The Future of Online Gambling - February 2010

Internet gambling is the elephant in the room when it comes to discussing the future of the British gambling industry as a whole. This is because it won’t be long before it potentially brings the land based industry to its knees, such will be the appeal of the product that it will make it difficult for people to leave their houses to gamble. However, as with the mistaken forecasts of the death of cinema when television and then VCRs and DVDs were invented, the future need not be overly catastrophic for land based venues. If they are allowed to adapt their offer and emphasise the thing which makes them different; physical social interaction, then they can compete on level terms with online and the future can be bright for both the real and virtual worlds of gambling.

Having said that, the short to mid-term future of internet gambling is actually mostly negative in this author’s view; increases in taxation, restrictions in the technology and constraints due to the current business model all make for a bleak outlook. It is only in the mid to long term future, when the next phase of internet gambling arrives that the future is far brighter and we enter a world of endless possibilities based on high bandwidth interactive streaming video.

But back to the short-term, the first issue that the UK online industry will have to address is taxation. The present ludicrous situation where firms based in the UK have to pay 15% remote gaming duty on top of all the other taxes such as corporation tax, VAT and NIC etc. that can make a total tax impact in excess of 50%. While those offshore, in ‘white list’ jurisdictions, have unfettered access to the UK population and can only be paying 1-5% in total taxes due to far more amenable hosts.

This market failure is arguably due to Gordon Brown’s ideological disagreement with the Blair-ite dream of the UK as a centre for well regulated internet gambling. By setting the remote gaming duty so uncompetitively high, Gordon was willing to forego the jobs and taxes that making the UK the centre of the internet gambling world would have brought and instead basically forced all of Britain’s gambling talent offshore to enrich the economies of many a tiny island. While this moralistic stand was affordable in the good times of the past, surely this can’t be so in the economic straightened times ahead.

Alistair Darling has already spoken to members of the industry about the Italian model of taxing internet gambling and it’s quite a good bet that either he, or more likely George Osborne, will start considering ways of addressing the tax imbalance. Unfortunately, we won’t be seeing a reduction in tax rates in the future. More than likely and this article’s first prediction for the future, is that we will see a reorganisation of the taxation and licensing system for online. We will see a system that will only allow companies (either off or onshore) to advertise in the UK if they pay a similar (high) rate of tax. This will probably be dressed up in terms of protecting problem gamblers but will be there to raise revenue and end the competitive advantage of low tax jurisdictions.

The next issue for internet gambling has been getting a drip feed of publicity recently and that is the growing realisation that Britain’s ADSL network is constraining the development of the internet and consequently the development of internet gambling. A recent Cisco report puts the UK in 31st place of 66 countries when tested on download speeds, upload speeds and latency, only making it up to 25th place when broadband penetration is factored in.

Quite simply, the technology of putting an internet signal through existing copper telephone wires is severely limited in what it can achieve and even at ADSL2+ (the latest technology) download speeds will only ever be up to (with the emphasis on up to) 20 mbps. The country needs a fibre optic network which will allow speeds of 100 mbps. Not just for our gambling industry but for every industry as we are all now web enabled. Unfortunately the key movers in this area are Virgin Media and British Telecom, one a heavily indebted conglomeration of different cable TV networks patched together with sticky tape and the other, a plodding brontosaur of an ex-state monopoly provider of yesterday’s technology. Neither, it would appear, has the funds to make the huge investment needed to make the leap to the next stage of internet development. The government hopes that new market entrants will step in but who has ever successfully made money (the first time around) from investing in infrastructure – surely a role for government?

With download speeds of 100mps (still one tenth of the speed South Korea will have in 2012) the UK online gambling industry will be able to fully embrace the potential of interactive streaming video; this article’s forecast of where the future is. But before we can discuss this we must consider the third hurdle for the industry, the current business model, which can only be changed by the jump to a fibre optic network.

Internet gambling offers, at the moment, a generic product; be it poker, casino games or sports betting, the offer is basically the same whichever site you visit. This is because the games are what they are, the baize on the table is always green and a bet on Manchester United to win the cup is the same whoever offers it, the only difference is price. This universal offer only gets exacerbated with the growing dominance of certain Israeli software providers; the end result is that the customer gets very little differentiation.

A lack of differentiation is why the online gambling business model is so depressing at the moment. Without differentiation, customers become price driven and in our industry this means they become ‘ladies of little virtue’, taking one sign up bonus after another, spending it then moving on. Customer life cycles are counted in months and customer lifetime value is usually not much more than two or three times what it costs acquire them. As profit margins decline and customer acquisition costs increase, so the industry moves to consolidate, as only the biggest survive when it’s all about volume – such is the meaning of grind and an ever increasing race to the bottom.

This author believes that the salvation of the online gambling industry will be when fibre optic cable networks allow large download speeds. Then we will lose the constraints of our current 2D software giving 1980’s style graphics which provide our customers with little more than a transactional experience. With these bigger pipes we can broadcast HD television quality pictures into our customers’ front rooms, but this being an internet based platform, the customer can also interact with the operator and have a close-to real life experience.

It will be the experience which makes for differentiation and from that we can redesign the business model for online gambling. If my customer wants to gamble on a computer generated simulation of gladiatorial combat, with a beautiful croupier dressed as a slave girl, who converses with him by name, then that customer will be stay with me and pay a premium. In the same way, one customer will want to play poker where he can actually see all the faces of his opponents and goad them in real-time. Augmented reality will mean from the comfort of his own front room he can stare across a Vegas poker table, watch his opponents’ faces and see the computers analysis of their last 100 hands played. Big pipes mean the freedom to develop gambling experiences designed for individuals and that means a bespoke service they will pay for.

No article on the future of online gambling could be complete without some commentary on mobile gambling. This is a product that has so far been constrained by technology; data speeds, screen sizes and phone capabilities. The short term future does now look bright, especially as we seem to be moving to a model of using Wi-Fi or possibly Wi-Max for our mobile data needs in towns and the mobile telephone network once out of town. Whether the devices that use this are phone like, net books or some futuristic wearable device is almost immaterial, the proposition remains the same; with low data speeds the user experience is generic and the business model negative, with high speeds the experience becomes where the value is.


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