses would be concerning enough for brands in the current regulatory climate, they’re even more alarming when we consider the corresponding figures from 2012 and 2013.

More specifically, peak revenues for the industry were recorded back in 2013, when operators generated $114.31 billion at a 6.7% increase in relation to the previous year.

Since that time, however, the exponential growth of the iGaming sector has clearly been outstripped by the decline of the brick-and-mortar marketplace, which has been simultaneously hit by both dwindling demand and participation and increased regulations on activity and betting limits.

This was also borne out by the figures from 2014 and 2015, when the total revenue generated by the gambling industry declined to $95.06 billion and $94.747 billion respectively.

Of course, there was a pronounced increase in revenue in 2017, with this performance coming prior to the aforementioned FOBT cap and driving an impressive total turnover of $101.02 billion.

This has since proved to be little more than anomaly, however, with the overall decline in market turnover increasing at pace since this date.

Further evidence of the diminishing returns in the gambling market can be gleaned from the performance of individual firms, with an estimated 90 operators in the UK boasting a turnover in excess of £5 million last year.

This was noticeably down on the 95 recorded during 2018, although the good news is that this remains considerably higher than the industry low of 75 published throughout 2014 and 2015.

There’s a clear takeaway here; with the gambling industry becoming less generative over time and this trend having begun back in 2013 when the sector was apparently at the peak of its earning powers.

Looking forward, it’s also clear that the diminishing yield in the iGaming sector will exacerbate declining turnovers in the industry, creating a scenario where one of the UK’s biggest growth markets could begin to contract markedly.

What’s Behind This Surprisingly Gradual Decline?

Undoubtedly, reduced gambling revenues have been triggered by a number of different factors, including rapidly changing player behaviour and the approach taken by UK regulators and legislators in recent times.

In terms of player behaviour, it cannot be denied that a larger number of gamblers have transitioned online during the course of the last decade.

This has been borne out by the numbers, which show that while the iGaming market GGY declined by a nominal 0.6% to £5.3 billion in the year ending March 2019, online gambling still accounted for a 37% of the industry’s total yield during the same period.

While overall gambling participation has increased incrementally in recent times (despite the overall decline in revenue), this doesn’t solely account for the rapid growth of iGaming since 2010 and the fact remains that a growing number of people are simultaneously joining this market while eschewing offline gambling and establishments.

At the same time, iGaming operators have been increasingly compelled to promote the principles of responsible gambling through the platforms, with this drive having gathered further momentum since the UK announced the safeguarding of vulnerable players as one of its core strategic objectives in 2018.

Unsurprisingly, this has led to an increase in the availability of information pertaining to problem gambling and the resources that offer help to players, while also introducing intuitive account tools that have enabled customers to monitor their activity and set customisable betting limits.

These efforts have undoubtedly reduced the average spend of the typical online gambler, with the industry becoming increasingly reliant on high-rollers to fund their growth and bottom-line margins.

As a result of this, the total GGY both on and offline has declined slightly despite an increase in gambling participation, and this trend is likely to continue for the near-term at least.

It’s fair to surmise that the regulatory climate has also changed markedly since 2012, with some rule and law changes having a direct impact on the revenues generated by gambling operators.

The government-backed FOBT cap was undoubtedly the single most damaging change, as this slashed the maximum wager on fixed-odds betting terminals from £100 to just £2.

It’s thought that these land-based betting machines had grown to account for 56% of all offline bookmaker revenues, creating a scenario where brick-and-mortar establishments were overly reliant on FOBTs for their increased turnover (particularly during 2017).

So, when the government opted to go against the advice of the UKGC (which had mediated and proposed a compromised betting cap of around £30) and opted to lower the threshold to just £2, it also pulled the rug out from under operators and saw turnover decline significantly in the industry.

When you consider the combined impact of increased online participation, the rise of responsible gambling in the virtual realm and the seismic FOBT betting cap, it’s easy to see why the overall gambling turnover in the UK has gradually declined incrementally since 2012.

The rise and subsequent fall of FOBTs even accounts for the sudden turnover hike in 2017 and the pronounced revenue decline 12 months later, and there’s no doubt that these high-profile factors have directly impacted the ability of gambling operators to generate money over the course of the last eight years.

What About the Next Five Years?

Given this and the increasingly precarious nature of the iGaming market in 2020, there’s no doubt that things could get worse before they get better, with the next five years potentially challenging for operators in terms of turnover, profitability and the ability to claim a viable market share.

Aside from Brexit (which is continuing to threaten the UK’s future relationship with the single market and the ability of iGaming operators to target international audiences from bases in Gibraltar and Malta), the most pressing concern at present remains the machinations of the so-called APPG.

Chaired by former Conservative leader Iain Duncan-Smith, this is a cross-Parliamentary group which has recently launched a full-scale investigation into the iGaming space and the impact of gambling-related harm in society.

Subsequently, the group has made a number of recommendations to the UKGC, including the imposition of another £2 betting cap across all online casino verticals.

Initially rumoured to cover virtual slots (which are the fastest-growing iGaming vertical and currently account for nearly two-thirds of the online GGY), this cap would now be applied to everything from table games to poker and would undoubtedly change online gambling beyond all recognition.

In truth, this type of legislative storm has been brewing for some time, and operators must take some of the responsibility for their failure to fully safeguard players and create a safe and compliant environment for their customers over the last two years.

It has also been inspired by the FOBT cap, and while the UKGC has six months to consider the proposal and is unlikely to agree to a £2 limit, operators should definitely brace themselves for some sort of limit and betting threshold to be announced before the end of 2020.

But what exactly would happen if the UKGC did agree to a £2 online betting cap? Well, the turnover generated by online and multichannel operators would be slashed, particularly when you consider that many slots offer players the opportunity to wager £125 or more per spin.

This would undoubtedly exacerbate the projected decline in revenue over the course of the next five years, while shrinking the size of the overall market and creating a scenario where small, independent casinos may either fall by the wayside or find themselves the subject of a strategic merger or acquisition.

While both turnover and profit will decline significantly in monetary terms, however, the actual gross gaming yield (GGY) will not change markedly in terms of percentages.

The reason for this is simple; as while turnover refers to the total amount taken in bets, the yield is calculated by subtracting payouts from this sum.

Given that the size of payouts will largely decline in line with dwindling bet amounts, this will create an unchanged profit margin from a percentage perspective (without accounting for additional overheads and tax increased taxation, of course).

This at least represents some good news for operators, particularly as it will create a window of opportunity for well-established market leaders who can absorb huge revenue decreases in the short-term while simultaneously altering their business models to adapt successfully going forward.

Of course, the question that flows from this is, “how will operators look to adapt their business models in the wake of a £2 betting cap in the UK?”, and we’d wager that the most established firms are already beginning to think in these terms.

The issue here is that the formative signs are not positive from the long-term perspective of the industry in the UK, with brands such as William Hill and Paddy Power already focusing more on less mature and high-growth markets such as North America.

Of course, William Hill has been developing a viable presence in the U.S. market ever since 2012, and this has proved to be a shrewd move given the store closures and losses brought about as a result of the FOBT cap and the recent, 6% hike in Remote Gaming Duty (RGD).

With brands like Paddy Power having since followed and blazed a trail for other operators to follow, a growing number of firms may subsequently look to increase their overseas operations at the expense of their UK customers.

In the worst-case scenario, operators could even look to relocate to increasingly tax-friendly havens in established gambling hubs such as Malta and Spain’s Ceuta, with the latter boasting the autonomy to offer huge financial incentives to brands who change their base.

Much will depend on the status of Gibraltar post-Brexit, of course, but this undoubtedly serves as an attractive proposition is an increasingly stringent regulatory climate governed by falling turnover, sharp tax hikes and staunch betting limits.

Ultimately, it has yet to be seen how developments will play out in the future, in terms of both the revenue forecasts, Brexit and proposed online betting cap.

While it can be hard to accurately predict a future given such variables, however, there can be no doubt that the warning signs are there for a market that continues to decline in the face of huge socio-economic challenges and increasingly steep regulatory hurdles.