Barred in US; set to blossom in UK

The world's leading online gambling companies may be based in the UK and Gibraltar, but until now, the bulk of their revenues have come from the US.

However, the Unlawful Internet Gambling Enforcement Act, rushed through the US Senate in a shock move late last month, is set to make it illegal for US banks and credit-card firms to process online gambling payments from the US, effectively outlawing the industry.

While the legality of online gaming in the US had long been regarded as a grey area, the Act, which is expected to be signed into law within weeks, is the first piece of federal legislation to deal directly with the practice. Its introduction follows a crackdown on gambling website operators and their executives by a number of US states.

The stakes are high. PartyGaming, the world's biggest online gaming company, derived 84% of its $977.7m (£518m) revenue last year from the US. Similarly, in the six months to 30 June, 52% of 888.com's $163.5m (£86.6m) net gaming revenue came from US punters. And according to Sportingbet, whose brands include Paradise Poker, 54% of its revenue in its latest quarter came from the Americas.

Investors who had gambled on the US authorities' lack of intervention have abandoned the sector; in the immediate aftermath of the Act being passed, with most operators suspending their US operations, an estimated £4bn was wiped off the value of online gambling firms' shares, their price falling more than 50%.

While operators consider their legal options in the US, they will also look at how to respond in the UK. Several sites said it was too early to say whether their UK marketing budgets would increase or decrease in response to the changed market. A spokesman for 888.com says the legislation will reduce its net game revenue, but 'what impact that will have on marketing we don't yet know'.

Gambling is already a major online advertiser in the UK, so whether operators choose to up the ante or rein in their investment, ad prices could be affected. Given that TV advertising was instrumental in the success of their US businesses, a loosening of the rules here next year could prompt some high rollers to enter the beleaguered UK broadcast advertising market.

Although some gaming companies have previously expressed caution about advertising on UK TV, the loss of the US market may force their hand. In its annual report, PartyGaming said TV advertising in the US 'has proved one of the most effective methods to drive new player sign-ups and has become the group's preferred marketing tool'.

Since they suffer from high levels of churn, as players find it easy to leave a virtual casino and join another, gambling websites have invested heavily in marketing to recruit players. Globally, Sportingbet's nine-month marketing budget is £59.8, while in 2005 Party-Gaming spent $100m (£53m). In the first half of 2006, 888.com spent £37.7m on customer acquisition.

The situation in the US will not affect every firm equally; while it has been a lucrative territory, several operators were already experiencing their fastest growth in new players elsewhere.

'We have been trying to diversify in Europe and Asia. That will continue as they will be our main growth areas,' says the 888.com spokesman. 'The UK is (also) a key marketing focus and will continue to be so.'

In August, 5,751,000 unique UK users visited gambling and sweepstakes sites - 23% of all people who surfed the web that month, according to Nielsen//Net-Ratings. Yet the UK figure, while high, pales in comparison with the 34.9m who clicked on a gaming site from the US.

Gambling and lottery firms ran 466 campaigns on UK sites in August, second only to e-commerce sites. In the year to 31 August, 888.com spent £1.9m on internet advertising, according to Nielsen Media Research (NMR).

'Gambling sites are big players in online advertising,' says Guy Phillipson, chief executive of the Internet Advertising Bureau. 'Whatever happens in the US, they still have business in the UK.'

Alex Burmaster, European internet analyst at Nielsen//NetRatings, expects the sites to shift focus and go after Western European markets 'with great gusto'.

The online casino and poker industry spent £8.4m on non-broadcast media in the year to 31 August, according to NMR. But offline spend is poised to grow from September 2007, when changes to the Gaming Act will allow broadcast advertising. Ofcom only allows gambling firms to sponsor TV shows at present.

Despite the recent crisis, the online gambling sector is valued at £6.4bn and spends a greater portion of its income on marketing than most. Whatever its response to the change in US law, it will be felt keenly by all media.

DATA FILE - UK GAMING'S SHARE OF ONLINE ADVERTISING

Number % of all
online
advertising
activity
Internet campaigns 466 6
Advertisers 171 5
Banner ads 1904 9
Ad impressions 540bn 5

Source: Nielsen//NetRatings
Figures for online advertising by UK casinos, lotteries and bookmakers,
August 2006

This article was first published on Marketing