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:0:08:26} Let's start with the European market which is more mature. We have seen Evolution dominating the market and growing faster, but their recent growth has not been that high, considering the maturity of the market. It would be great to understand how you see European live casino evolving over the next five to 10 years?

{audio:0:09:12} Europe is not a standalone market and will have implications for the US and other markets. The European market is pretty mature and you can see that growth exists. In terms of live casino, there are three main providers. Evolution control the market and Playtech is their main competitor in both Europe and the US. The third one is Pragmatic, which until one and a half years ago, you could not even consider a real competitor in the live casino industry. 

{audio:0:10:27} Pragmatic is an amazing story which you need to take to the university and explain to students; this is how you create business. They came from nowhere to became one of the main players, not only in the live casino, but also in the RNG. Pragmatic have minor games but they realized they could have both good quality content and account management activities. They have good relationships with all licensees and operators. They understand the right way of positioning the games and offer discounts to their operators on a weekly basis, to ensure they get the best real estate on the website. That is their story for RNG and now they also have live casino. They had the right strategy and vision and established their studio in the Romanian market. They started with three or five tables, and have become one of the main competitors with over 100 dedicated tables. Are you familiar with dedicated versus not?

{audio:0:12:25} The moment I saw Pragmatic had a dedicated deal with Unibet, I was shocked. That was when I realized Pragmatic was one of the main players. Playtech have been in the market for 15 years already, together with Evolution, and over the last four or five years have focused on live casino. They understand that this is the main vertical to focus on because the growth will come from this main product, and they dramatically improved the product. This includes the quality of the video, operational performance, connectivity and relationship with licensees and positioning on websites. 

{audio:0:13:34} These are the three main competitors in live casino and I don't see that any special competitor will join the European market. I believe the US market will have more competitors in future because live casino is a production product. You need studios, staff and IT to develop the API and UI, but it's not rocket science. Disney can easily have a live dealer operation and will join the European market once they have a US footprint. Three to five years from now, they will establish their live dealer studios operation in the US and will have the knowledge, studio capacity and volume to enter other markets.

{audio:0:15:09} Let's start with Pragmatic in Europe and understand what they do well. What is the quality of the games they supply their operators or what is their secret sauce, because Playtech can replicate the commercials or the account management?

{audio:0:15:55} Pragmatic have the right mentality of a small company, whereas Playtech and Evolution are big companies and Evolution controls the market. Pragmatic will always treat themselves as a small company and understand that they need to compete by giving operators discounts and keeping good relationships with their licensees. They put all the focus on these main items, good relationship with the licensees, discounts and good positioning on their website. To do that, they offer up to 60% discount. Pricing and commercials are never a factor.

{audio:0:17:38} What type of games are they supplying in the live casino space?

{audio:0:17:43} They have the most popular games: blackjack, baccarat and roulette. They have variations of these games, like unlimited blackjack, for example. They also have Slingshot, European and American Roulette, as well as the Lightning concept, are you familiar with that product from Evolution?

{audio:0:18:16} This is one of the main money makers in the industry. It combines regular roulette with multipliers. Lately, they understood they need to have show games, which will never be a money maker. Blackjack, roulette and baccarat are the main money makers. You develop the game shows and game variations and concepts as acquisition tools. It looks popular, sexy and impressive and players love the concept, but after 15 rounds you try to cross sell from the game shows to the main money makers.

{audio:0:19:42} Do you see Pragmatic innovating in that regard, because Crazy Time from Evolution has been very successful in aggregating players to cross sell to classic games?

{audio:0:20:09} Could Pragmatic invent a Crazy Time game show to aggregate demand?

{audio:0:20:20} Everybody sees what Evolution does and tries to follow them. Both Playtech and Pragmatic innovate, but they come up with the same concept with different features. As long as Evolution keep controlling the market, innovation will come from them. Lightning is a good example which is the concept of having regular multipliers, which Playtech and Pragmatic copied, but it's not that easy to be innovative when it comes to game shows.

{audio:0:21:33} Can players distinguish between a classic Evolution or a Pragmatic game?

{audio:0:21:47} They can distinguish but Pragmatic are trying to minimize the gap. The quality of Evolution games is better than Pragmatic and other competitors; there is still a gap.

{audio:0:22:22} What is the market share in Europe between Evolution and Pragmatic?

{audio:0:22:31} Pragmatic hold 5% to 10% of the market and Evolution hold over 50%.

{audio:0:22:44} How do you see that market share evolving in the next five to 10 years?

{audio:0:22:51} Yes, in the European market. Will Evolution maintain their market share?

{audio:0:23:04} Getting the first position is the easy part, but maintaining it is the hardest. They will continue to maintain their position as market leader, but Playtech, Pragmatic and even Authentic which was recently acquired by Scientific, will take some market share over time.

{audio:0:23:50} What is the history of the US market? The first player was Ezugi, which was later bought by Evolution, and the second was Playtech, so how did that evolve?

{audio:0:24:10} Ezugi had a partnership with Golden Nugget when they started the in 2016. Evolution entered the New Jersey market by opening a studio in the Hard Rock Hotel in 2018, after which they acquired Ezugi. They then opened studios in Pennsylvania and Michigan and are currently working on another one in Connecticut. Are you familiar with the US market?

{audio:0:25:00} I have been following the recent developments in New Jersey, Michigan, Pennsylvania and Connecticut, but am happy to hear your perspective.

{audio:0:25:14} The Wire Act prohibits interstate solutions, meaning everything has to be local, which includes your servers, studio and staff. That makes it complicated to justify the costs. With poker, the main damage is on shared liquidity, but with live dealer studios, it means they need to separate studios in New Jersey, Pennsylvania, Michigan, and Connecticut. I believe, in five years, there will no longer be a wire limitation and interstate solutions will be allowed. Evolution are investing because they want the footprint to control the market, and once the Wire Act changes, they will begin to make money.

{audio:0:26:48} Why are you confident there will be a change in regulation?

{audio:0:26:54} It makes no sense to maintain the Wire Act limitations, not only for live dealer studios but you can read articles and talk to regulators. I talk to everybody in the US and they all understand that the Wire Act will get changed, but it will take time.

{audio:0:27:17} Is it common knowledge in the industry?

{audio:0:27:26} Everybody is talking about it. They are investing to ensure they get market share. They have exclusivity with some of the licensees, which gives them the option to operate and receive good income, but once the Wire Act changes, it will be much easier for them. They will have to maintain their existing studios but could close some of them. It will be much easier to operate in the US and serve many countries from the same studio. Do you know Draft Kings?

{audio:0:28:19} Draft Kings is an operator who has a footprint in every US State. Their sports book exists almost everywhere and they have started developing their live dealer studio.

{audio:0:28:47} Is there any public material on that development?

{audio:0:28:51} No, it is not public knowledge, but they are talking about it. If you talk to someone from Draft Kings, they will tell you they are planning to develop their own live dealer studio. I believe that is why they acquired Golden Nugget, who has the knowledge together with Ezugi. Today. it is a combination of Golden Nugget, Ezugi and Evolution but I am not familiar with how it is operated.

{audio:0:29:47} Is that a great strategy from Draft Kings in the sense that they can build the live studio but will not have access to the IP of top games?

{audio:0:30:10} The money makers are the three main games, blackjack, roulette and baccarat. Draft Kings will develop their own versions and 85% of the income comes from those games. Draft Kings will continue working on those three main games and give the rest to Evolution and Playtech. In parallel, they will develop game shows to have in their own studio.

{audio:0:31:59} Why have big European operators like 888 and Bet 365 not built their own live casino studios?

{audio:0:32:23} The US has a high correlation between live dealer studios and land-based casinos, which does not exist in the European market. Today in New Jersey, Pennsylvania and Michigan you are not required to build a studio inside a land-based casino, but there is a correlation because you need a license to operate a live dealer studio, meaning you need a partnership with one of the land-based casinos.

{audio:0:33:00} Why is that important or an advantage for an operator?

{audio:0:33:04} New Jersey regulations state that you need to partner with a land-based casino. Live dealer studios need IT and technical stuff to go online, but the dealer activity is identical.

{audio:0:34:07} If you build an online casino through a land-based casino, do you sacrifice part of the land-based casino to stream to live players, so it doesn't make sense to use the facilities of a land-based casino because the studio itself is not the same and you're using physical space which was intended for land-based players.

{audio:0:34:57} Yes, but in the hotel casinos of Atlantic City, 25% to 50% of the space is empty.

{audio:0:35:11} They have the space and need to put something there to make money from the activity, as they have more employees. To operate one live dealer table 24/7, you need at least eight dealers, which excludes management, IT and pit bosses. For 10 to 15 tables, 150 to 200 more employees are required.

{audio:0:35:45} How long would it take operators to reach the level of quality of Evolution? Pragmatic is a great competitor but they struggle to match the quality from Evolution, so how long would it take Draft Kings to match that quality?

{audio:0:36:08} I believe it will be shorter. In the US money talks, and all the best production companies in the world are based there. One cannot compare Universal Studios, Disney or Netflix to Evolution, so it will be much easier for US companies to establish live dealer studios. Going back to the question why you see this activity in the US and not in the European market, for 10 tables you need to hire 150 employees and you cannot justify the operational costs. Draft Kings currently have 40 to 50 private tables from Evolution.

{audio:0:38:16} Yes, in New Jersey, Pennsylvania and Michigan. If the Wire Act changes, they will need to operate the studio themselves, and having 50 to 60 tables makes financial sense. The US market has higher volumes than all the other territories in the European market.

{audio:0:38:58} Will everything happen once the Wire Act is no longer in place?

{audio:0:39:08} No, it will happen before since everybody understands the Wire Act will change. It makes sense for them to build foundations, which is exactly what Draft Kings are doing.

{audio:0:39:25} When do you expect that to happen?

{audio:0:39:30} I believe it will take them a year.

{audio:0:39:33} Yes, I believe that by the end of this year, they will have something.

{audio:0:39:40} I have been following the press on the US market, specifically on licensing.

{audio:0:39:49} If you look for Draft Kings live dealer studio, you will find nothing on the internet.

{audio:0:39:58} No I am talking about the Wire Act.

{audio:0:40:02} This is something everybody is talking about it but it became less popular because everybody is focusing on the pandemic and Ukraine, so nobody is putting their foot in the water. Everybody is talking about the fact that it will have to get changed.

{audio:0:40:26} How will Evolution compete in the US market once everything pans out?

{audio:0:40:34} They will have real competition in the US, not Pragmatic with 5% to 10% or Playtech with 15% to 20%. Playtech and Draft Kings will take some market share but I am unsure if Draft Kings plans to operate live dealer studios on a B2B level, but they plan to do it on a B2C level. Draft Kings is a tier 1 licensee and will take 10% of the market for their own needs and operate their own live dealer studios. I'm sure all these companies are waiting to see when is the right time to enter this market. Disney recently started searching for sports betting employees. Disney wanted to make entertainment without entering the gambling industry, but they understand this is the future. They have their advantages and can create good connection between entertainment and gambling activity, and sports betting is more popular in the US. Once they entertain the sports betting industry, I am sure they will look at casinos as well, and the distance between sports betting and live casino studio is very close.

{audio:0:42:50} How do you see Evolution fighting those new competitors? Today, Evolution has a commercial relationship with Draft Kings and have 100% of the market because there is no competition in the US, what levers can they pull?

{audio:0:43:27} They are trying to have their footprint, good deals and agreements with licensees, to create the right relationship, to ensure that once there is competition, everybody will feel that the right option is Evolution. It will take time for the competitors to take market share. Playtech established their studios in Michigan and have another one in New Jersey, so it takes time to sign deals with US licensees, mainly due to the commercial activity from Evolution, who are pushing everybody to on exclusivity, including William Hill. They are trying to teach the market that they don't have any replacement.

{audio:0:44:52} Do you see players remaining with Evolution games or is there no loyalty?

{audio:0:45:02} They will be loyal to Evolution because they are used to it. If you are an Android guy, you are used to it and know which buttons do what, and seldom switch to iPhone. I am not saying Evolution and their competitors are on the same level, but it will take time. You need to learn not only the operators but the players as well. You need to give them another option to be familiar with the UI, with other games and lobbies. The learning curve takes time on both the operator and player levels. I believe their competitors will take market share, so now they are focusing on their footprint and exclusivity, to ensure everybody is familiar with Evolution rather than other competitors. I believe they will keep innovating new game shows, to combine the US sports book with the live casino product.

{audio:0:47:12} Why has Pragmatic not entered the US market, considering the size of it?

{audio:0:47:27} That is a good question and nobody has a clear answer other than Pragmatic. The US is one of the biggest markets in the world, but it is super complicated to operate in the US. There are 50 different jurisdictions with 50 regulators. In the US, you need to go state by state and have relationships with regulators to go through the licensing process, which takes time. I am not sure if Pragmatic has the right mentality. Being small is a disadvantage in that they do not have the right organization to enter this complicated market.

{audio:0:49:20} Do you not expect them to enter the US market soon?

{audio:0:49:23} I have no doubt they will enter the US market, but it will take them time. I am not familiar with their plans for the US market but I know they are doing an amazing job in the European market and also have a good footprint in Latin America.

{audio:0:49:47} Do you have any specific comments on the recent regulatory issues that have been surrounding Evolution after the report about money laundering saying that they were involved in supplying their games to US sanctioned countries?

{audio:0:50:11} I understand responsible gambling and the main responsibility is on the B2C side. Take Syria or Russia as an example. If you are a B2C operator who has activity in a country in which the US has sanctions with, operators give players the option to enter a live dealer studio using a VPN. Evolution cannot control that but have become a monster in the online industry. Somebody called me after it became public, that the New Jersey regulator will retract the license from Evolution, but there is no way because they are too big. If Evolution has no license in New Jersey, you will simply kill the New Jersey market.

{audio:0:51:58} The regulator will investigate and Evolution might get a fine in New Jersey. The main issue for Evolution is that each time these issues become public, it affects their share price.

{audio:0:52:41} Would you say Evolution has been more aggressive than Pragmatic or Playtech on reaching black/gray markets, or is that something every supplier does?

{audio:0:53:13} Evolution are super aggressive and do whatever it takes to have more business. One of the main items in the agreements between game providers and licensees is liability. The operator expects the provider to be fully liable for all bug issues coming from their games. Usually, it's an endless competition between the operator and the game provider, where the operator wants to uncap it and the provider wants to cap it to minimize risk. US operators are asking for one cap. I am familiar with companies who never give uncapped liability, but Evolution will give whatever it takes to get a signed deal. If Draft Kings asked Evolution for uncapped liability, they will sign the deal and once there is a crisis, they will manage it. They will negotiate and find the middle ground to minimize the risk, exposure and liability.

{audio:0:55:15} Will Evolution lose any country license due to their aggressiveness?

{audio:0:55:21} Maybe in the future, once there is real competition on the live vertical, but these days, the New Jersey market has no justification to operate and have any online activity, if Evolution are not part of it. The same is true in Pennsylvania and Connecticut and the regulator will not kill the business.

{audio:0:55:56} How big could be the US market get in the next five to 10 years? Will more states open up for online casino?

{audio:0:56:13} I had a feeling three or four years ago that it would be faster, but it is not. The moment sports betting became popular in the US, I was sure it made sense to everybody to have the sports betting activity and casino in parallel, however it takes time. I believe two more states will legalize online casino in 2022.

{audio:0:56:49} Any specific states or is that only a number?

{audio:0:56:53} This is the number for 2022, but it is hard to predict.

{audio:0:57:14} Will the US market be the same size as Europe or could it be even larger?

{audio:0:57:30} Definitely larger. New Jersey had $1.6 billion in 2021 and the UK is £6 billion and is a mature market. New Jersey is not even close to a mature market and will be over 2 billion, and New Jersey has a population of 10 million.

{audio:0:58:15} The UK is eight times larger.

{audio:0:58:17} Definitely larger so you cannot compare. By the end of this year, it can easily become the same size as Europe.

{audio:0:58:31} Is there anything else important to consider when analyzing Evolution, Pragmatic, Playtech or the online casino space?

{audio:0:58:46} We mainly discussed the majority of live casino but we can discuss RNG in more detail and the competition there. Are you familiar with platforms in the US?

{audio:0:59:00} What do you mean by platforms, like the lobby?

{audio:0:59:03} Lobby is part of the platform, but platform is the player account management. The competition in the US is super high and currently there are two main account providers, Scientific and Gun. I can explain their strategy and how Gun became a market leader in the US.

{audio:0:59:40} I am more interested in game suppliers like Evolution, Ezugi and Pragmatic.

{audio:0:59:49} In the orientation of live casino, we can discuss RNG but I'm not sure if this is the right time or if this is your main topic.

{audio:1:00:00} Could you comment on Evolution's acquisition of Big Time Gaming?

{audio:1:00:27} M&A is a full subject to discuss in more detail, but it was obvious on the panel they had two weeks ago, on the one hand, they are trying to maintain their brand separately. Since they have the volume, knowledge and capacity, they are trying to give the advantages for each of their brands. They are trying to create a one stop shop.

{audio:1:01:07} On the other hand, they allow their brand to operate independently, which is their strategy.

{audio:1:01:55} How important is the role of the lobby to defend Evolution's business? The Crazy Time game show attracts demand, but more money is made in classic games. My understanding is that Evolution is trying to build a lobby in which you create an ecosystem within the operator's website, so that once you enter the Evolution lobby, you will remain playing Evolution games, so you will close the system there.

{audio:1:02:43} That is crucial if you want to create your own ecosystem and ensure nobody plays games from other providers. I'm not sure if they want to maintain this lobby because maybe they want to push other content or have other providers. From an Evolution perspective, they are pushing to have this lobby implemented to ensure everything is done in this ecosystem. It creates a super high value for the company and their activity.

{audio:1:03:33} Many thanks for your time. It's been very interesting to talk to you, I have learned so many things.

Evolution Gaming: US Competition

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: US Competition

Former Director at Playtech and Ezugi

inpractise.com/articles/evolution-gaming-us-competition

Evolution Gaming

Why is this company interesting?

Executive Bio

Former Director at Playtech and Ezugi

Interview Transcript

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