Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Stefano, could you please give us a brief introduction to your background?

I got into the gambling industry 12 years ago. After completing university, I worked for Politecnico di Milano, the engineering university in Milan, where I undertook research into the Italian online gaming market which was booming at that time. After three years of research, I had the opportunity to join Paddy Power, who were looking into launching the startup in Italy. I am proud to have been the third hire on that startup, which went from zero to 70 people in a few years, and was a leader in the market for several months, at that time. It was a great startup experience and I remember buying an IKEA kitchen for our office on a Saturday morning.

From there, I took on different roles, almost immediately taking a commercial direction as I wanted to own the P&L. Initially we launched poker and bingo products after which my portfolio included other gaming products. When we merged with Betfair, I managed their gaming products. Four years ago, I moved to London to further expand into other regulated jurisdictions where we do business. This has been my trajectory in the industry.

Today you are effectively responsible for managing the gaming P&L?

That is correct and gaming includes all non-traditional sportsbook or exchange.

But you're managing the European countries outside of the UK?

I am primarily focused on Italy, Spain, Romania, Brazil, Denmark and Sweden. We also operate in many countries using the English language, but with a smaller focus.

What is the rough revenue split between live casino, slots and bingo?

Approximately 40% of my P&L is slots, 30% live casino, 20% traditional table games such as blackjack and roulette and the remaining 10% is poker, bingo and other products. This split differs between our competitors because that depends on which product you lead with. Poker Stars is much bigger on poker than all the other products, but that is specifically our split.

What is the structure of your tech stack?

We have our own proprietary gamer accounts where all customer data is stored. We also have our own platform covering the sportsbook and exchange. Those two products drive the Betfair brand proposition but we also integrate several suppliers on the gaming side. We have long-lasting relationships with Playtech, Evolution, Red Tiger and several others. The top operators in the market integrate with over 50 different suppliers.

So you are supplier agnostic and simply want the best games on your platform?

In the end, we want to offer the best possible experience to our customers. Historically, it was possible to have exclusive agreements withspecific suppliers but all operators want is to have a broader portfolio so they can appeal to more customers. We ensure all their favorite games are available on our website or mobile app.

Do you have your own proprietary player account manager platform similar to Playtech's IMS platform?

We use that for some of our products like sportsbook and exchange but also use a proprietary platform for a subset of our products. Playtech provides the very powerful IMS platform which offers bonusing and management of the customer journey.

So you use the IMS platform for gaming but not for sports and exchange?

We share the game account and the management of the customer's data but when it comes to gaming activities, the two worlds are somewhat divided.

When I am on Betfair's sportsbook, I get bonuses from the proprietary system which then integrates with IMS which is mainly used for gaming player management?

The sportsbook operates exactly like that. Other suppliers offer specific bonuses or free bets which we also use. There is integration between our platform accounts and those products. Part of it is proprietary but others are third parties which we leverage to incentivize our customers.

Why do you outsource the gaming player account management system to IMS when you in-house the sportsbook and exchange?

Playtech's IMS is a very powerful tool developed over many years and cannot easily be replaced because many of our campaigns are built around it. Replicating those capabilities is an extremely complex task for any operator. We are developing something similar which we use for some suppliers but it will be a while before we achieve the level of sophistication or complexity that Playtech offers. A company our size wants to completely own the bonusing system but that will take time and ultimately, we need to choose whether to invest in that or other areas of the business.

Is it hard to switch out of that IMS system and build your own?

It is not difficult to switch it off but it is challenging to build something with the performance, capabilities and features of a Playtech IMS.

Why is bonusing so crucial?

It is one of the characteristics of our industry. Opening a game account with different operators is a relatively simple activity. There is no barrier to move across different operators and, therefore, we and our competitors keep bonusing customers to acquire them. This is industry standard and you can build your sign-up bonus using different mechanics. We get value from our customers and bonusing is a tool to reward them and retain them on our platform. We use it to build customer loyalty with our brand and it is an unavoidable tax on all industry operators.

It’s also very frequent bonusing and promotions.

A key element of our industry is how frequently we interact with our customers. Many of our customers are active on a daily basis, playing or betting small amounts. Those who are engaged in this form of entertainment tend to come on board and interact frequently. That is also why the bonus is such an important element because you can incentivize or reward the loyalty and frequency of their visits. Both Netflix and Amazon Prime are examples of businesses who have frequent interaction with their customers.

Does Playtech's IMS enable you to drive those promotions?

IMS is a big component but we also have our own proprietary platform.

Do they have to be linked because after I play sportsbook, I can then play gaming slots which needs to be linked to my account?

Bonusing on sportsbook and exchange resides on our platform whereas for the Playtech subset of games, we use IMS. Other suppliers do not have as strong a platform as Playtech, therefore, we have had to build our own to compensate for that.

When playing an Evolution game, would I get a bonus from you or Playtech?

For Evolution it would be from us; definitely not from Playtech. The Playtech IMS system only works for their own games as it is basically ring fenced in that environment. We all face this challenge when building promotions which we want to scale across our game offering.

In the absence of their own bonus machine to link offline and online, perhaps the Playtech IMS is a good solution for US land casinos to get up and running quickly?

I do not know how developed the offline capabilities of the Playtech system are. We might touch on that for Evolution and NetEnt where, having a platform allowing land-based operators to easily transfer their business online on a common platform, is a key component. I am sure that some of those suppliers offer that but I am not an expert on land-based. Having a common supplier for both the offline and online world would definitely be an advantage.

Does NetEnt have their own bonus machine?

Almost all suppliers have some sort of bonus features. Both NetEnt and Evolution have one but the complexity and depth of development which those platforms offer varies widely. Suppliers have their own strengths and weaknesses. Playtech's strength is in their IMS platform whereas Evolution and NetEnt offer higher quality games rather than features or bonus systems.

Do you think suppliers are at a disadvantage if they don’t have a strong bonusing system integrated into the product?

It depends which other platforms those operators use. If they have developed their own powerful bonusing system then that is not necessarily a big disadvantage. If they are able to integrate Evolution and NetEnt or other suppliers on their own bonusing system and it is advanced enough to offer different bonus mechanics to the customers, it is not necessarily a disadvantage. Integrating Playtech is an interesting opportunity because it is more turn key.

It’s an out-of-the-box solution.

Yes, it is an out-of-the-box solution which other suppliers might offer but not as complex or rich as the Playtech IMS.

Which variables do you focus most on when managing your gaming P&L?

The most important thing to me is the product because product is king. If you do not offer a wide variety of games or have enough promotional features, you are at a disadvantage. In the countries where I am trying to grow our business, I am focused on improving our product by integrating more suppliers and improving our promotional capabilities. The second element is the customer journey. For newly acquired customers, it is vital to offer a smooth, potentially winning, experience up front or you risk losing the customer immediately. You need to ensure you retain them long enough to pay back their acquisition cost.

The first two or three days of the experience with us are key, especially in gaming. Failing that part of the customer journey makes it very difficult to create loyal customers. The third element is entertainment because, at the end of the day, we are part of the entertainment industry. We not only compete with other gambling companies but also with other forms of entertainment. We cannot be boring and need to maintain a fresh offering by continuously launching new games and building engaging promotions. We need to refresh our products, website and mobile apps, giving an excuse for customers to keep coming back and playing with us.

Do you look at your P&L on a game basis or a customer lifetime value basis?

The first element for us is looking at the origin of our customers. Betfair is a sports type of brand so our customers know us because of our betting exchange above everything else. Sportsbook customers come to bet on sports events but many of them enjoy slots, live casino or other type of games we offer. My aim is to maximize those cross-sell opportunities by offering those customers an excuse to also play our gaming products. That means being online in the right places where those customers look for sign-up offers or other reasons to join Betfair.

Do you look for games to convert sportsbook players to live casino and slots?

Yes and, specifically on this topic, live casino is a key product because it is complex to directly acquire live casino customers. I have very rarely seen success for our brand in acquiring customers through our live casino product, but it is vital for cross-sell. We have learned, through customer behavior, that sports customers love to play live casino. Sports games are skill-based games because, knowing the probability of an event to happen and what the right price is, requires skills and knowledge of the sport events. Sports customers see elements of skill in the live casino product because they need to know how to play blackjack or what an optimal strategy is on roulette, as compared to slots where there is no skill at all, simply pushing a button, pure luck, more fun and pure escapism.

How does the lifetime value between live casino and slot customers differ?

There is no way to look at lifetime value between products because customers who play the two different products have different preferences. You are still focused on maximizing their lifetime value and doing the right thing. We battle to move customers from live casino to slots. Instead, we keep refreshing our offer by launching new slots, integrating new providers and offering more engaging promotions. An interesting trend which bridges the two worlds is game shows, which are a new form of live casino initially developed by Evolution but which Playtech copied.

It is still a live casino product but is more casual. Evolution and Playtech are closing deals with Monopoly, Deal or No Deal and other appealing brands where they build live shows around those brands. The game mechanics are similar to slots; pure luck without much skill, but everything happens with a real human interacting live with customers. This allows operators to acquire customers and subsequently cross-sell them to other traditional live casino games.

I was playing Monopoly to test it out. So these are effectively game shows and it seems like they are used by multiple operators, so Evolution will have a studio in Riga or Romania and will live stream to all their customers to see on the operators’ site?

That is correct and is another important distinction when talking about live casinos. The vast majority of the tables these suppliers offer are shared. For example, on a specific roulette table, our customers play on the same table where William Hill, Ladbrokes or other customers play.Suppliers like Evolution and Playtech also offer another possibility which almost all big operators leverage, which is to design their own live casino studio. Betfair are currently launching our own dedicated live casino studio in Spain and Italy, where only our customers are able to play.

Rather than a generic casino environment without brand, customers see our brand. The host speaks about our brand and promotions which, from a marketing or brand perspective, means you can message or design a promotion for your customer in that specific environment. These are instrumental to growing our international business and are an interesting part of our offer.

And are you using Playtech for those dedicated studios?

We use are Playtech and Evolution as the two live casino suppliers. The Betfair Paddy Power site had a long-lasting relationship with Playtech. We initially launched internationally, but from January in the UK, we are hosting the Evolution offer. The dedicated portion of our offer is still with Playtech with whom we will probably remain with for quite a long time.

Why do you keep the dedicated studio with Playtech and not Evolution?

Designing and building those studios is a costly strategic investment so it needs to last for several years. It is difficult to change dedicated studios from one supplier to another.

Why did you not do that with Evolution instead of Playtech?

We had a prior relationship with Playtech and simply continued with them.

Has that got to do with the IMS platform integrating with promotions?

That is one more reason to stick with them because we know how powerful IMS is and the possibilities it gives us in terms of bonusing the customers.

So your dedicated live casino offering with Playtech is supplemented with Evolution's live Monopoly game show?

That is correct because our original live casino offer was from Playtech. We continue to develop our own dedicated studios and have recently launched with Evolution, whose live game shows complement it very well. Evolution were innovative in the industry by developing the concept of game shows so complementing our portfolio with their games is definitely important.

What is the rough GGR split between game show and blackjack or roulette games?

Game show revenues represent no more than 10% to 20% so are not important for monetization. Traditional live casino tables are much more important from that perspective and where you really monetize your customers. Game shows play an important role on both the acquisition side and entertainment of customers.

So Game shows are mainly for conversion of sportsbook and other customers to live casino, but you actually earn the money on the traditional blackjack and roulette games?

For monetization, that is correct.

Would other operators build out dedicated studios by choosing Playtech and then supplement with Evolution game shows or would Evolution also be attractive for both?

Evolution is still a viable option for dedicated studios. When launching a live casino offer, all operators need to remember that there are not many live casino suppliers. Building a compelling live casino offer is both complex and expensive. You need a physical presence for the tables, you need to manage a work force of hosts, and also ensure customers cannot cheat. Suppliers need to ensure it is impossible for customers to predict where the ball will fall on the roulette wheel.

If the design of the table is not done properly, mathematical models could predict where the ball falls. On top of Playtech and Evolution I can only think of Ezugi and Pragmatic Play who have recently launched live casinos whereas with slots there are many game providers.

What are the core decision-making criteria when choosing a live casino vendor?

The quality of the product is key, as well as included features such as bonusing. The level of innovation is also important which includes future planned developments. Price is another key element. You should be happy to sacrifice a portion of your margin to have a better product as opposed to compromising and retaining more value but having less tools for customer acquisition and retention.

How do you measure the quality on a game like Monopoly? Is it about converting customers to other games to drive lifetime value?

Aside from measuring, it is important for the company to try different directions some of which will fail. You need to fail before finding successful new products which is what Evolution did. They were very good with the first game shows whereas the following ones were not that successful.The important thing is not staying still. To grow your entertainment business, you need to continue to refresh your offer, launch new products and evolve your messaging and promotions to customers. It is difficult to compete and that is what you look for in your suppliers.

So in live you have Evolution's Monopoly game show as well as their roulette and blackjack?

That is correct.

As well as your own dedicated studio with Playtech?

You can be very specific on which portion of your supplier portfolio you take. We are more selective on slots but on live casino, our customers should have as many tables as possible. We now show the game shows that the suppliers come up with and that number is small. Playtech have followed that trend and now offer live game shows. Having a broad portfolio enables your customers to find what they like. It is vital to have a comprehensive amount of games and suppliers.

How does the dollar value staked on Evolution versus Playtech's blackjack differ?

I cannot answer that yet because our experience with Evolution is limited. There will be customers who will prefer one platform over the other but I do not expect big differences. What might make a difference to our customers is the availability of the dedicated studio. We might focus some promotions for the highest spenders. On those tables we may see slightly higher value on Playtech but that is due to the type of offer. Our competitors who have dedicated studios with Evolution rather than Playtech might show the opposite situation.

Would you filter all your high value players on your own dedicated suite and offer them a more coherent holistic experience?

That is a possible strategy but it depends on how your customer base is built. A good option would be to dedicate some tables to high spenders with a targeted customer experience.

How do dedicated studios work? Do you pay a set-up fee and a fixed fee per table which covers the fixed cost of Playtech running the studio, the rent and the dealer?

That is all correct but before that, when you have to relaunch the studio, what you pay is the set-up fee of the whole studio. There is an important initial long-lasting investment after which you pay a monthly fee on top of the revenue share you have with the specific supplier who maintains the studio. You also build a strong relationship with the hosts as they become the voice to the customer for a brand like ours who use a dedicated studio. It is a dedicated environment for our customers built around both our brand and proposition.

The dealers effectively become your brand.

They become our brand which is why you need to have a strong relationship there. Sometimes a specific dealer does not fit our brand or what we would like to communicate or interact with our customers, and then you may need to make those shifts, but yes, in that environment they almost become our ambassadors. Making the link with game shows, you highlight how the live casino element is quite close to traditional TV shows because there is a person there who is talking to all the customers who are watching it.

I want to talk about the game shows in a moment, but in terms of the pricing for dedicated studios, the monthly fixed fee covers the rent after which a percentage of the GGR is paid that goes through the table?

That is correct; part of the revenue we make is given to the supplier as shares.

How does Playtech set the pricing for dedicated tables?

The pricing depends on many things. Historically, Playtech was considered to be an expensive supplier, but that is not necessarily the same for everyone as it depends on when the relationships were established. It might be that a specific supplier wants to have a relationship with you because, for them, it is strategically important as it shows the market that they are a big operator and therefore opens up other doors to them. Therefore, the price might be lower or higher due to those reasons, so it is difficult to extrapolate and say this supplier is more expensive than the other. One of the reasons Playtech were so expensive is because they were one of the very few suppliers with an incredibly broad portfolio of games.

They offer live casino, traditional online casino with slots, bingo and poker; they have a very comprehensive offering.

Do they bundle that with IMS?

You are never forced to take all their products. Both Betfair and Paddy Power brands offer all the Playtech products but if you want you can just take one or the other.

What do you think is their best product?

They have a quality live casino and very good slots. Other suppliers may have more entertaining slots but their key strength is their IMS promotional platform.

Playtech recently signed Parx Casino in the US supposedly because of their IMS product. They used the IMS product to get into these accounts and can offer slots and live casino, but it seems like the IMS is what hooks them?

That is the way I would look at Playtech and it is definitely a big strength. Having that platform on top of all the games available to the operator, that is quite an important feature for new operators who want to launch their online games in the market, especially in a recently regulated and still regulating market such as the US. What happened between Evolution and NetEnt goes in that direction. Last year, Evolution bought Net Entertainment for approximately €2 billion which is a move that really has the US in mind.

Evolution already had an amazing live casino offer but nothing else really. NetEnt has a very compelling slots offer, so the combination of the two companies gives the new group the possibility to offer new operators who want to enter the US market a more out-of-the-box offer.

They can innovate with both slots and live but the operator needs to have their own player account management system?

If you want to launch both a gaming and a live gaming offer today, you can avoid building anything and only have third parties doing all the work for you. You simply need to design the brand but that would be quite short-sighted. The long-term brands who win are those who control the biggest element of the offer. The game account is where the customer is managed, the data is stored and the payment systems are integrated. Today you need to have your own system. This is even more important in a world that is regulating. An important trend in the industry is the fact that many countries are progressively regulating the online gaming business.

Unfortunately for us, each country is coming up with their own specific rules. Operators need to adapt their platform to the differing needs of each country. That has a cost but it is also complex, and having a platform which is flexible enough to adapt to those changing regulations is a key element and a factor of who will succeed or fail in our industry. Size is becoming even more important because you need scale and money to adapt to this changing world.

I want to talk briefly about the game shows and one thing I was curious about is the price that Evolution charges. Obviously, they are paying for the intellectual property of Monopoly so are they much more expensive than the traditional games?

When a supplier's game leverages a famous brand, part of that cost is passed to the operator so we tend to pay more for branded games, which is true for any operator in the market.

Is that 10% to 12% of GGR for traditional games and another 5% to 6%?

It really depends on the type of game and on the specific brand. It is interesting when you sign those contracts because each branded game has an additional specific price.

What is the biggest risk for the game shows of Evolution and Playtech?

It is difficult to predict because there are many new games on the market and we have to evaluate their longevity individually. I doubt some will last like traditional table games do. I do not believe that one of those game shows will become the roulette of the future. It is more similar to what happens on TV, where they last several years but, after which, customers get bored. You then need to come out with something different, which is the typical life of these game shows.

What advantages does Evolution have over Playtech?

I do not think Evolution has an advantage over Playtech on the traditional tables; they are both very good. There are differences in small details, especially on the traditional tables, but it is difficult to identify specific advantages on traditional ones between Evolution and Playtech. It can be where the buttons are on the screen or the layout of the table. The real long-term match will be around innovation of available platforms rather than specifically on the traditional tables.

On the game shows, I could bet thousands of pounds every spin if I wanted. Every 30 seconds, I could bet as much as I had or wanted to. Do you see that as a regulatory risk as we saw in the UK with slots and roulette machines in stores? They introduced a £2 limit which hurt store profitability.

There is nothing specific for game shows but the industry trend and what is really happening is that each country is increasingly regulating this industry. The UK has a positive gambling culture – even healthier than Italy – but despite this cultural element, the UK regulator is getting more rigid and probably rightly so. They are ensuring that operators care about customers in that they do not encounter long term problems from our products. It has become such a delicate topic that big operators like us have already put systems in place to ensure we realize when a customer is playing too much. We come forward and communicate that to the customer, so much that we can even suspend the account. Any big operator has no interest in creating problems for their customers. We want a healthy sustainable interaction with our customers in which they do not waste their money but are entertained by us instead. We know that gambling is risky and moving in the direction of limiting it, in the end, is correct.

In the UK, they didn’t regulate online casinos yet?

No, the regulation is applied to online as well.

They limited roulette or slots staking in-store, but they did not limit it online?

The stake limit you can make is not yet available but it is coming; lowering the how much you can bet each time, on each type of game, in addition to several other limitations.

Does that include game shows such as Monopoly?

That applies to every type of game.

Is that coming soon?

I am unsure of the exact timeline for the UK as it is not under my responsibility but the expectation is that some of those additional limitations will become law this year.

Would that be a risk to Evolution or Playtech who provide those game shows?

Providers and operators have to adapt to the regulation and change the dynamics. Rather than having fewer customers betting large sums of money, hopefully this industry will evolve to more people placing smaller bets. Limiting the amount that can be bet might open the industry up to a broader customer base than it is today. This week is Cheltenham, which is a cultural moment for UK and other customers, who are currently betting on horse racing. It is part of the culture and those customers bet this week for fun without wasting their money. Why can that not happen year round; placing small bets with the thrill of winning or losing money in a healthy and controlled way? That is the direction our industry is heading for.

Why does Playtech not produce innovative game shows like Evolution?

Playtech has followed that path and is coming up with their own game shows.

How do they compare with those of Evolution?

Playtech is a follower in this case and are not yet at the same level as Evolution. One of the characteristics of our industry is that once somebody comes up with something that generates revenue, it is relatively easy to replicate it, which is currently happening with live casinos.

Will we see a Pragmatic Play enter with a similar offering?

The game shows are here to stay. It is a new category of game which will expand and the live casino providers who want to keep up will need a game show in their portfolio. It is less important to have famous brands associated with them but rather that they are fun to play.

You mentioned how blackjack and roulette are effectively becoming a commodity. How do you see the pricing of both dedicated studios and traditional games and game shows evolving? Could Evolution say, you cannot have our game shows without our traditional games or dedicated studios?

In the past, it was more common to have exclusive deals with specific suppliers. We had an exclusive deal with Playtech on live casino, which was good for several years but it no longer makes sense for big operators. In the end, operators are focused on offering the best experience to their customers, which you cannot do if you limit yourself to integrated suppliers. The suppliers also need to pay attention because there is a concentration trend where operators are becoming increasingly bigger which means that they are available in a growing list of countries. When suppliers like Playtech or Evolution push exclusive deals, they risk losing the access a specific operator provides them in certain markets. Suppliers have increasingly accepted they have to compete side by side on the operator environment which, in the end, is good for innovation and development of games as well.

If you were running an online casino business at a large land-based casino in the US, how would you approach building out traditional games versus game shows? Would you build studios in your casino for live blackjack and roulette and leave game shows to the vendors?

There is no space for an operator like us – or even a land-based casino in the US – to make the investment and develop their own live casino offering. Everything is possible but it will be too expensive and acquiring the competence to do that is difficult. Today, the suppliers who do it are too efficient to consider doing it on your own, even if you are a land-based casino who already has the space and the studio.

They have the dealers and the talent.

They already have some of those elements but that is still not enough. They need to have the knowledge and competence to optimize streaming and ensure all tables are set up to deter cheating. It is too expensive and requires specialist skills and knowledge so I do not foresee that happening. What can happen is that some of those land-based businesses can make their tables and hosts available to these providers, which then becomes a hybrid solution. It is a merge of competencies. Physical land-based casino businesses have the space, while suppliers bring their capabilities to bring that land-based type of business online. That is possible.

You said that most of the monetization value is in blackjack and roulette so that could reduce the cost for the land-based operator if they used their own space and got Playtech to build and run it as a consultant or vendor from their property?

It depends how a deal like that might be structured but an operator like that might offer a lower price because the tables which are set up in that environment could be used by other operators. It is definitely a possible synergy and something that could happen in the US.

How does Evolution's acquisition of NetEnt improve their offering?

Evolution is very strong on the live casino offering, probably the best in the world, but they do not have slots. NetEnt is a strong slots supplier because, two years ago, they purchased Red Tiger for $200 million. Those two businesses complement each other. This is vital because when Evolution offers their services to anybody who wants to enter the US, they now have a more complete portfolio which the potential operator can consider to go live with for their customers.

Do you think this makes Evolution more attractive than Playtech?

More competitive in the sense that it reduces the gap between Playtech. Evolution was live casino whereas Playtech was broader in number of game types. Now Evolution has a very compelling slots offer, so the gap between the two suppliers is a slightly smaller. They probably see this trend of concentration, aggregation and mergers continuing on the operators' side, and expect that to also happen on the supplier side. The cost of adapting products to changing regulations in different countries is also true for suppliers. Mergers and acquisitions will continue in future because that is the world in which we now operate.

What is the biggest risk for the merger?

Technology is the biggest risk as we offer our products using complex systems. Some of them are old; NetEnt was established in 1996 and Evolution 10 years later. Integrating those platforms into an efficient system to offer to other operators is a complex and costly exercise. Paddy Power Betfair did that when we merged and if is not done well it can cause problems. Other mergers got into trouble doing that and suffered badly as a result.

We will have to see how it goes over the next few years.

Both Evolution and NetEnt have been very successful and will continue on trend and it will be interesting to see how that evolves.