GPWA Times Magaine - Issue 23 - February 2013

COVER STORY Entraction’s CEO, Peter Astrom, believed the deal “represents a fantastic opportu- nity for our employees, customers, and shareholders alike,” while Patti Hart, CEO of IGT, stated, “The addition of Entraction advances IGT’s position in legalized inter- active gaming markets. It strengthens our interactive portfolio by adding poker, bin- go, casino and sports betting. This combi- nation will drive enhanced value for our global customers and partners.” Unfortunately this “fantastic opportunity” did not materialize for everyone because just over a year later IGT announced the closure of the Entraction poker network. A spokesman from IGT explained, “As part of our regular business process, we have been evaluating our resources, prod- ucts and markets from a commercial and compliance perspective. As a result, we are consolidating our product develop- ment, allowing us to combine a number of locations and focus on the most attractive opportunities. Change and uncertainty in European market conditions have di- minished the expected returns in certain real-money wagering products” (author emphasis). Here, consolidation has been dressed up as a good thing, a strategic decision, but it was not really good for the shareholders of IGT, operators us- ing Entraction’s software in Europe or those who played in Entraction’s online poker rooms. Another common feature of maturing business sectors is going public – the IPO. Again, this is often presented as being a good move for companies, opening up new financing options, raising funds for ac- quisitions and increasing the status of the company. But in many instances the IPO is of most benefit to a company’s founders, enabling them to get some money out of the business, and the banks which handle the IPO. In the gambling sector the IPOs of Betfair and the new bwin.party entity have not been a success as measured by share price performance. But a look at the IPOs of Facebook and Zynga shows that this is a problem not exclusive to the iGaming sec- tor. There is also the sense that once a com- pany goes public and becomes beholden to shareholders and investment funds senior executives in the company can lose focus on running the business and developing the services their customers want. Instead the executives are focused on appeasing Wall Street analysts and paying more at- tention to the share price than to the op- eration of their business. This might all seem irrelevant to affiliates, too much to do with “the suits” and the corporate world to have any influence on their day-to-day work. But as iGaming firms mature and become more corporate they also become more averse to risk (perceived or actual), especially if they are, or become, public companies too as part of the maturing process. As companies take fewer risks with regulation they withdraw from the “gray” markets. With fewer companies operating in fewer markets it could be argued there will be less demand for affiliates, thus compelling the affiliate sector to undergo its own process of consolidation. The process of consolidation through merger and acquisitions means the iGaming sector is left with fewer opera- tors. There are several knock-on effects of this process for affiliate marketing. First, there is the disruption caused if a software supplier withdraws their servic- es to certain markets when it is acquired by new owners. This can cause problems for an affiliate’s customers if they cannot use the software or play the games they prefer. They might wish to switch to a different operator. Affiliates might also have disruption to their business and in- creased costs if they have put time and effort into promoting a certain brand in a market which suddenly withdraws from that market when new owners “review the business” they have just acquired. A decreasing number of iGaming op- erators means those that remain are in a stronger negotiating position with af- filiates. If they choose, the operators could reduce the revenue share paid to affiliates in certain markets because they know that the affiliates do not have as much freedom of choice to work with other brands as they did in the past. As maturity and consolidation lead to larg- er, more risk-averse iGaming brands, there is also the possibility that these brands will wish to deal only with larger, more “corporate” affiliates and conduct greater due diligence on all their suppli- ers, these affiliates included. Naturally, this trend could put pressure on smaller affiliates as they are squeezed from the market because they cannot reach the scale and supposed corporate profes- sionalism required. Clearly, a business sector and individual companieswithinitcannotstayinthestart- up phase forever and avoid growing up. There are, indeed, some merits associated with maturing, not least that it brings greater status to the sector and makes it harder for governments to dismiss. But affiliates must recognize the growing pains associated with the consolidation process and the potential disruption it can cause to their clients, operations and ultimately their profitability. Lorien Pilling is Research Director for Global Betting and Gaming Consultants, Isle of Man. “For a sector that has been characterized by innovation, nimbleness and technological development, the idea of becoming more corporate does not sit comfortably. Being more corporate does not necessarily mean being better, more professional or more efficient.” Growing up is hard to do