On the face of it bricks and mortar casinos might seem the obvious candidates for setting up successful online gambling operations, but historically their efforts have been a bit hit and miss. David Schollenberger of Healys explains why they’ve yet to make a big impact in i-gaming and ponders whether this may change in future.
The online gaming industry in the UK far exceeds its land-based counterpart in revenue and profitability.
Why have the-land based casino companies been so slow in coming to the market?
Is it fear of cannibalisation of their existing customer base?
Is it regulatory concerns?
Is it lack of the necessary management skills?
What opportunities are there for land-based casino companies to move online and what advantages do they have?
What is the attitude of US casino companies compared with those in the UK?
Should existing online gaming companies welcome or fear competition from the land-based operators?
Why so slow?
Many land based operators were early adopters of online gaming licences back in the early 2000s. But a number of them were unsuccessful due to their lack of understanding of the market, inappropriate business models and inadequate marketing. Some companies feared cannibalisation of their existing customer base, thinking their customers would stay at home rather than visit their casinos. Sheldon Adelson, owner of Las Vegas Sands, has been one of the most outspoken opponents of online gaming, citing morality arguments for his objections although it is more likely he is concerned that online casinos will take business from his land-based casinos. Others have said the regulatory risks of operating on the internet with a highly regulated business have also been a concern.
Cannibalise or complement?
The experience of many land-based operators is that online customers are a different demographic than typical casino being younger and having grown up using smartphones and laptops as a means of entertainment. In addition, for some casino games such as poker, customers new to the game may be too intimidated to go to a poker table in a casino with experienced sharks around a table; they may prefer to train and learn the game playing online in the privacy of their home. Finally, just as the advent of DVDS did not kill cinema as was feared when DVDs were first introduced, online casinos can enhance and not replace the demand for playing in land-based casinos. Online casinos simply cannot match the social experience of playing casino games surrounded by friends in the atmosphere and amenities of a live casino.
There are a number of challenges for land-based operators wishing to operate online gaming businesses and these are both commercial and legal. Online gaming requires management with different skill sets and different business models. There is a different customer base with different expectations for service, ease of use and game design. For example, the online user expects much more technical sophistication in the games and their display. It is much easier for a customer to flit from one online casino website to another if his interest is not kept with sophisticated visual effects or the game is not easy to use than it is for him to leave one land-based casino for another. This will require the operator to have significant development and programming staff (if their games are proprietary) to keep the games operating continuously with minimal errors, and the site maintained, updated, and with state-of-the-art features. Reward programmes also need to be tailored differently. Land-based casino customers are rewarded with complimentaries such as free drinks and meals, accommodation, transportation and shopping vouchers. Online customers are rewarded with bonuses and credits.
Online gaming can be offered globally but regulation and marketing may be different in each market. Operators need to carefully decide which markets to operate in. They then need to obtain the necessary resources, people and regulatory licences to operate in each market. It is vital not to take on more markets than can be accommodated by an operator’s resources and to prevent access to its services in jurisdictions where online gaming is prohibited or an operator does not have a licence. Land-based casino companies must be particularly vigilant when it comes to regulatory compliance in the online world to protect their land-based licences. Regulators in many major land-based jurisdictions such as Nevada and New Jersey will impose sanctions on domestic licensees for regulatory violations in other jurisdictions. So, for example, selling online into a small black or grey market could jeopardise the Nevada licence of a big operator; the risk of taking wagers from grey jurisdictions may not be worth the reward. The cost of licensing and operating legally is significant. This has been one of the reasons behind the recent consolidation in the industry and a land-based operator with a significant legal and compliance team will have the edge over those without
Threat or welcome competition to igaming companies?
A land-based operator already has significant marketing expertise, a customer database and compliance capability (at least in that country) that would seem to provide it an advantage in the online world. However, as previously mentioned, the marketing approach that is suitable for online gaming is different, so the marketing team will need to adapt to the marketing models that are successful in online gaming (e.g. use of marketing affiliates) or hire in staff with experience with online gaming companies. It will also need to develop rewards programmes suitable for online gaming. Its customer database will be useful to some extent, but the demographic of online users is different. The regulatory team will also need to expand their knowledge and reach to all of the countries where the company wishes to operate and protect the company from use outside of those countries. So land-based companies have a big learning curve and investment to make in adapting to the online world. The biggest advantage that land-based operators enjoy is the trust and reputation of their brands. Having bricks and mortar establishments that are known and credible provides assurance to a customer that his or her money is safe and that the operator will be around in the future. One of the biggest concerns among online customers is related to the trust and reputation of a virtual operator
The bottom line
Online gaming offers a vast opportunity for land-based operators. The market is big, the capital investment modest and the profitability high compared to land-based operations. The strong brand and reputation for reliability of the land-based operators, as well as their established marketing and compliance capabilities, should provide advantageous. Nonetheless there are significant challenges and risks to be considered, particularly in relation to the ‘crown jewels’ of their home jurisdiction gaming licences. A move into online gaming by a bricks and mortar operator should be fully thought out, planned and adequately resourced to give it the best chance for success.
In reverse: online to land-based?
Land-based casinos obviously involve a large capital investment for an online operator and a margin that is less favourable due to higher operating costs and higher tax rates. Therefore it is difficult to see what would motivate an igaming company to set up land-based operations. However, the regulatory model of the US states that have legalised online gaming so far (Nevada, New Jersey and Delaware) is that online licences are only granted to operators that have land-based licences. Should an online operator wish to operate in the US, obtaining a land-based licence will therefore be a prerequisite.