We are excited to introduce the iGaming NEXT INSiDE series, a quarterly analysis of trends and developments from right across the entire iGaming ecosystem.
This feature provides insight from several senior executives and offers a pulse check on the state of the overall market.
Testing times
Recession fears have gripped the iGaming industry as cash-rich companies have pulled back spending in preparation for a potential economic downturn.
Several companies have had to lay off employees in order to cut costs, while the collapse of Genesis Global has caused ripples throughout the sector.
IPO volumes have decreased, and SPAC listings have been cancelled as the cost of capital has risen, putting pressure on near-term profitability.
Many insist the party isn’t over, however, and executives who spoke to iGaming NEXT were tentatively optimistic about their ability to weather the storm.
The reality is the industry has never been tested by a true recession.
Experts have noted that during the global financial crisis of 2008/2009, the iGaming industry was seen as recession-proof because of the robust parallel growth that emerged from players shifting from land-based to online gaming.
As the current economic downturn unfolds, the question remains: how severe will the impact be this time?
Impact of inflation
Untamed inflation has emerged as a top concern for the iGaming industry.
In October 2022, H2 Gambling Capital said it expects the total global gross win in 2023 to reach around $483bn.
However, H2 noted that due to inflation, revenue in real terms for 2023 is set to be only 4.2% higher than what was generated in 1998.
This lack of growth in real terms is a significant concern for both operators and investors, making market share shifts increasingly critical.
Competition from dot com
Meanwhile, several operators raised alarm over the continued growth of the black market for online gambling.
Jesper Svensson, CEO of Betsson, expressed his concern earlier this year, stating the black market has been growing rapidly in some markets over the last few years.
As more markets tighten local regulations, non-licensed operators are increasingly stepping into locally licensed markets and taking business away from licensed operators, he said.
While the reasons for this trend may vary from market to market, it is generally driven by a switch towards stricter regulations and limitations on player activity, he added.
Sam Brown, CCO at Malta-based operator Rootz, agreed it was important to highlight the growing black market for online gambling.
Talking to iGaming NEXT, Brown said the industry is almost evenly split between operators who hold local licences and those who operate in the grey or black market. He included dot com operators with Curaçao-licensed iGaming sites, as well as those with no licence at all.
Rootz COO Sam Brown on when the going is good: “You know that there are parts of your business that you could change or tweak but the fight for market share and growth means you tend to take your eye off that.”
“Running multiple regulated jurisdictions is obviously much more operationally and cost-intensive compared to operating with just a single licence,” he said.
He anticipates that in 2023, there will be a sharper distinction between operators who strive to comply with regulations by obtaining legitimate licences and those who persist in operating as illicit players outside of the regulated market.
Defending the bottom-line
The biggest challenge on everybody’s mind is the global economic situation, according to Brown.
He added that during downturns, companies typically focus on operational efficiency, while during times of high revenue growth, businesses tend to overlook areas that could be improved.
“You know that there are parts of your business that you could change or tweak but the fight for market share and growth means you tend to take your eye off that,” he said.
Going forward, Brown expects companies to defend their bottom-line more fiercely.
As a result, he anticipates a sharper focus toward cost efficiency, as well as investments in AI and other tools to enhance operational efficiency.
Additionally, he believes affiliates may also experience pressure and companies may reduce marketing spending in the short term.
The future of affiliates
Meanwhile, the affiliate industry is experiencing its own transformation, partly as a result of massive advancements in AI.
The advent of ChatGPT and similar softwares means that content production has become a lot cheaper.
“Companies can now manage their affiliate sites with much smaller teams compared to before,” Levon Nikoghosyan, CEO of iGaming affiliate directory AffPapa, told iGaming NEXT.
With the advancements in technology, it raises the question of whether operators will attempt to generate a larger share of their traffic internally, without relying on affiliates.
On average, affiliate traffic typically constitutes between 30% and 40% of an operator’s total traffic. However, a general rule of thumb is that the larger the operator, the lower its reliance on affiliates.
AffPapa CEO Levon Nikoghosyan: “On average, eight out of 10 casinos are shut down within the first six months of their operations.”
According to Nikoghosyan, attempts by operators to completely generate their own traffic have been largely unsuccessful, especially for newer brands.
“We know that on average, eight out of 10 casinos are shut down within the first six months of their operations,” he added.
Running a successful casino requires more than just a platform and brand; operators must manage numerous other factors.
Therefore, he believes affiliates will continue to play a critical role in the iGaming ecosystem as they allow operators to concentrate on their core business.
However, in the affiliate world, there are new brands challenging the status quo. AffPapa itself is a good example.
Established in 2020 by a group of friends with the aim of challenging the dominance of big affiliate networks, the company introduced a subscription-based platform model, which provides operators with access to listed affiliates in return for a fixed monthly fee.
Nikoghosyan warned that squeezing affiliates or reneging on payment agreements is not an option. “It’s a small industry and word of dishonest operators goes around quickly,” he added.
Costly game certification
Game studios are facing a challenging time in the gaming industry due to the increasing need for game certifications in various markets.
This has become a “necessary but expensive part of the business”, according to Andrew Crosby, CCO at Kalamba Games.
Income from regulated markets is a valuable asset for game studios that are looking to grow their business and eventually exit, he added.
He highlighted that game operators now face longer launch times due to the increasingly stringent regulatory requirements in the industry.
The certification process, which involves legal, compliance, and technical processes, can take between six and nine months, resulting in delays in going live with new games.
“Moreover, thus far no one has really challenged the game certification process itself,” he said.
However, he believes there are several companies gearing up to challenge the dominance of the more established testing labs and certification providers.
He expects that they will bring down the cost of certification in the longer term.
Growth ahead
Across the board, all experts expressed optimism about the prospects of the industry.
The gaming industry is growing, with markets in Asia including Thailand, Japan, Indonesia, and Vietnam all showing significant growth.
Africa is also a growth market, with Lagos, Nigeria, expected to become the world’s largest city by the end of the century.
“Despite the population shrinkage in regulated markets in Europe,” Crosby said, “I think there are still a lot of opportunities for growth, especially in the emerging markets.”
Positive change
Recessions are an inevitable and necessary part of the economic cycle.
History has shown that what goes down eventually comes back up, although the road to recovery may be a bumpy one.
Difficult times can inspire companies to become leaner, more agile, and more willing to innovate.
For an industry that is often set in its ways, a recession isn’t all bad news as it can trigger positive change.