By: Mauro De Fabritiis

The world economy is currently under one of the biggest threats in recent history. The full impact of COVID-19 is still hard to estimate; and the gaming industry is, surely, among the affected sectors. Looking specifically at Spain, after several weeks of confinement, it appears that the COVID-19 figures are slowly improving and that we are entering the downward-sloping side of the curve. This means that the government is preparing a series of actions to “go back to normal” or, at least, to end the current lockdown, even if, for the moment, there is no concrete timetable.

Factors impacting the market

In this uncertain scenario, the short and medium-term evolution of the market is unclear and will depend on the following factors:

The unfolding of the ongoing COVID-19 outbreak: Countries like Spain could be “back to normal” somewhere between July-August but the problem now is what will be considered “normal” for the foreseeable future.

Future outbreaks and their severity: There is much uncertainty regarding potential future outbreaks, especially those that could occur during the next winter. We cannot discard a scenario where a new outbreak will force governments to institute confinement measures for even longer periods than we have already seen.

The measures instituted by governments: Considering the previous two points, there will be measures that will remain in place for longer periods. In fact, in some scenarios, the Spanish government might not allow sports and high-attendance events until late 2020. This will also have an effect, to varying degrees, on bars and, more especially, retail gaming venues.

Social changes: Apart from the direct impact of COVID-19 and the measures that governments will institute in response, current pandemic will also have an impact on day-to-day habits of the population. It is clear that some time will be needed before a large part of the population will again consider going to public venues, stadiums, concerts, and similar events.

The acceleration of regulatory changes and restrictions: Regulators across Europe are speeding up the introduction of restrictions on gambling advertising. In the case of Spain, the government has introduced a temporary ban – with some minor exceptions – on gambling advertising for the duration of the state of alarm.

It is too soon to provide a full estimate of the impact of the virus on the Spanish gambling market due to the uncertainty surrounding the future the development of the outbreak. It will certainly have a heavy impact on land-based operators due to the closing of all gambling venues. For online operators, future developments will be affected, apart from the COVID-19 outbreak itself, by the advertising restrictions that were introduced by the Spanish Government for the duration of the emergency.

We will see an inevitable decrease in sport betting due to the almost total absence of sports events, while casino and poker are expected to grow but not sufficient to compensate for the decrease in betting volume in 2020.

2020 and beyond

Apart from the short-term impact of the COVID-19 and the lockdown, we have identified some general trends for the rest of 2020 and, probably, the medium-term development of the gaming market in general:

A severe decrease in retail gaming: The tight mobility restrictions and the closure of all non-essential venues has paralyzed retail gaming operations that still need to face an important fixed-costs structure without revenues. This is likely to have a significant impact, especially on small/medium operators that may not be able to reopen their business. Big operators and companies that somehow managed to prepare for the crisis will survive, even though their annual revenues for 2020 will be severely impacted. Additionally, they will face an uncertain future, as new outbreaks may occur again.

The short-term uncertainty for betting: As betting is obviously dependent on the quantity and quality of sport events, the current lack of relevant events is having a huge impact on the betting industry. There is a much uncertainty regarding the resumption of canceled events and competitions in the short-term; and even if events will resume, it remains to be seen whether public attendance will be allowed. Across Europe, authorities are considering normalization scenarios with severe attendance restrictions for big events, which will have an unpredictable impact.

Accelerated growth of online gaming: As a matter of fact, online gaming is the fastest growing segment in the gaming industry and COVID-19 will most likely accelerate this trend. In the online segment, we predict the following developments:

  • The prevalence of mobile: Even under current circumstances, with people confined at home, mobile is still the preferred channel to access the online offer; and, in general, consume any kind of online content and entertainment. For certain operators, mobile already generates more than 80% of their total turnover. This trend is expected to further accelerate in the coming years.
  • The (possible) surge of esports betting: For several years now, esports has been one of the promises for the industry, but the reality is that betting figures are still very low compared to offline sports. In this sense, the current situation of lack of relevant sports events offers an opportunity to operators to promote esports events, a category that is growing by double digits every year and that currently appeals to one of the broadest and most attractive audiences.
  • The increase of virtual betting: Traditionally a niche product, virtual betting is now an established vertical that is very attractive to certain customers under current conditions. In recent weeks, there has been a significant interest from operators in launching or improving their virtual betting offer.
  • The (temporary) resurge of poker: With most people now staying at home, poker is among the products that benefited most. In fact, some poker operators are now seeing record figures in active players. It is still too soon to say whether this will only be a temporary resurgence for a product that was facing a global decrease or that this will herald a new rebirth for poker.
  • The continuing growth of casino: The casino vertical continues to grow, in particular due to the good performance of live gaming products. Speaking specifically of Spain, we expect that, in the short term, the regulator will start allowing the offering of live black jack, a product that certain customers are eager to enjoy.

Conclusions

Even in this uncertain landscape, we are optimistic about the prospects of the online gaming industry. We think it will ultimately benefit from the COVID-19 outbreak, even if there are important short-term threats that will have a permanent effect on the industry.

Given the predicted trends, the assumed return to “normal” requires a rethinking of the business models to face the emergency.

For land-based operators, redefining of the layout of the shops to be “COVID-19-proof” and identifying technological solutions to automate the sales processes and optimize management costs, will be the main drivers of future investments. In general, sustainable gaming, favored by a digitalization of the physical offer, will become the new paradigm for businesses that will allow the traditional channels to survive and succeed with an omnichannel (and safe) experience.

For retail operators that already have an effective online presence, a specific effort is required to redirect a relevant part of their resources to stimulate the growth of their online channel. In most cases this was already being done, but this effort now needs to be accelerated to strengthen the business in the short term, while not losing sight of the medium-long term vision.

For online operators, the need will arise to respond to regulatory restrictions by adapting strategies and business models. For some companies, it will be necessary to re-evaluate hypotheses of internationalization in order to obtain the necessary economy of scale for the recovery of investments.

The increase in regulatory costs and regulatory constraints on advertising are creating the basis for a concentration of the market in the hands of a few medium-large operators and the exit of medium-small ones with unclear positioning. A significant increase in M&A operations is expected during the next 2-3 years. Speaking specifically of Spain where there are more than 80 licensed operators (of which more than 30 received their license in 2019 as part of the last tender), we expect a very active 2020 and 2021 in terms of M&A activities.

There is room for the Spanish gaming industry to surf the wave of the ongoing COVID-19 emergency, but concrete support from the Spanish government is urgently needed or, at the very least, the government should refrain from implementing unnecessary measures that will harm the licensed industry and will only benefit illegal operators. This means that reasonable, as well as effective advertising rules should be implemented that allow customers to identify the legal offering, while at the same time stimulating operators to promote responsible gaming behaviors in a controlled and safe-guarded environment. This is the only way to allow the restart of the market, avoid a collapse, and, in the medium term, ensure that a sustainable gaming industry is built in Spain.

Mauro De Fabritiis
Founder of MDF Partners
mauro@mdfpartners.com