Does Size Matter?

18th May 2014 by

David Schollenberger, Partner and Head of the Gaming Team at Healys LLP, examines the advantages and disadvantages of size for iGaming companies.

iGaming companies come in all shapes and sizes, from a one-man-band start-up based at the founder’s home, to the publicly listed multi-billion dollar multinational company. Every size has its advantages and challenges. This article will review some of the key advantages and disadvantages of size for iGaming businesses.

Smaller size gaming companies

Small size gaming companies generally have a more entrepreneurial culture. They tend to be more flexible and less risk averse to trying innovative strategies that may fail because there is less at stake in terms of money and jobs. Often, it is the entrepreneur’s own money at stake in the business so he or she must answer only to themselves for a decision or strategic direction that doesn’t work.

Smaller companies have the distinct advantage of being less bureaucratic. Decision making and strategy determination can progress quicker with the smaller management structure and levels of approval. Products can be brought to market quicker because there are fewer people and processes in product development. Innovative and creative ideas can receive less resistance because of fewer hoops to jump through.

Smaller companies tend to be closer to the customer. Products can be more quickly adapted in response to customer feedback as a result. While bigger companies are studying customer preferences and considering business plans, a smaller company can have its new gaming products launched and online. Smaller companies have fewer departments and staff and closer interaction with users is possible, meaning that complaints can be handled faster and on a more personal level.

Many smaller companies have a close knit family feel. This can be a positive or negative, depending on the individuals involved. It can mean a nurturing paternalistic environment where management looks after its staff like an extended family. A small business where everyone knows each other may be more likely to develop a feeling of positive teamwork which can improve morale and productivity. The special needs of individual employees may also be better accommodated in small companies. On the negative side, a smaller business can also be a “hell on earth” with no place to hide from dysfunctional staff or an arrogant and dictatorial owner/ CEO who treats employees disrespectfully and only seeks personal gain.

The lean size of smaller companies has advantages in cost and overhead, which can be passed on to the user of the gaming company services. Its leaner team size makes employees much more aware of how the business operates and makes staff feel more a part of the direction and being able to directly influence the success of the company. With fewer employees, a business can arguably adapt to more difficult economic times with fewer redundancies and keep the business operating efficiently.

Employees at smaller companies may find they are wearing multiple hats and given a broader range of responsibilities compared to the narrower roles that they would expect to have in larger organizations. This provides the opportunity for more challenges, to learn new skills and to have greater opportunities. For an entrepreneur, a small company allows the principal to have greater managerial and ownership control of the company since funding needs for the business will not typically be as great as for a larger company.

On the down side, smaller companies can lack the resources to provide the level of service, product quality and compliance that can be provided by larger gaming companies. Smaller companies will neither have the marketing and advertising budgets to promote their products as effectively as larger companies, nor the development teams that can produce the most technologically advanced and sophisticated products. From a legal perspective, the smaller company has a greater challenge with compliance in a highly regulated gaming industry, with a smaller staff to cope with regulatory requirements in multiple jurisdictions and smaller external legal budget. The smaller company also does not usually have the set of elaborate policies and procedures common to large companies that guide staff in compliance and provide consistent approaches to issues.

Larger size gaming companies

Larger size companies have the advantage of more resources, economies of scale and expertise available. A larger gaming company is more likely to have a large marketing and advertising team and budget that can make their products and services household names. Their product development teams can constitute armies of developers that are able to put man-hours and features into products that smaller companies can only dream about. With narrower roles, their employees can become true experts in their functional area. Successful larger companies also have the luxury of having a greater M&A war chest to buy businesses to fill gaps in their product and services offering and do not always need to grow organically.

Liquidity is hugely important in multiplayer games such as poker online. Larger gaming companies operating across multiple jurisdictions are able to achieve levels of player numbers and liquidity that are not possible for smaller companies. Larger companies are typically able to pay their staff higher salaries and benefits and, therefore, attract top talent. While lacking the “family feel” of smaller companies, there are generally stricter policies and procedures in place in larger companies that protect employees more effectively against abuses such as bullying, harassment and provide more equal opportunity for employment and advancement.

On the compliance side, large publicly traded companies are given enhanced scrutiny by regulators, the investment community and auditors over its management, finances and compliance practices. They have larger compliance staff and greater budgets for external legal advice, which enable more robust compliance programs. Accordingly, they tend to be more squeaky clean and transparent and not take shortcuts on compliance or they will be quickly caught out, risk fines or penalties for the company and/or risk losing their jobs (and freedom).

Due to the larger funding requirements of larger companies, additional investment in the company generally needs to be sought at some stage which, if in the form of equity, will usually dilute the ownership interests and management control of the founder entrepreneur(s). Debt financing will similarly put restrictions on the business and security over its assets.

As negatives, large companies can be bureaucratic and slow moving in decision making and product development. A large company involves many more people and processes in developing products, slowing the speed to market. A large number of employees in geographically separated departments can create an impersonal environment. Large companies have large overheads, more employees and greater expenses and therefore tend to be more risk averse to commercially risky (but potentially lucrative) ventures. Large companies are less paternalistic than smaller ones and can be more ruthless in making redundancy decisions where employment reductions are needed to maintain profi tability.

Right for your business

There is no one right size that fits all iGaming business. It is really down to the strategic aims of the company, the type of desired culture facing your customers and in the working environment, the preference of the entrepreneur to maintain ownership and management control balanced against the need to seek additional investment and whether a certain size is essential for liquidity, economies of scale and the continued success of the business. Bigger isn’t necessarily better, and the iGaming market accommodates many different approaches to sizing.