Consolidation of industry: Too big to differ?

Betting Business - Consolidation of industry ICE VOX
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The gambling industry is divided on the question of whether consolidation will be positive for consumers and product innovation according to a poll at ICE VOX.

Should we expect a consolidating gambling industry to become more or less innovative? Most people err on the side of the latter, but it’s a question that divides the industry.

The economist Joseph Schumpeter predicted that shareholder capitalism would inevitably replace buccaneering entrepreneurs with cautious boardroom bureaucrats, thus diminishing the animal spirit that drives innovation. It’s an old idea, but regarding gaming industry consolidation, it’s a concern that is starting to haunt the market’s investors executives and innovators in equal measure.

It appears most are inclined towards pessimism. When asked whether consolidation will be positive for the consumer experience and product innovation, only ten percent of those polled by ICE VOX replied ‘yes’. Almost half, 45 percent, said ‘no’, and another 45 percent said ‘maybe.’

“I’d agree with the argument that some firms have been slack on true innovation, because they’ve relied on buying up rivals or competitors to grow,” says Lorien Pilling, director at Global Betting and Gaming Consultants, speaking separately but perhaps the median of the VOX consensus.

Although, the industry can be excused for this, he qualifies, in the face of rising taxes and regulations, “which will always impact on what you can offer and what will be profitable”

“There’s no point innovating if it loses you money,” Pilling adds. “Certainly in Europe innovation has been curtailed by regulation and tax.”

Often incentivised by the concerns of their shareholders, corporates have sought to protect market share through cost cutting synergies: merging with rivals that reduce overlapping expenditures, rather than make risky investments in new concepts or technologies.

“Certainly the likes of Ladbrokes and Coral are merging for this reason, but has anything new come out that changes the way gamblers interact with the sites that they use?” Pilling asks. “I’d argue it’s been fairly limited.”

Kristof Fahy, chief customer officer at the newly merged Ladbrokes Coral knows all too well the advantages of tie-ups with rivals, as well as how time and cash consuming it can be to make them work. While the results might not appear revolutionary, streamlining services is crucial to keeping customers onboard.

“We saw things that the Coral brand does well and things that the Ladbrokes brand does well, so we’re trying to create the best of both worlds,” he says.

Fahy urges boards however, to be mindful of the Schumpeterian trap. There are times when bureaucracy should step aside, he says, and leave space for innovators to flourish.

“We have some really smart people at Ladbrokes Coral,” Fahy adds. “Part of our role in the exec team is to clear the way for these smart people to just get on. No disrespect to steering groups and project managers, but as soon as you have those people involved, innovation is dead. Ideas are sat there in your business right now. Innovation starts internally but you have to clear the way for it to happen.”

Ed Birkin from Ignite Research feels this period of risk-aversion is necessarily temporary. Cost cutting strategies are vital to adapt to these new restrictions and tighter margins, he argues, and there is likely to be a phase where firms sideline innovation to focus on integration. But there is a “misconception that consolidation reduces competitive pressure,” and once integrated, firms should be able to maintain their margins and still innovate.

Indeed, they must. If even the biggest brands fail to keep differentiating their products, they will lose out to their competitors. “It’s all about getting participants onto your platform as opposed to somebody else’s. The cost of capture is, or can be quite high.” says Tim Stocks, managing director at merchant bank, James Stocks and Co.

“If you’ve got a more differentiated product, people will come onto your site. And the new thing only has a short shelf life, so you’ve got to be keeping people that you’ve attracted onto the site, with new ideas and new excitement.”

For Stocks, the imperative to differentiate means that if larger firms are less capable of doing it themselves, they will look to acquire those that can. And while scale dominates, small firms will struggle to survive on their own, so the mutual incentives to acquire or be acquired will heighten.

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