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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:0:00:45} Could you start by telling me your background in the space; what you have done and are doing?

{audio:0:01:12} I went to school in Las Vegas to study this industry. The University of Nevada had a gaming program, so that was where I set sail. Since then, I worked in the brick and mortar side of the business, so the actual casinos, which is where I started off. Then six years ago, I joined a startup online casino game, similar to Candy Crush where you run out of lives; you run out of slot coins and purchase more. That was acquired by Penn National Gaming who is a big operator in the US. At that time, they had a database of social gamers and wanted to convert them to real money when the time was right. I helped them with the online side of the casino, then joined FanDuel 2.5 years ago, where I launch all their products such as online casino and sports and daily fantasy into new states.

{audio:0:02:38} Are you also involved in the regulatory stuff?

{audio:0:02:43} Yes; my team oversees everything from once the deal is signed with a market access partner through to understanding the rules and regulations and presenting the regulators with our ideas and what we want to do to enter the market. I also do all the vendor licensing.

{audio:0:03:10} Yes. We are currently live in 10 states with our online sports book, four with online casino and we have 17 retail venues.

{audio:0:03:25} Are you in live casino, as well?

{audio:0:03:35} No, casino we are live in four states for online.

{audio:0:03:40} Do you use Evolution for that?

{audio:0:03:44} Yes, in two of the four; New Jersey and Pennsylvania and soon also in Michigan. Because it is focused on the live dealer element, a lot goes into licensing and setting up the studio. We went live in Michigan in January but no Evolution yet because the lead time is so long.

{audio:0:04:21} What are the lead times to putting it on?

{audio:0:04:25} They are the only player in town who do what they do, so you would imagine they are working with all the various operators to integrate them into their product, so there’s a lot that goes on there. Depending on the state requirements, they may need studios in the state or different servers; there are many complexities but it has taken longer than usual in Michigan. We would have liked to have it sooner than we have done.

{audio:0:05:06} Are online casino and sportsbook the two main verticals?

{audio:0:05:13} Yes, but they complement each other. In a state which has both, it is easier to cross-sell and monetize customers, but the more valuable vertical is casino. With sports betting, the margin is so small compared to online casino. The four states which have casino are more valuable.

{audio:0:05:57} If sportsbook is not as profitable, why do you do it? Is it mostly to bring on people because everybody bets on sports?

{audio:0:06:08} Yes, that is part of the strategy. The sports betting industry is still massive and if every state legalizes it – which we hope it does – there is a huge opportunity there. When they bring the casino element on board, that is when money starts to go haywire.

{audio:0:06:35} Slots and roulette is way more profitable from the casino point of view than sportsbook, just like poker is not that profitable on casino relative to slots?

{audio:0:06:47} Do FanDuel create their own sportsbook or does Kambi help you run that?

{audio:0:06:57} We did not start off with one but we currently have our own. There are two elements to a sports betting product. The first one is the player account wallet, or PAM, which is a player account management system which we call account wallet. The second one powers your technology. When I joined two and a half years ago, we were using a vendor for account wallet and IGT for the front end. Since then, we migrated off both of those and now run our own account wallet technology and front end. That took us a long time but we did it because the margin is so small on sportsbook and you have to eliminate all the points where you dish out money. For a smaller company who owns a brick and mortar and want to run their own brand, Kambi provides a soup to nut solution.

{audio:0:08:24} How difficult is it to run your own sportsbook? I hear the debt and risk management side can be complicated, so why do it yourself versus getting a Kambi?

{audio:0:08:43} FanDuel has Flutter and Paddy Power who have done this for before. We have our own risk and trade team, whereas companies like BetRivers and Barstool do not and use Kambi instead who have the niche skill set required.

{audio:0:09:31} Is scale important running your own online casino versus a vendor doing it?

{audio:0:09:40} The risk of trading part, for sportsbook, is definitely the most difficult piece, whereas with casinos you need a product which can support all the different touch points. The product is important when it comes to the user experience and design. They both present their own challenges. With sports book you have risk, trading, marketing, interface and account wallet, whereas casino has many more touch points such as the API integrations to different vendors.

{audio:0:10:34} What are the important differences between brick and mortar and online?

{audio:0:10:47} Marketing tactics are crazier online in the first two weeks of the product life cycle. When they enter your casino or sportsbook for a silly free-to-play game, the on-boarding is short. There are many competitors in these states and you can hop from casino to casino on your phone. To get customers on the bricks and mortar side, they have to physically drive there and spend a day or weekend, which makes the marketing tactics longer tail for bricks and mortar than online.

{audio:0:11:48} With online if you win or lose you receive an offer or experience immediately, whereas on the casino side it takes longer to come through. On the online side, especially for sports betting, sports happen fast whereas bricks and mortar casinos do the same thing over and over. Tonight could be game 6 of the World Series and game 7 is in two days so the marketing team has to get things ready in those two days, whereas that does not happen with bricks and mortar.

{audio:0:12:27} How do you build loyalty and retain online customers?

{audio:0:12:37} For each customer segment you have to figure out what they do and do not like. Much of it is bonus based so when you lose $100 you receive $30 back to allow you to play again. With our VIP or high value customers, we will send them to the Super Bowl or offer higher bonuses. Some operators also operate bricks and mortar which allows for omnichannel experiences.

{audio:0:13:44} How does online differ from land-based as far as regulatory hurdles go?

{audio:0:13:58} I think they are similar but, in many states, online is different from bricks and mortar. In the early days, many regulators tried to do the same practices in areas like marketing but online is so different. There are account wallets and money and state lines and where do servers go. With marketing alone, you could be working with over 150 vendors, who sometimes need to be licensed.

{audio:0:14:48} Could you break down those 150 different vendors?

{audio:0:14:55} A vendor in New Jersey who supports an online sports betting or casino business has to go through a vendor licensing process. If you print 100,000 t-shirts to give away to players, they need to get registered. There are so many different agencies; even e-mail service providers need a vendor license, which can slow down your go to market strategy if misunderstood. In New Jersey they do that but in Tennessee only certain types of vendors need to get licensed.

{audio:0:15:55} It is our job to understand the vendors we work with and ensure they go through the license process because if a critical vendor has no license, you cannot use them. There are many advantages to operators who do this well because they will never be late to a new launch. Smaller operators do not have teams who focus on licensing so that slows them down.

{audio:0:16:41} Is the licensing of vendors drawn out or does it vary widely by state?

{audio:0:16:55} It definitely varies wildly by state and depends what kind of vendor you are. Service providers who operate our sportsbook will go through extensive paperwork, finger printing and disclosing information about their company; whereas those making t-shirts would complete a four-page form, but some states also require finger printing. Once submitted to the regulator, it becomes a waiting game because they need to review your application and may ask questions.

{audio:0:17:44} Have you heard about the European regulatory body who declared Malta a gray market which affects gaming companies regulated by the Malta Gaming Authority such as Evolution? How will that impact the process?

{audio:0:18:11} I have not heard about that one but in several states, such as Indiana and New Jersey, if you are a vendor or service provider banned from operating in that state, obviously that will have a big impact. I would imagine gray market vendors would be on that list. Every month New Jersey sends out a list of vendors who did not renew their license or cannot operate in the state. There are many reasons why but once you are on that list you can no longer use those vendors. There could be a world where that impacts the states coming and those where we are already live.

{audio:0:19:04} You mentioned states with both online gaming and sportsbook are more valuable that those with only sportsbook; which other customer values differ by state?

{audio:0:19:23} It sounds silly but median income correlates with GDP. States which have a lower median household income correlates to customer value. The tax rate varies so much that it could have a material impact. In Pennsylvania, the tax rate is 36% whereas in New Jersey it is only 13%, and that plays into the overall impact of the equation of how you bonus and where you invest.

{audio:0:20:15} Does it also get that granular on the regulatory side where you can only have certain products or maximum bet sizes or does that not play into it?

{audio:0:20:26} In the early days, we were worried how state-by-state regulatory nuances would impact how we did business but many states have been great. When you roll out in a state, there is a lot of language in the regulations but we worked with the regulators to explain our side. When a professional golfer named Jon Rahm got Covid he had to exit his match. We would immediately refund people with site credit which they could use for other bets. In the early days, we were not confident all states would allow us to do that given the different regulations and requirements. The regulators want to operate the best sportsbook in their state. It was a risk but for product or marketing promotions we have quickly gotten over those hurdles.

{audio:0:21:43} Are virtual private networks a problem and if so, how do you deal with it?

{audio:0:21:59} The technology is pretty good. Before we go live regulators use agencies who use geofence testing to test our product to ensure bets cannot be placed over the border. Some state regulations prevent one from betting inside a casino on a phone, for whatever reason, and that would also be geofence tested.

{audio:0:22:39} Have you seen any particular trends in regulation and where is it headed?

{audio:0:22:50} I get fooled quite often from hearing rumors they might go a certain way. New York chose a completely different direction than we thought they would. One is not necessarily better or worse than the other but any time you guess what a new upcoming state will do, you usually find yourself wrong. Arizona, Louisiana and New York are coming up, and they will all have their own flavor which is challenging because it is not federally recognized. Every state is nuanced, giving opportunities to people like me who understand that, to create a plan which makes sense.

{audio:0:23:47} Is there a chance a federal regulatory body replaces this patchwork system?

{audio:0:23:56} There are a million articles which talk about it but I have no idea. We are in the first innings and many states are trying to figure it out. During Covid, there was a priority for incremental revenue from gambling so there was a lot of speed up but I am unsure what will happen in future.

{audio:0:24:33} It seems every state will have something in place over the next few years. The trend is generally positive towards enabling gaming and broadening it. Has it been two steps forward and one step back or how would you describe it?

{audio:0:24:54} In all the states we currently operate in or plan to it has been a positive. In those states without it, people are contacting their lobbyists and lawmakers to vouch for it. We also see a lot of good from it. In Tennessee, a percentage of online sports betting revenue goes to education. In Colorado, it goes to organizations who help with the shortage of water in the Colorado river.

{audio:0:25:48} You are involved with FanDuel launching new games and products; what kind of new things do customers want?

{audio:0:26:05} Industry wide operators are ensuring they have the best content out there. A player from a bricks and mortar casino wants to play those same games online, that is important. The process of signing up for one of these apps and getting verified and making deposits is intimidating and verifying users is definitely a challenge.

{audio:0:27:02} When signing up for any sports betting or casino app, you enter in information such as your date of birth and address. If you type a 1 instead of a 0 you will fail verification and need to call customer support and submit documentation. Many companies are improving that. You also need good payment methods. An online casino or sports book who only accept ACH and one other is disadvantaged to one who accepts PayPal for deposits and withdrawals. I spoke about the cross-sell experience where you attract someone from sports book to casino and back again. Many operators do that well and those who do not are definitely working on that.

{audio:0:28:15} Who has all the content currently?

{audio:0:28:32} The big names in bricks and mortar are Scientific Games, IGT and Evolution. When you enter a casino, you will see thousands of slot machines, mostly from those providers.

{audio:0:29:03} Who has mastered the process of signing up?

{audio:0:29:11} I do not think anyone has an advantage with sign up yet. Many operators are also in the first innings and are trying to figure out ways to optimize that. The requirements are difficult but different touch points to aid verification are coming soon and everyone is in the same boat.

{audio:0:29:43} With payment methods, why would somebody not be able to take PayPal?

{audio:0:29:54} To be integrated into their products means timing, contracts and licensing.

{audio:0:30:06} The biggest sport books have the most payments and content whereas the smaller ones are limited.

{audio:0:30:16} Is scale an advantage because you have more resources to throw at it?

{audio:0:30:27} Is anybody particularly good at cross-selling?

{audio:0:30:32} That depends on your product and the experience you offer. Sportsbooks who have access to land-based gaming are at an advantage because they have a database of customers who frequent their brick and mortar casinos and are more likely to play on their phones elsewhere. The trifecta is getting them to play sports betting, online gaming and coming into your casino, rather than going home and playing a competitor app who offer a better experience and promos.

{audio:0:31:26} Regarding your original question about the cross-sell experience, there are only four states with casino and 10 with sportsbook, and those four each have their own product features. Accessing the casino from the sportsbook without going to another app is critical. Currently they all offer that experience but in the beginning they did not.

{audio:0:32:02} When betting on sports there is a small button at the bottom of the app saying ‘play blackjack’. When you click that, blackjack opens without you having to leave sports book.

{audio:0:33:05} When launching games, how do you decide what to do?

{audio:0:33:18} Some operators design their own game studios and create their own content but it is mostly impacted by what customers want to see and play. There is a lot of good information about which games perform the best, both from an online and a land-based perspective. It is important to have those popular games in your library and, I believe, the more the merrier.

{audio:0:34:13} How do you know which games perform better? Is that information publicly available?

{audio:0:34:25} For those operators who also have land-based, it is probably very easy to do. They look at the top performing slots in their bricks and mortar and figure out which perform best. There are definitely subscriptions which cover both the online and bricks and mortar space. Each month they release an index of top performing games by category. They include the amount of states and casinos they are in and how often they are being played, to rank them in order.

{audio:0:35:33} Are there any unappreciated areas which people misunderstand that you would tell an investor in this space?

{audio:0:35:54} Understanding the state-by-state regulatory nuances is definitely number one. Failing to do that could slow you down. Second is the acquisition of new users. Everybody is going to bat trying to eat up as many people as they can. They are realizing that apps are sticky. In the early days, they would try different apps but they always return to the one they like most. The new user customer experience is critical as well as finding unique ways to acquire customers.

{audio:0:37:04} Operators who have access to bricks and mortar is an untapped potential to date. Both Barstool and MGM have a national footprint and do a good job getting bricks and mortar players to play online. That is pre-acquisition because, instead of a TV commercial, they can email users in their database and invite them to play online. That way they do not pay any media or acquisition fees to get that person on board. I could spend millions of dollars in media and I acquire all the wrong customers.

{audio:0:37:59} Has the cost of acquiring new customers increased?

{audio:0:38:05} No; industry wise, it is definitely better than most expected. If you look at the cost of getting a person in the door and how long it takes to recoup that, most operators are happy. Some states have lower customer values because of median income and we will pin what we think the customer value will be and, in most cases, it has been above the line.

{audio:0:38:52} Do you have an internal minimal return?

{audio:0:38:57} It is out of the gate because it is new. You make assumptions from the data and quickly tweak them. Put something into the market and, if it does not work, avoid it the following week and go from there.

{audio:0:39:15} Are the state-by-state regulations stable or do they change regularly?

{audio:0:39:25} It is very stable well-oiled machine but there are changes that happen. If you pick up the regulations from day one compared to year two or three, there are not many changes. In Pennsylvania, the vendor licensing process shrunk but you still have to go through it.

{audio:0:40:14} Does it help that you know people there or does is not really matter?

{audio:0:40:20} Their job is to be fair to all operators in the state and they are big on that. Operators need to ask the right questions because going in with an agenda does not accomplish much.

{audio:0:40:45} Did you do it on your own instead of Kambi because it was cheaper and more profitable or was risk management also a driver?

{audio:0:41:15} It is a dream to control your own destiny and having everything in-house – such as change requests and things you want to add and take away – makes you nimble. An example is a product feature called game parlay which many operators lean on; the ability to wager multiple events in the same game. We call it same game parlay; other operators call it something different. We were able to do that really quickly whereas, if we were not working on our own tech, it may have taken longer. Having our own risk and trading program is advantageous.

{audio:0:42:17} When we talk about the regulatory aspect of scalability, Kambi were first in every market they are in. They work with BetRivers, Barstool and DraftKings and, in any of the states which have gone, they have had one or more of their customers in the market on day one. They are good at licensing and ensuring they have servers in the market. However, if I work for company A and want to something in the product which makes sense for company A, it might not make sense for company B and C, so that is the difference.

{audio:0:43:20} Are there any other hurdles besides scale?

{audio:0:43:39} It requires experience, scale and resource. You would probably hire engineers and product folk who you would not otherwise need. You need a road map of the features you think are competitive advantages and that you can quickly do yourself. Doing it yourself is not enough; you also need to implement things which make a difference.

{audio:0:44:16} Is there any risk or something which might disrupt or dramatically change?

{audio:0:44:29} Yes, several things, one of which you brought up earlier which is the gray market. Responsible gaming is another big one, just like the liquor industry has responsible drinking. In all live states, you have to disclose responsible gaming messaging on assets in creative and market. This is a big thing overseas and the US should get on top of it before it gets out of hand. We all want many customers but you need the right customers, otherwise it does no good.

{audio:0:45:28} Where has it gotten out of hand, like the UK where they limited bets?

{audio:0:45:38} I meant get out of hand from a customer perspective. You want them to be in a safe environment and each state has a program where you can exclude yourself from gaming. The online perspective differs to walking into a casino because if you exclude yourself from gaming, you cannot log into any of the platforms, whereas you could sneak into a casino unnoticed. Operators have to be more mindful how they market and be aware that some folks cannot do this for fun.

{audio:0:46:33} Responsible gaming entails being aware which customers consistently lose money, are there other aspects to it?

{audio:0:46:44} The industry has tools within products which allow people to limit themselves. One can specify a weekly deposit of $100 or maximum play time of 20 minutes per week. As those tools evolve, we will end up in a much safer environment. Awareness is a big one and many sports betting operators take the budget and time for commercials and campaigns about responsible gaming. It is okay to have tools in your product but the educational piece is just as important.

{audio:0:47:48} What are the biggest opportunities you see in the next few years? You did mention possibly tying in bricks and mortar to online gaming which is interesting.

{audio:0:48:00} I will be interested to see, as more states expand, whether casinos partner with bigger brands or choose to go white label with Kambi and do it themselves with their own brand. I am still a believer in the social aspects because, in most cases, only a small percentage of the population leverage these products. Having a social element is slightly less intimidating and gets people involved before they go through the crazy verification process and deposit money. That is still a huge opportunity for both sports and casinos. There are also many conversations out there about eSports and skill-based games so it will be interesting to see how that shapes up.

{audio:0:49:02} Gambling on eSports would be something. Does that not currently happen? I should say illegally or officially, as I am sure someone is betting on the sidelines.

{audio:0:49:19} Some states are involved but I do not know of many operators who are involved. It will have to get regulated and looked after correctly for it to make sense more broadly.

Former Director at Penn National Gaming & Director of New Markets at FanDuel

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Former Director at Pragmatic Play

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Former Director at Playtech and Ezugi

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Current Commercial Director at Paddy Power Betfair

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Former COO at NetEnt

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PENN NATIONAL GAMING INC

Flutter Entertainment PLC

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. 