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:0:02:57} I'm interested in learning about your background. I run a concentrated portfolio and Evolution is my largest position, and any time I get a chance to talk to people who know Evolution, I jump on the bandwagon. Before jumping into the questions, what did you do at NetEnt and what are you doing now?

{audio:0:03:54} Before we start, I read your publicly available assessment on the NetEnt piece and Evolution acquiring it and I broadly agree with everything you have in there. It had great insight which shows you know the business and whoever you spoke with helped you along the way, so that piece was very well written and I liked it. 

{audio:0:04:21} I was always on the sports book casino operator side in various operational roles culminating in GVC who were Evolution's biggest customers at the time. I was very close to Evolution from that side of things and helped drive them on. When they acquired Ezugi, I helped with Ezugi Live in New Jersey and built new studios in Romania before they became part of the Evolution family. I then went over to the game supplier side, which was new for me, with NetEnt. I took operational learnings from the customer side and applied those to NetEnt. Looking at your list of questions, I like the way you refer to Legacy NetEnt. Whilst I was there, we went through multiple restructures which was part of the reason some of that was slow. When we acquired Red Tiger, that gave us a kick in the right direction in terms of people, processes and what we wanted to do, which set the scene for Evolution acquiring NetEnt. 

{audio:0:05:54} Obviously, from the sell side, we looked at it very differently to how Evolution and Martin were looking at it. I was also very closely involved with the CTO, and was part of the planning as to what was going to happen. After I left, I consulted for a customer of Evolution, called White Hat, for the last year. I have seen some of the benefits of what Evolution have done with NetEnt over the first year post-acquisition. I also saw some of the frustrations from the customer side as well, which you alluded to in the reactions to the deal, so I could probably go into those from multiple angles.

{audio:0:06:44} Perfect. Before you start, how long were you there post acquisition?

{audio:0:06:51} In legal terms, two months, but in real terms about seven days. The deal completed on the 1st December 2020 but there was a lot of planning required for that deal. I had an intense period of work with David and others in the team. I am currently consulting for several companies, both public and private. There are some bits where I should be careful what I talk about, but I will manage that. I am also setting up a new organization within the gambling sector and really want to disrupt part of the sector which hasn't been disrupted yet.

{audio:0:07:52} I'll be very curious to learn more.

{audio:0:07:55} I am currently working on that with a team in Bulgaria and Malta and we're going through some accreditation and will likely take a CEO role in future, in that organization.

{audio:0:08:09} It looks like you have a very diverse background so we can take this in many directions, but the primary thrust of my questions is around the acquisition of NetEnt and why, since then, it seems as though nothing has happened. Since you spent so much time in NetEnt and perhaps there was a slight overlap on the Evolution side, you had an opportunity to observe how Evolution has performed since. Could you give me some color on the cultural differences because both were Swedish companies?

{audio:0:10:06} You made a good point about them both being Swedish companies on paper. I spent my first six months at NetEnt living in Stockholm and immersed myself in the culture of the NetEnt office. That gave me good perspective of the way Swedish organizations operate, and Evolution is an exception to that rule, but Legacy NetEnt took a Swedish cultural position. Prior to myself joining and when Therese Hillman was appointed CEO, there were some big challenges within the organization. It was extremely bloated, with middle management making many decisions. There were many committees and counsels and almost everything went to a vote and everyone had a say. There was a little bit of technical debt and a lot of process debt. There was a lot of management for the sake of management, within the organization.

{audio:0:11:30} After Therese became the CEO, she kickstarted the process of stripping out the waste which wasn't needed to run the organization. Myself and Andy Whitworth – who came in as the Chief Commercial Officer – set up the UK office and started to revamp commercials. I came in to look at product and operations and gave a kick in that direction. We were somewhere down a route of making these changes to the organization, when we acquired Red Tiger and were ourselves acquired by Evolution. We still had the historic mindset of a very Swedish company. You could have three or four Fika breaks a day and people were flexible with their working. This was pre Covid and we went from a bloated organization with no sense of urgency, still living off legacy games like Starburst. 

{audio:0:12:38} NetEnt were one of the first organizations to have free spins integrated with casino operators, PAMs and platforms. We were in the process of changing that but the underlying culture was still very Swedish. Then we acquired Red Tiger who was completely opposite and was running at a very high profit margin compared to NetEnt and others within the sector. We paid a premium for Red Tiger which kickstarted the changes to how we thought about technology, people, operations and processes. Both the Bulgarian and Malta teams from Red Tiger showed people in NetEnt that it could be done leaner and more efficiently; the difference between a Swedish and an Eastern European operation to be blunt. Evolution were known for being very aggressive and getting stuff done. Management does not take no for an answer, which Todd speaks about in his presentations; it is simply a case of figuring out a way of doing it. 

{audio:0:14:17} If Martin or Todd wanted to build something, the technology and operations teams would figure out a way. They were based in Latvia for their technical and operations, which is a different culture from Swedish or Indian developers. They are a technology company and you can have some fluff and commercial and sales, and they can want to do things quickly, but if the tech doesn't react, you cannot achieve that. 

{audio:0:14:58} David Craelius came in with his team in Riga, which is exactly what NetEnt needed. We had started that journey and Evolution have now continued that and have given it their twist and pushed it in the right direction. Everything I'm saying is well known to competitors in both the game studio space and casino operators. They all knew how slow NetEnt had got and the new NetEnt did customer appreciation days and spoke publicly about not resting on our laurels of having Starburst and Gonzo's Quest. We were changing and doing things differently. Evolution have spent the last year unpicking some of the legacy of NetEnt, not from Starburst or Gonzo IP but unpaid technical and process debt which was there.

{audio:0:16:15} Evolution had big plans for Gonzo; how have they managed Legacy NetEnt products?

{audio:0:17:07} The Gonzo live game wasn't great compared to Crazy Time, Dream Catcher and some of the Lightning products Todd and the team rolled out. Gonzo seemed a bit of clutching at straws, wanting to use some NetEnt IP and almost hack stuff together; not a great game. When we acquired Red Tiger, we did the same process; we looked at what IP we could leverage from Red Tiger to help us revamp technology for NetEnt. We got the Bulgarian Red Tiger dev team to build a Megaways version of Piggy Riches for release, which performed well. Good choice of IP and quick execution gave us results. Todd has a brilliant team who have retained expertise on the slots side. Nick Robinson and the Big Time team are part of the slots family within the Evolution Group. Surely all those great heads can turn some NetEnt IP into a live product. 

{audio:0:18:46} Todd releases a limited number of games each year and they are the showcase piece at ICE with everybody wanting to launch what Evolution offers. They built some great branded content over the years, and some follow-on content like Dead or Alive II. Red Tiger were building things like Pirates Plenty and other great Megaways games. They could continue with that and let Todd and his team focus on the next Crazy Time. They can absolutely do it, but I think they are spreading themselves too thin. They should focus where they are good. They should keep making stuff in the old NetEnt and Red Tiger, because both casino operators and players want it. They shouldn't make a hybrid for the sake of it because of an acquisition.

{audio:0:20:00} They announced the acquisition in July 2020 and I have read through the materials which have been published since, such as earnings calls and everything else. There was a big build up in expectations, particularly on the Gonzo side, but things haven't necessarily played out. Perhaps the team can regroup and make another Crazy Time in future. I met with Todd recently and raised that question and we'll see how the team is able to revamp. The Red Tiger acquisition by NetEnt was phenomenal. There might have been a lot of competition for Red Tiger at that point, and NetEnt was very happy to have acquired it, but what was the rationale behind the NetEnt sale to Evolution? Was it because you were bloated, performance was lagging and you wanted to monetize assets, and was it the best decision by NetEnt?

{audio:0:21:41} Yes, I think it was the best decision. We had legacy tech for both slots and our integrations with customers, and we were still building slot machines in a very old way. We didn't have single frameworks like Big Time, Elk and Pragmatic did, so they could build games faster and more cost effectively than we could at that time. We had some large cost centers and breaking that apart was taking time and costing money. I'm not sure if you're up to speed with Swedish labor laws and how difficult it is, and there was unionization. We were working through those processes and had to keep the lights on, so it was business as usual of having a road map and delivering, whilst making the business more efficient and more cost effective. 

{audio:0:22:49} We had a lot of regulatory headwinds. Regulation was coming to Germany which was unclear at that point. Holland had gone through regulation and Sweden had just cut bonusing. The UK headwinds were there and all that regulatory activity was damaging towards us. We also saw huge opportunity, in places like the US, with states opening up, but due to the legacy, we couldn't turn things around quickly enough to capitalize on that. The negatives were starting to outweigh the positives. We had NetEnt Live which Andres and team were turning around. It had been a huge cost center and it wasn't working as optimally as it could. We were trying to slow that tanker down and turn it, while looking for new opportunities at the same time. That was very difficult to do, and when you put all that together and the board was offered a 43% premium to keep the NetEnt brand alive it made sense for the sale to go through.

{audio:0:24:31} Are there other competitors who can compete with what Evolution owns?

{audio:0:25:01} Yes, increasingly so. There are potentially high barriers to entry in certain places because of licensing regimes, but if you look at the revamp Microgaming went through and the launch of Games Global and the number of studios they have, with Walter as CEO coming in from IGT, taking that on and ex-Red Tiger NetEnt Julie Allison as Chief Revenue Officer, they are turning around the perception of old school micro gaming into a force and a global leader. Pragmatic have got every vertical and have seamless integrations with the operators' wallet. Playtech is always there in the background and have exclusive deals in markets with operators. Relax entered the market a few years ago and have made great content such as Money Train 2. Simon Hammon was ex-NetEnt and took his knowledge of building slots to a new place. Evolution have a lot of competition but they still have some great minds. They still have NetEnt IP and Nick Robinson on the Big Time side. There is no reason why they can't succeed and build great slots again.

{audio:0:26:52} If you were Martin today, knowing what you know about Legacy NetEnt and the team, culture, products and IP, are there issues you would address right away to get Legacy NetEnt growing quicker?

{audio:0:27:20} I think they are doing those things and the right things, but these things take time, which is why there's been almost nothing for a while. They need a single game framework across the entire slots business of Evolution, to build a game in the time it takes Red Tiger to, but with a NetEnt style quality and IP. Tearing apart the six different game studios NetEnt had, and saying they will all work in the same way to be more efficient and write one set of code. The other part is on the customer side, which is what they're doing with one stop shop and is absolutely the right thing to do. 

{audio:0:28:32} I've been on the operating side and managed 150 integrations at GVC with games suppliers, getting those on the road map so that as soon as there are regulatory changes, you prioritize your key suppliers. Instead of having to do something for Evolution, Ezugi, Big Time, NetEnt and Red Tiger, having a single integration point with a customer wallet will drive engagement with all Evolution brands. They need to ensure the simplest route to market for the customer. NetEnt had great branded slots and Narcos performed amazingly. 27 million people were watching Narcos at the time, globally, on Netflix, so of course it was going to have a huge reach. They need to look at how NetEnt succeeded back then and start to build those again. Those are my three things: single game framework, leverage group integrations and the one stop shop, and look at what NetEnt did well, because customers and casino operators still ask for that type of content.

{audio:0:30:24} I was at the iGaming conference in New York last week and saw over 40 players offering similar products on the live side. The number of competitors is growing as we speak and you feel optimistic about the opportunity. At the same time, there are places where they can fix the bleeding a bit. I'm curious how close you were to the regulatory aspect of things. Last November, a short report was issued on Evolution about regulatory issues from New Jersey. Are you comfortable talking about the regulatory angle in general?

{audio:0:31:42} Yes, I am comfortable. I was close to it in my White Hat days as well as at NetEnt, in terms of games certification, licensing regime changes; happy to answer on that side of things.

{audio:0:32:01} Did you get a chance to look at the short report which was issued last year?

{audio:0:32:08} Yes, I saw that when it came out last year.

{audio:0:32:17} My take is that there are many game suppliers and operators who operate in jurisdictions they shouldn't, and there are several reasons why. Some knowingly do it to drive revenue and look at ways to disguise, hide or make that less prominent. There are others who potentially don't have the systems in place or the capability to block or monitor it. There is an argument that they should have systems in place but if players want to play something, they will always find a technological way to get around it. 

{audio:0:33:26} Evolution has licenses in regulated markets and are very careful where they operate. As games suppliers, we would always supply a list that was signed by the customer of where they could and couldn't supply content, how it had to be done and what the implications were. Cease and desist letters would be shared between companies reminding them not to operate in certain territories or markets. It is a very complicated and gray area, but it will continue to happen for multiple reasons.

{audio:0:34:15} One of the allegations was that this was happening in black markets, such as Iran and Syria, and more interestingly Evolution was aware of it because they mailed a copy to the New Jersey regulator. I've had conversations with people, both from the company and outside, and am wondering if it is possible for Evolution to deliberately look away while this is happening?

{audio:0:35:14} I don't think so. At NetEnt we had traffic reports constantly running on black markets or those blacklisted by us. We would tell operators that they cannot allow customers to place bets in those markets and would take action with those operators. I would think that Evolution would do the same, especially if they want to be first in regulated markets such as states in the US or Ontario which opened earlier this year. Whichever markets open next, they would want to be there, so instead of looking away they would take action.

{audio:0:36:07} When you were at NetEnt, if this happened because this is a space which attracts certain types of operators – which is why you have systems to prevent it – what would be the next step if an operator pierced through your infrastructure?

{audio:0:36:55} We would look at what we could do, technologically, to further enhance those systems and prevent it from happening. As a licensed company, we had that responsibility to make our protection stronger. The commercial team would ensure operators put blocking in place and stop these players from playing or close these accounts down. We would send threatening letters to legal representatives of those operators and there would be provision in our contracts with casino operators to terminate the agreement if they continued to breach it.

{audio:0:37:56} When would the regulators come into the picture?

{audio:0:38:03} Typically, these things occur in unregulated markets. If there was a stipulation as part of the licensing conditions from a market where we did hold a license, which said we needed to declare what our traffic was from these other places, we would do that. If we held 18 different licenses and a customer had allowed bets to come through from Iran, there's no requirement for us to proactively inform the 18 jurisdictions we're licensed in.

{audio:0:38:46} In this specific short report released in November, they alleged they were able to access through Iran. I listened to the company's own explanation of how a person might have pierced, and they eventually mailed that to New Jersey. Could they somehow punish Evolution for allowing this to happen in a different jurisdiction?

{audio:0:39:34} The New Jersey regulator would have their opinion but they care about the legal operation of the casino within the state boundaries of New Jersey, and the fact that the players there are protected. There could be an angle where the New Jersey regulator sees it as they're allowing unsafe or illegal play within the boundary of their state, but that is where their control ends, at the state boundary. They could look at it in terms of, does this company know how to operate and are they allowing things to happen in the right way, but I don't see how bets being taken via an operator where a customer is using a VPN, will result in either a freeze on anything or license conditions imposed in New Jersey.

{audio:0:40:53} I have also heard that but I don't think the regulators will say everything is clean; there has to be closure and we haven't seen that yet.

{audio:0:41:13} Many companies have been awarded licenses in New Jersey, Pennsylvania and Michigan. Those companies meet the licensing conditions and the technical requirements, as set down by the DGE in New Jersey or the PDCV in Pennsylvania, but they may also operate in other markets which are not yet regulated, or in gray markets. There are different levels of that probity and personal disclosure about what the company is doing, where a company could be fully compliant with the DGE in New Jersey doing everything by the rules, but a part of the company operated in multiple unregulated markets.

{audio:0:42:14} You mentioned your new venture will take a slightly different angle and you mentioned Malta and Bulgaria, and Malta brings up another question I have. Slightly more than a year ago, that gray market slap on Malta raised questions about taxes and the types of companies operating there. After this new administration came into play, they started asking for a minimum 15% global tax from every country, but Malta has been taxing at 5% or 6%. Do you have any take on those issues, including your potential new business? Will they continue from Malta or find other attractive jurisdictions?

{audio:0:44:04} For several years, even prior to the gray listing, companies were looking at where to go next. There is a high turnover of staff in Malta due to a saturation of iGaming businesses. There was a slowdown in investment in Malta from iGaming companies and on the back of those things and the gray listing, many companies looked for alternate license opportunities. They looked at the Isle of Man, Curacao, Latvia, Estonia and other jurisdictions. For some organizations, that would be a secondary license. They want to be able to supply to the widest reach of countries and jurisdictions, so holding a license in Malta allows them to operate in European countries which don't have their own licensing regime yet, and pay a low tax rate. They can also leverage a knowledgeable workforce who command low salaries. 

{audio:0:45:51} A second license in the Isle of Man would give them access to Asian markets, excluding China of course. Their tier 3 would be Curacao, from where they could supply other markets globally. There are obviously challenges around different payment providers and the ease of getting money into the wallet and back out to the customer, which differ depending on the license you may hold. Several questions were asked about the future of Malta at that point, and people did start looking at other licensing options, but there hasn't been a massive shift of people closing their Maltese operations because of that. It has simply increased the shopping around for options, and potentially, where 100% of your traffic would have been via Malta in the past, it may be reduced to 75% from Malta and the balance in other licensed locations.

{audio:0:47:23} I was under the impression the stamp of the Malta Gaming Association was worth a lot more. Is there another stamp just as valuable to operators or players?

{audio:0:47:43} Not at the moment, but in the past Gibraltar was up there, then Brexit happened. Malta remains the go to, and the gray listing started to raise questions from both operators and suppliers as to if this does go south, where can they quickly move stuff to and where do they need to do due diligence.

{audio:0:48:34} Evolution still only pays 6% tax because of their Maltese base, and I am modeling out a higher tax rate for my own conservative numbers, but where else they can get the same treatment and benefit from such a low tax base, only time will tell. You, very nicely, put those three points as the primary focus if you were running the combined entity today, but from a resources standpoint, is that becoming a challenge for the industry? I have heard that other software development companies are finding talent very challenging. AI software is even more challenging, but given the focus on online, both live and regular slots, is that an issue to be concerned about, given your interest in starting a new operation? How do you address resource constraints?

{audio:0:50:37} In the global tech market, it is getting more expensive to hire and retain skilled software engineers. Large organizations are paying ridiculous salaries and sign on bonuses, and are driving higher salary expectations with software developers and engineers. The Covid impact saw some organizations offer flexible working opportunities, but the gambling space was more advanced than many other sectors and already had much more flexible working, which was almost a USP for some organizations but that has now gone away with flexible working practices. There is less of a draw and retention mechanic with that. 

{audio:0:51:42} Two more factors are the saturation of gaming suppliers and game studios. Every few weeks, new game studios are being spun up. People leave Pragmatic, NetEnt or Playtech to start their own game studio, and they pull many developers into those. There are hubs of game suppliers in Sophia, Bulgaria, Krakow, Poland and Kiev, Ukraine. There's a huge number of game studios competing for resource of people who know what they're doing. Evolution have done a great job with operationalizing their technology. Last week, Todd spoke in New York about how difficult it is for those other 39 in the space to compete. On the slot side of things, the technology is pretty simple. You can buy off the shelf RNGs from several organizations and get your RGSs all sorted. You have good people doing the game production and the math, with simple technology. 

{audio:0:53:03} There is saturation in distribution to customers in aggregator platforms, and the barriers to entry are very low. You can spin up a game studio without that much cash, so there's huge competition. It is very difficult to hire and retain good people at a cost-effective rate. As an industry, we've had a huge number of people based in Ukraine developing platforms and working in the iGaming sector, and what's currently happening in Ukraine has slowed that down and people are, quite rightly, focusing on other things. As a sector, it's definitely seen an impact and will have implications elsewhere in terms of cost and recruitment and setting up operational centers the longer that conflict goes on. Developers are very easily taken onto new projects and moved around. During my last role at White Hat, we saw the cost of a Java or Scala engineer increase 15% in a year.

{audio:0:54:46} Evolution keep saying they have a handful of employees, Legacy NetEnt had some employees and you're still running those teams, particularly in Kiev, but why was Ukraine so huge in slot development? Was it simply East European tech talent?

{audio:0:55:12} Yes, and several organizations, including Playtech, were quite early into Ukraine. 888 had a development resource there and GVC Entain also had a big group there historically, which split into multiple organizations which continued to grow.

{audio:0:55:46} Can brick and mortar casinos, such as MGM and others, successfully make the jump over to online, both in slots and live?

{audio:0:56:23} Some will and some won't. The ones who are currently having success are those who realize it's a very different way to acquire and retain customers.

{audio:0:56:43} BetMGM is probably the best example and another is Bally's. BetMGM has a joint venture with GVC Entain, and they leveraged years of European regulated market knowledge. The US organizations which aren't successful try to do it without leveraging that experience. They employ people from fast moving consumer goods marketing creative arts backgrounds, and when you look at BetMGM’s approach to customer acquisition and retention versus others who aren't doing it in such a good way, you see huge differences in the results. 

{audio:0:57:45} The other example is Bally's, who acquired a sports platform which they are integrating into their player account management system. They acquired Game Assist which has been a casino and, effectively, a data company giant in the UK and Europe. Bally's took the best bits of that technology and platform and plugged them together with operational marketing knowledge of people who have been doing this in the UK, Spain and other places for many years. 

{audio:0:58:19} Those US land-based casinos who do it in that way will succeed. Those with the cash behind them who can build those platforms in the right way to ensure the proprietary tech where it needs to be is correct, and leverage the integration and data piece on top. There was a good piece last week from the Bally's interactive MD, Robeson Reeves, who spoke about how they plan to leverage that and put it all together. They will succeed, but a US bricks and mortar casino who tries to do it themselves will fail as they will not be able to keep up with the marketing spend.

{audio:0:59:05} Later in the year, I would love to have another conversation with you, and hopefully you would have had your chance to launch your new business by that time. It looks like there is much more I can cover with you but my angle to this conversation was primarily NetEnt. I appreciate you taking the time, this was fantastic and good luck in your new venture.

{audio:0:59:50} Thanks very much, great to chat to you. My knowledge spans multiple areas of the sector, so happy to have a chat at any point.

Evolution Gaming, NetEnt, & Online Gaming Regulation & Tax Outlook

Former COO at NetEnt

inpractise.com/articles/evolution-gaming-netent-and-online-gaming-regulatory-outlook

Why is this interview interesting?

Executive Bio

Former COO at NetEnt

Interview Transcript

Related Content

Evolution Gaming: B2B Aggregators and Regulatory Outlook

COO at a Large Online Gaming Aggregator and Former Netent Director

Evolution Gaming: US Competition

Former Director at Playtech and Ezugi

Evolution Gaming vs Pragmatic Play

Former Director at Pragmatic Play

Investor Dialogue: Evolution Gaming Short Report

Partner Interview