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.

{audio:0:05:48} I have a fund and we are shareholders in Evolution, so my purpose today would be to learn more about Evolution's relationship, particularly with aggregators. My understanding is you run a large aggregator in the EU which resells EVO games in both regulated and gray markets, so that's what I'm looking to do. Could you tell us a little more about your experience in the industry and what you did?

{audio:0:06:31} I've been in the online gaming industry for the past 13 years and have touched all industry activities, as an operator, platform provider, game provider and an aggregator. I have also touched affiliation marketing so I have been through the whole industry cycle. I will explain how aggregation works within the industry and the challenges that both operators and game providers have.

{audio:0:07:30} Aggregators are both technology providers and distributors. I always compare it with a warehouse to which many suppliers deliver their goods, which are delivered to various shops by trucks belonging to that warehouse. The shops are the online casinos and the operators and suppliers are the game providers and the aggregator is the distributor. 

{audio:0:08:22} The distributor has two agreements, one with suppliers, the other with operators. Each of these agreements come with certain terms and conditions. Commissions are mostly based on revenue share, where they take a percentage of GGR, or the gross gaming revenue, which is calculated as total bets less total winnings. Both the aggregator and supplier take a percentage of that, and the remainder stays with the operator. Within those commercial agreements, there are certain restrictions that both suppliers and operators have, mainly related to the territories where they can operate, which depends on their licenses. Some jurisdictions even oblige aggregators to have a license, but the majority do not. 

{audio:0:10:11} Licenses are heavy on both the supplier and operator, but mostly on the operator because they have direct contact with players, whereas distributors don't know who the players are. Game providers also don't know who the player is, because they receive a unique ID code per transaction, which is usually a mix between characters and alphanumeric. We cannot communicate directly with players, meaning the operator is responsible for handling players' data and knowing their origin.

{audio:0:11:22} Does that ID number reveal where the customer is?

{audio:0:11:27} Usually the operator also sends us the two-character country code, to know where the player is coming from, because we must know this due to territory jurisdiction restrictions. Suppliers must have that because being licensed means they are bound to have audits by the respective regulator authority, who check where players are coming from to see if they are conforming with the respective license. Aggregators receives exactly the same as suppliers; it's in one transaction. If the aggregator receives a restricted country code such as the UK, we identify that a certain operator is accepting players from these jurisdictions, we immediately notify that respective operator to stop accepting players from that jurisdiction, and if they do not take action within 48 hours, we block that operator. The same thing happens for suppliers. 

{audio:0:13:26} There are instances where suppliers suspect operators are getting traffic from a suspicious jurisdiction and we can verify that by going directly to the operator. Don't forget aggregators act as the technology bridge as a distributor, and there will be open communications between supplier and operator via the aggregator. There have been instances where certain operators target gray or black markets and try to mask the player origin. Such operators will always be identified because technology is constantly being upgraded. Some players escape their web, but both the aggregator and supplier will pick them up.

{audio:0:15:15} Can you get around virtual private networks which mask the player's origin?

{audio:0:15:23} Yes, they can get around that, but in my experience, they are short-lived. I know the operators who were targeting Turkey, change their domain name on a daily basis. So there are districts that do but it's a short-term strategy because they always get caught. Both the aggregator and the supplier have a responsibility to inform this respective operator, so that they stop getting traffic from this respective territory. Some jurisdictions change. For example, on the 4th of April, Ontario in Canada will introduce their own gaming license, which means only those operators and suppliers who have such a license can accept players from Ontario. 

{audio:0:16:49} We would inform all our operators and suppliers they can no longer accept any players from Ontario unless they have a license in place, and we would ask them for evidence to have that license in our hands to verify that. We cannot simply accept an email, so we need to do our own due diligence, and whoever doesn't have that license, must stop accepting players from that area. Not all aggregators have the technology to block territories; some leave it up to either the operator or supplier to block players from a particular jurisdiction. That means if the operator ignores all the instructions and puts the games on their website, when the players try to play that game, a message appears saying that game is not allowed in your jurisdiction. There are ways to block it and it can be done in seconds. Any questions so far?

{audio:0:18:19} Yes, several questions popped up. My understanding is that aggregators can sell to other aggregators, who can resell to another aggregator; how common is that?

{audio:0:18:44} It's not that common because games become expensive with many middle men. Aggregators typically take a 2% margin, so if the other aggregator is making a further 2% it becomes expensive and when that game reaches the operator, they will reject the offer because it is no longer viable for them. Those agreements occur when aggregators have their own exclusive content. In that respect, it makes sense because that exclusive content is not available elsewhere. They won't make a deal to take over all available content from an aggregator, it will only be for specific content.

{audio:0:20:01} If an aggregator has exclusivity, another aggregator might go through them. That makes sense about too many middle men making it very expensive. Is it easy to set up an aggregator?

{audio:0:20:18} It's not easy to set up an aggregator, because you need good technology behind it. Your platform needs to handle 150 operators simultaneously. In my current operation, we launch around 200 games per month to over 100 operators, so the concurrent activity on our platform means it must be solid to handle that load. The data comes in 24/7, so you must have a good back end to provide the data which operators and suppliers analyze performance daily. This includes live payment transactions between supplier/aggregator and aggregator/operator. 

{audio:0:21:51} Do you take into account different licenses? I understand that some licenses are “better” than others in the sense that they are more rigorous or more difficult?

{audio:0:22:08} The Central European licenses which include the UK, Italy, Sweden, Denmark and Belgium, are all robust and very restrictive. These jurisdictions use gaming licenses so that the respective government can collect more taxes. There is no unified rate common in Europe, so some charge 20% and others charge over 30%; it differs from one jurisdiction to another. Most jurisdictions protect players by limiting their bets, either daily, weekly or monthly. Those jurisdictions have eliminated VIP players. If you had a European VIP player who used to play a six figure amount every week, they can no longer play in a regulated market. 

{audio:0:24:09} Two and a half years ago, Sweden was number two market in Europe, but after regulation, Swedish players could only play on Swedish licensed operators, those numbers decreased and Sweden is no longer considered a top European jurisdiction. I believe the regulators were wrong because the way they did it effectively kicked out VIP players, who still want to play and will choose .com sites which means the money is leaving Europe. Therefore, the European jurisdictions will collect less tax and give more space to the gray and black markets.

{audio:0:25:38} You are in favor of regulation but from an aggregator or gaming provider perspective; what are some of the advantages of regulated or gray?

{audio:0:25:59} I am in favor of regulation because having a license means a player knows you are a trusted supplier, aggregator or casino. The license is a guarantee that if you make a deposit in that casino and win, you can withdraw that money. Unlicensed casinos have no authority on who inspects so the casino owners can do what they want with your money. Gaming is all about trust, irrespective if it's land-based or online. If I was a player, I would choose both a regulated casino and supplier. This is the entertainment industry and the competition includes Netflix, YouTube and e-Sports, because we are all competing for screen time. A player who spends 30 minutes a day playing a slot game or placing a bet on e-Sports, has ample choice where to spend their time. Watching a movie on Netflix is an experience, but when you play at a casino, there is the thrill you can win money, especially when jackpots are involved. 

{audio:0:28:17} Players who bet large sums test casinos which are not officially regulated. They will go to a .com site which is regulated in Curacao or the Isle of Man and place small bets, and when they win, they will withdraw. Casinos regulated in Curacao and similar jurisdictions impose KYC procedures with any player, which is also required by the respective payment method the player uses. Five or six years ago, the payment providers were not bothered, as long as they got their share, they would simply get away with it. Today most wallets impose due diligence and KYC on every transaction. The media reports of rogue casinos who don't know what they're doing, but those days are over. They haven't been eliminated but the numbers are decreasing. Banks are very restrictive about origin of wealth, and will ask for identification and address confirmation. They also ask for the source of income. There are tools in most casinos where players can set their own limits, which once reached, they will stop playing. There are still .com sites who accept gray transactions.

{audio:0:31:27} What kind of due diligence does Evolution do on an aggregator and is that typical from other gaming providers or is it more or less stringent?

{audio:0:31:41} In the past year, other game providers like Play and Go, Quick Spin and Push Gaming also do that. When an aggregator gets a new operator, we inform Evolution that they are interested in technical games. Evolution sends us their form and tell us to do due diligence on that operator before we switch them on. Some game providers do due diligence before they give us permission to activate their games to a specific operator. Most game providers who do due diligence are either operating in the US market or are interested in a US license. They do their due diligence in order to cover themselves and ensure this is a licensed operator. They also go into the details about the OBOs of this particular operator and the entity where they are registered, and once that particular game provider approves them, they instruct us to either activate or not activate that particular operator.

{audio:0:33:56} Do Evolution and other game providers also do due diligence on customers you bring to them?

{audio:0:34:05} They do due diligence on the aggregator but also on your customers?

{audio:0:34:13} Exactly, unfortunately after what happened to Evolution last November, they are extremely cautious and have become more bureaucratic and difficult to work with. Every water they touch they think is steaming hot which created a bad impression with operators. They grew too big, too quickly and now own NetEnt, Red Tiger and BTG. They have become too strong and the industry dislikes it when a particular provider dominates and dictates. They are still number one in live casino, but after November, things are different and they are very cautious. I'm also seeing it from people working at Evolution, where many are leaving because the atmosphere has become stricter. It is not comfortable for some positions to stay at EVO. That is what I heard through the grapevine.

{audio:0:36:14} Are the other providers are also tightening up?

{audio:0:36:19} Not all of them. The European based providers do things prim and proper and get licenses, but many studios in Eastern Europe or Asia don't care about licensing at all; as long as you activate them on an operator, they are fine. For most of them, their objective is to generate some interest and good revenue, then attract big investors to buy them out, who will then regulate them. The latest trend to grow in the industry is by mergers and acquisitions. The European market is well-established and not growing, so all eyes are on Latin America and the US, who are two sleeping giants.

{audio:0:37:50} Do you have an opinion on that November report?

{audio:0:38:00} It was nothing new, but the jurisdictions mentioned were Iran and Syria where there are also trade restrictions, so one cannot sell flour or sugar there either. They are not markets that generate massive amounts of money. You are still breaking the law irrespective if it's $1, $100,000 or $1 million, but there was also an unlicensed operator in Italy. From a supplier or aggregator perspective, the operator sends me a player code saying a player comes from Norway which doesn't require a license. The operator could be using a VPN masking the Italian player, so to the aggregator and Evolution, that player is coming from Norway. On our records, nobody can tell me I am accepting players from Italy. Eventually, several months down the line, something escapes from an operator and you find an Italian code. 

{audio:0:40:35} This happens on a daily basis, so I found it unfair to point fingers only at Evolution. I am 100% sure they did not accept that, because no decent company who has so much at risk would accept players from such jurisdictions; that would be suicidal. When these things happen, most operators, game suppliers and aggregators take immediate action. Evolution has investors whose investment portfolio includes big American companies, so why take such a risk. I believe that report was put together specifically to damage Evolution's reputation. If an operator repeats the same offense, they will cut them off and send them a legal letter and sue them. 

{audio:0:43:08} Most agreements impose hefty fines when they are in breach, up to six or seven figures, so when an operator signs that agreement, they know they are playing with fire. Certain operators pull out when they see this liability imposed on them in such agreements, rightly so, because they know it's not their piece of cake, which is good. The legal agreements which cover restricted territories and liabilities of breach of agreement are not the same as they were five years ago.

{audio:0:44:03} Will there will be fallout from regulators based on that report?

{audio:0:44:21} I doubt it; European regulators are doing stricter audits which are quite rigid, so I don't think there will be a fallout. Each regulator has pulled up their socks and have proper measures and monitoring systems in place, but the regulators are learning to work together with operators. There are no longer media reports of big fines being issued.

{audio:0:45:19} How you would characterize the relationship with regulators, because from the outside it seems that it's not necessarily an industry where the regulator catches you and issues a big fine or want to kick you out, it seems that they work together.

{audio:0:45:38} The only European regulator who is trigger happy with fines is the UKGC, who have implemented rigid marketing and bonus restrictions, rather than territorial ones. The UK updates their marketing and promotional restrictions twice a year, and that is where they have imposed fines. Italy is the best European jurisdiction who communicate with all stakeholders. They publish reports and every quarter there is a big meeting in Milan with game providers, operators and the regulator, where they analyze which markets are growing and being impacted. It is an open discussion which is improving, but it remains far from solved.

{audio:0:47:05} Is it riskier to resell to an aggregator versus an operator?

{audio:0:47:24} The more middle men there are, the less visibility you have. We try avoid other aggregators and I only have agreements with three others, because I sell them my exclusive content and they sell me theirs. We never resell generic content because it makes no sense.

{audio:0:48:07} You mentioned cutting them off for violating a rule; how common is that?

{audio:0:48:21} It is not common today. We constantly monitor every game provider or operator and will also do our own due diligence. That is how we work; it is not industry practice. I want to know who I'm working with and who the OBOs are. If they change entities, I would do another due diligence and update all the agreements. Everything is above board and transparent.

{audio:0:49:26} How does Evolution stack up against their competitors in your mind?

{audio:0:49:40} They are dominant in live casino and still have 70% market share, so super solid. Pragmatic are challenging them and Microgaming launched their On Air studio two months ago. Evolution also owns Ezugi which is another live casino provider, so they are dominant. Unfortunately, they dictate the rates because they know operators cannot do without them, so they have a strong position irrespective of what happened in November. It was a shake up, which they needed, because I am a former NetEnt employee and know what happened there. NetEnt was number one at that time and nobody could match us, but we sat on our throne looking down at others and became arrogant. I hope Evolution don't make the same mistake. Irrespective of market share, they must become more humble and listen to their customers. There have been some improvements because they know their share price is still down there, so commercially they are being slightly more sensitive.

{audio:0:52:18} Are you an investor in Evolution stock?

{audio:0:52:28} Would you be favorably inclined that EVO would do better than they are doing now, or do you think they will lose something?

{audio:0:52:41} They will lose market share because a company like that cannot remain dominant. Our industry is super-fast so I am sure other companies will challenge them. Their games road map for the coming quarter which they launched two weeks ago, included previous games which they are giving an additional touch. It's like watching Rambo I through Rambo IV. We haven't seen anything new from Evolution this year, who used to release three titles per year.

{audio:0:54:15} The movie analogy would be like expecting a certain movie house to be number one for years, but it doesn't work that way.

{audio:0:54:24} No it doesn't work that way, and I'm not only talking about our industry. We have no finishing plan of who becomes number one. I aim to do the best of what I did yesterday, because today you're number one, tomorrow number two and the next day number three. You can no longer stay number one today. There are many variables that impact our industry.

{audio:0:55:12} Where are the big opportunities now? You mentioned expanding into Latin America; could you talk about that with Evolution?

{audio:0:55:21} Latin America is shaping up with Mexico and Colombia on the forefront when it comes to licensing. There is some noise that even Brazil and Argentina will come, and Brazil is the largest market, especially when it comes to sports betting, so I think that's the next big thing. India is another interesting market, who also plan to eventually regulate.

{audio:0:56:13} Could any other opportunities arise over the next few years?

{audio:0:56:21} The internet is changing with web 3.0, metaverse and blockchain technology. I believe the industry should embrace blockchain to be a transparent accounting ledger. It could offer transparency to the whole history without any interference because it's a sealed ledger. We already see companies in the industry who proffer KYC services using blockchain, so I think the industry will eventually embrace that, but it will take several years.

{audio:0:57:24} Does the opportunity in Asia remain large?

{audio:0:57:28} There are rumors South Korea might regulate and China is totally blocked now.

{audio:0:57:40} I've heard other people say that the exposure to China is small.

{audio:0:57:54} They are blocked but can still slip through before eventually getting caught.

{audio:0:58:00} Most Chinese who like playing, simply travel to Vietnam or Cambodia and play from there, they are Chinese nationals with a Cambodian IP.

{audio:0:58:16} Yes, because they find a way to do their payment transaction.

{audio:0:58:24} So there could be indirect exposure to China?

{audio:0:58:30} Yes, but I wouldn't know.

{audio:0:58:32} Right; nobody knows, people are guessing.

{audio:0:58:35} Yes, it's guess work. Nobody can say you are accepting players because when I show the audits of the country IDs I have, you cannot challenge me.

{audio:0:58:58} Is there anything on the regulatory front that is useful to talk about?

{audio:0:59:11} You are focusing on Evolution, who are super careful. To get games into Ontario, you need to make some modifications in the integration of the actual game. They told us they would not start discussing technical requirements unless the operator sends their license, whereas they used to start discussing during the time operators applied for their license.

{audio:1:00:27} Will being more careful hurt their growth going forward, or not that much?

{audio:1:00:38} Because of what happened in November, there are many internal investigations on all their traffic, and I'm sure they will cut off their finger to survive. They might have a bump in revenues, but they will recover from a jurisdiction such as Ontario. That's how I see it.

{audio:1:01:36} As regulatory costs rise, it makes it more difficult for smaller competitors?

{audio:1:01:45} The major difference is cost. Six years ago, operators and game providers didn't have a compliance team, whereas today they all have legal and compliance teams with many lawyers and compliance officers to ensure they abide with the respective jurisdiction. Being in a regulated industry, the costs are high compared to a .com operator.

{audio:1:02:30} That would seem to favor the bigger players with big budgets?

{audio:1:02:34} Most operators are not interested in the UK and would rather accept traffic from Japan, India and Korea, and let the big guns fight for the regulated markets. They have lower costs and good margins and will do it for five or six years until they cannot. That is not a bad decision but when you're on the stock exchange you cannot do that.

{audio:1:03:09} Evolution has so much more money to spend than their competitors.

{audio:1:03:16} Their pockets are massive.

{audio:1:03:21} The games are also so much more involved today?

{audio:1:03:24} Scientific Games have a strong presence in land-based casinos, but even Playtech and IGT, the big guns who have a history in the gaming industry, cannot match them online.

{audio:1:04:00} Thank you, this was very informative, I appreciate all the color and detail you have given me.

Evolution Gaming: B2B Aggregators and Regulatory Outlook

Evolution Gaming

Evolution is a B2B live casino gaming operator which provides customers with professional croupier services via its online casino and gaming platform. (Live casino refers to a game where a game presenter runs a gaming table followed in real time via a video stream.) The company has a large addressable market. 

Live casino is the fastest-growing segment in online casino, with an annual growth rate of 31% from 2017 through 2021. Evolution dominates this space. Sales increased 90% in 2021 and are 6x greater than in 2017. The business has high and increasing margins; EBITDA margins were 68.9% in 2021 and management believes they hit 69%-71% in 2022. The business is capital-light with capex of less than 6% of sales in 2021. Evolution generates substantial free cash flow and has no net debt. 

Evolution Gaming: B2B Aggregators and Regulatory Outlook

COO at a Large Online Gaming Aggregator and Former Netent Director

inpractise.com/articles/evolution-gaming-b2b-aggregators-and-regulatory-outlook

Evolution Gaming

Why is this company interesting?

Executive Bio

COO at a Large Online Gaming Aggregator and Former Netent Director

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