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Economics of Internet Gambling

Page history last edited by Justin Mevorah 10 years, 8 months ago

  • Who is making the money (profitability)? How much?
  • Costs and cost “drivers” – what determines costs?
  • Revenue and revenue “drivers” – what affects revenue?
  • Impact of the internet – how does it affect cost and revenue?
  • how regulations and violations affect the business 

 

 

Who is making money? 

 

1.Software developers 

 

 

Cyberarts:

 

Est. Annual Sales: $2,000,000
Est. # of Employees: 20
Est. Empl. at Loc.: 20
Year Started: 2004

 

 

 

 2.Money Transferers

 

  • gamblers often fund accounts by credit or debit and cash out directly to the card.  In the US however, banks usually reject the use of the cards for online gambling.  As with any restriction, there are loopholes.   Electronic money services offer accounts where Online gambling money can be funded.  Payment by check and wire transfer is common as well.  
  • Sites that allow the user to transfer money over the internet such as Moneybookers and Neteller have discontinued use for U.S. residents.

 

Here is a graph showing what moneybookers chared taken from here.

MONEYBOOKERS FEES

MONTHLY SALES PRICE PER TRANSACTION
$0.00 - $3,000.00 2.9% + $0.29
$3,000.01 - $10,000.0 2.4% + $0.29
$10,000.01 - $100,000.00 2.1% +$0.29
> $100,000.00 1.9% + $0.29

 

 

3.Online casinos

 

  • The top earners listed on google finances are shown to be William Hill, ladbrokes and Partygaming.  Their  annual incomes are listed as 342.96, 309.84, 77.80 respectively (in millions). 
  • For comparison's sake, we will create a financial comparison of these three companies.
  • EBITDA=Revenue=Expenses (Excluding tax, interest, depreciation and amortization)

 

Comparison of revenues and profitability across the internet gambling industry in 2008

 

 

 

 

  William Hill Partygaming 888.com
Revenues £68m 472.9 U.S m 256.8 U.S m 
Ebitda £28m  133.3 U.S m 55.7 U.S  m 
Cost £40m 339.6 U.S m 201.1 U.S. m

 

 

 

 

what determines costs?

 

  • There are different costs and revenues for online gambling compared to a real casino.  In a real casino, you would have to employ security guards, a bartender, waitresses, entertainment 

 

     Costs, and what drives them 

  • Labor
  • Taxes
  • Rent
  • advertising 
  • money transfer

 

  • Taxes are dependent upon local government. Internet Gambling Laws Worldwide and State to State
  • Labor is not the same as in traditional casinos.  Where there were once card dealers, security guards, bartenders and valet parking, you will now find programmers etc...
  • rent is not as much of a cost factor in online casinos as it is with traditional casinos.  No prime real estate is necessary.
  • Advertising is much more essential in the world of online gambling.  There are many competitors within the same market, so differentiation is a must.  Online gambling houses spend millions of dollars sponsoring professional poker players and spreading advertisements across the web.
  • The online gambling industry is facillitated by the banking industry.  All money transfers must be done through a third party, and each transfer incurs a cost to the casino.

 

     Revenue and revenue drivers 

  • At its most basic level, revenue is driven by the popularity of the online casino.  It stands to reason that more users = more money
  • Additionally, it is essential that first time customers become repeat business.  A company spends a certain ammount of money in the process of aqcuiring a new customer (customer acquisition cost), so the hope is that each new customer will yield a substantial revenue.
  • Online casinos usually offer multiple gambling options in order to provide solutions for a greater demographic of potential gamblers.  It's not a far stretch of the imagination to think that someone who plays online poker might also be interested in sports betting or casino games.  So, an online casino will increase its customer retention rates by providing a greater selection of options. 

 

      Impact of the internet

 

  • How has the internet affected costs? Revenues? 
    • Costs 
      • fewer low level employees
      • cheaper rent
      • no property upkeep
      • no extra amenities
    • Revenue
      • Greater potential markets, as location is no longer a hinderance
      • Lower initial costs will attract more customers (meaning, you don't have to deposit $300.  some casinos have a minimum). 
      • Constantly expanding market - as more and more of the world's population gets broadband internet access, the number of potential online gamblers grows.
  • Online casinos function in the same way any other business does; it must be able to derive a revenue greater than its costs, in order to gain profit.  Yet, the structure of the business has changed, and there are new factors to consider. 
    • online casinos can appeal to a wider demographic compared to real live casinos
    • different types of people need to be hired as compared to live casinos

 


 

Economic profiles of companies within the industry

 

 

 

William Hill - 2008 Highlights

Net Revenue (PoundsM)

+6 %   -963.7m

to pounds 963.7m

 

Online Net Revenue 

(Pounds M) 

+13%

Retail Gross Win (Pounds M)

+7%

taken from- http://www.williamhillplc.co.uk/wmh/investors/   

 

William Hill - 2008

 

The U.S.A is denied access to Business presentations that William Hill offers here

William Hill shows this message when trying to view documents with information showing the businesses financial standings

 

"Denied 

Restricted country

 Due to applicable legal restrictions, electronic versions of these materials are not directed at or accessible by persons located in the United States, Canada, South Africa, New Zealand, Australia, Japan, Guam, US Virgin Islands, Puerto Rico, American Samoa, Midway Islands and Northern Mariana Islands. We apologise for any inconvenience this may cause".

 

An Interactive Business Presentation for William Hill showed:  

"The Competitive environment is fierce

-723 Casino sites

-485 Poker sites

-257 Bingo sites 

-388 sportsbook sites    Sportsbook constrained by technology

A sportsbook is a person or company that accepts bets"

 

A graph taken from a William Hill business presentation.  Here are three companies William hill owns

 

  William Hill Interactive Playtech Purchased Assets Pro Forma William Hill Online
Pounds (m) H1 2008A H1 2008A H12008A
Net Revenues 68 26 94
Cost of Sales (14) (3) (17)
Contribution 54 23 77
Margin% 79% 88% 82%
Marketing (9) (9) (18)
Other Costs (17) (6) (23)
Ebitda 28 8 36
Margin % 41% 31% 38%

 

 

 

 

  Partygaming Plc (PRTY) - London Stock Exchange Chart

 

PartyGaming PLC - claims to be the world's leading listed online gaming company.  It is on the London Stock Exchange. 

 

US$ Million 2008

Net Revenue

Poker  274.0

Casino^ 176.0

Sports Betting 18.0 

Bingo 4.9

Total Net Revenue 472.9 U.S. Million

Casino revenues and Clean EBITDA have been adjusted to exclude bingo which is now disclosed as a separate business segment.

  

Total Clean EBITDA   133.3  

 


 

 

Information on Ladbrokes Financial Statement for 2008-

 

     "The competitive envoronment for poker remains extremely challegning and, in the second week of February, we joined the microgaming network to improve the liquidity on higher stakes tables".

 

     "Poker net revenue fell 6.5% to 29.0 million pounds with the competitive environment continuing to affect both player numbers and yield". 

(Balance sheet can be found on pg. 17)

 

     "Undoubtedly, being very serious for a second, a clear benefit of knowing more about your

customers, who they are, what they bet on, when, how and of course which shops they use will

definitely stand us in good stead over the coming years. Because it is without question that

knowing more about your customers and using that information in a dynamic way will provide a

competitive edge". 

 

     "spreading out geographically is important here, plus an increasingly competitive environment for Poker

recruitment. This was partially offset by the lower cost of recruitment, which we enjoyed during

Euro 2008".

 

Here is Ladbrokes London Stock Exchange chart

 

 

 

 Information found on Ladbrokes Investors Transcript

 

(Operating margin = operating income/net sales   

Operating margins give analysts an idea of how much a company makes before interest and taxes on each dollar of sales.  It is best to look at the operating margin over time and to compare yearly and quarterly figures to its competitors.)

 

 888 Investor Relations Page 

 

888 2008 annual report- http://miranda.hemscott.com/ir/888/pdf/2008_Annual_Report.pdf 

 

2008 

Total Operating income US$ million up 21% -  263 mil

Total operating income casino up 15% -139 mil

Total operating income poker down 4% -79 mil 

Ebitda up 23% 56 mil

Net cash generated from operating activities up 22% 56 mil 

Real money registered customer accounts up 24% 5.8

 

888's Revenue year ended dec 31 2008 in $ Million

 

Casino 135.1
Poker 77.2
Emerging Offerings 44.5
Total Revenue 256.8
Other Operating Income 5.7
Total Operating Expenses 262.5
Operating Expenses 77.3
Research and development expenses 27.4
Selling and marketing expenses 80.2
Administrative expenses 22.0
Ebitda 55.7
Finance income and exchange gains 0.3
Depreciation and amprtisation (7.3)
Profit before tax from continuing operations 48.6
   

 

  


 

Sportingbet (these stats are taken from www.Sportingbetplc.com/pages/101/Results.stm

 

  • Operating profit up 35% to £10.1m at 23% of NGR
  • European sports revenue up 19%
  • Poker market remains tough - gaming revenue down 10%
  • Fully diluted EPS* up 36%
  • Live streaming driving further growth of in:play
  • Net cash of £27.3m 

 

Q2 2008/9     amounts wagered -402.2

                    Net gaming Revenue= 43.6

                    Costs                         (33.5)

                    Operating Profit          10.1

                    Tax                             (0.4)

 

Q2 operating profit up 35% to £10.1m

 H1 operating profits up 39% to £16.2m

 Q2 like for like revenue growth of 19%

Continued focus on sports, margin and efficient marketing

Strong start to Q3 

 

 

Inspired Gaming Group  PLC provider of Server Based Gaming systems and is the pioneer of Open Server Based Gaming (Open SBG).   Here is the Google Finance Page for Inspired Gaming Group PLC

 

  Q3 (Sep '08) Annual
(2008)
Annual
(TTM)
 
Net profit margin -47.45% -27.04% -27.04%  
Operating margin -42.56% -17.37% -17.37%  
EBITD margin - 25.24% 9.19%  
Return on average assets -21.91% -9.36% -9.36%  
Return on average equity -74.06% -25.77% -25.77%  
Employees 1,451 - -  

 

Cashcade - a leading force in the rapidly expanding interactive gaming market

Foxybingo.com and online bingo

and Getminted.com an online casino as well as a gambling news site 

They now own Think bingo and Bingo Scotland

Cashcade has a blog on the gambling industry as well

 

  • According to Global Betting and Gaming Consultants the value of the online bingo market will be worth $1Billion by 2010
  • In the UK alone around 8000 players online play bingo every day according to tracking software bingotrends
  • Player numbers continue to rise with over 150,000 new players joining in the first quarter 2008

 

Leisure and Gaming Plc is engaged in the network of licensed betting outlets and interactive licensed betting, and gaming operations over the internet. 

 

Q4 (Dec '08) Annual
(2008)
Annual
(TTM)
 
Net profit margin -7.07% 2.79% 2.79%  
Operating margin 1.01% 6.98% 6.98%  
EBITD margin - - -  
Return on average assets -6.15% 2.61% 2.61%  
Return on average equity -9.04% 3.93% 3.93%  
Employees 35 - -

  

  


     

  • The Business is projected to increase rapidly and reach a peak by the year 2015.  It is said to still be in its infant stage.  LINK

 

 


 

 

 

How regulations and violations affect the business

 

William Hill shows this message when trying to view documents with information showing the businesses financial standings

 

Denied 

Restricted country

 

Due to applicable legal restrictions, electronic versions of these materials are not directed at or accessible by persons located in the United States, Canada, South Africa, New Zealand, Australia, Japan, Guam, US Virgin Islands, Puerto Rico, American Samoa, Midway Islands and Northern Mariana Islands. We apologise for any inconvenience this may cause. 

 

   What can be done to limit Internet gambling?

  • Reinstate the IGPA- Legislators cant target individual gambling patrons while giving exceptions to special interest groups
  • Enhanced enforcement mechanisms against credit card providers and transfer agents
  • Enhanced enforcement mechanisms against ISPs (Internet service provider)
  • Reduced tax rate on winnings from regulated gambling environments.  This would encourage individuals to partake in gambling away from the internet.  

 


More Sources:

 

An Overview Of The Regulations

 

 Economic Analysis Of Internet Gambling

 

Trade Agreement Violations

 

The Feasibility of regulating internet gambling on the internet

 

Smoking Ban article 

    

 

 

 

 

 

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Comments (15)

JKoziol said

at 2:01 am on Apr 15, 2009

Here is an interesting article on the economic role of the industry in the US

http://jobfunctions.bnet.com/abstract.aspx?docid=119871

David Seabrook said

at 2:56 am on Apr 28, 2009

Put links on main pages - they don't work in comments

Adam Steinberg said

at 3:34 am on May 4, 2009

financial reports for sportingbet.com - http://www.sportingbetplc.com/pages/101/Results.stm

Adam Steinberg said

at 3:41 am on May 4, 2009

use the financial reports to illustrate analysis of revenue, costs, and productivity. create a table so that you can use a continuous format to present multiple companies.

Adam Steinberg said

at 3:50 am on May 4, 2009

mention tax as a cost. tax dollars spent will be available on financial reports.

Adam Steinberg said

at 3:52 am on May 4, 2009

where does sportingbet.com operate? how does that affect their tax costs?

Adam Steinberg said

at 3:53 am on May 4, 2009

sportingbet google finances - http://www.google.com/finance?q=sportingbet

Adam Steinberg said

at 3:54 am on May 4, 2009

we struck gold - the sportingbet google finance page links to other similar companies. we can create comparisons based upon this graphical information.

Adam Steinberg said

at 4:02 am on May 4, 2009

http://www.google.com/finance?q=LON:INGG is another good example. it is comparable as an online casino.

Adam Steinberg said

at 4:06 am on May 4, 2009

google finances for the casino and gambling industry as a whole http://www.google.com/finance?catid=uk-60427371

Adam Steinberg said

at 4:08 am on May 4, 2009

Adam Steinberg said

at 4:09 am on May 4, 2009

http://www.google.com/finance?q=LON:PRTY - partygaming.com google finances page.

Adam Steinberg said

at 4:17 am on May 4, 2009

here's another good example to draw numbers from - william hill - http://www.williamhillplc.co.uk/wmh/investors/

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