May 16: Gaming feels pressure of recession risk
Gaming’s recession risk, the week in shares, iGaming Next day two, startup focus - BroThrow +More.
Good morning. On today’s agenda:
Deutsche Bank says free cash flow is the best way to judge recessionary risk.
Betting and gaming shares suffer a tumultuous week.
iGaming Next New York day 2
Startup focus - BroThrow
Dollars and cents. Click below:
Gaming’s recession risk
Don’t panic: A note from Deutsche Bank on Friday set out the potential ramifications of a recession on the prospects for the gaming sector. Looking at the history of the last GFC-related downturn between 2007-2010, they point out their thoughts are “not meant to be alarmist”.
Drilling down into specific categories, the team suggest the impact on regionals was “relatively muted” with new capacity largely softening the impact.
Las Vegas, however, was more severely impacted. With the city among the hardest hit by the housing crisis, Strip GGR fell ~19% from peak to trough 2007-09. The Locals market fared even worse, suffering a ~21% fall peak to trough over the same period.
For the early 2000s recession, Strip revenues fell 2.5% between 2000-02 but Locals GGR rose 3.3% benefiting from a ~5% population growth tailwind.
Free cash: The DB team note that traditionally EBITDA has been the lens through which gaming business models have been viewed. But they go on to make the case that free cash flow might be a “better tool for analysis”.
Terms: They define free cash flow as EBITDA less maintenance capital, cash interest, cash taxes and rent. This puts all operators “on a level footing”.
Storm warning: The DB team conclude that “even in the event a recession does not take place”, the gaming industry could be faced with “pressure from changes in discretionary spend patterns, relative to 2021 and the last 12-months period, specifically.”
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The week in shares
Dead cat: The end of the week saw something of a bounceback sector-wide betting and gaming stocks led naturally by the bellwether DraftKings, which rose nearly 1% on Friday to end the week at $12.61. Caesars was also up over 10% while Penn National managed a near 8% resurgence.
The sector was helped by the 3.82% rise in the Nasdaq on Friday. But the index performance was still down almost 1% on the week.
Head and shoulders: What will be worrying investors is the longer-term picture is somewhat dispiriting. As good as indicators as any in this regard is Roundhill Investments’ BETZ ETF which contains within it a broad spread of global betting and gaming stocks.
Performance since inception two years ago has waxed and waned as investors initially warmed to the sector and then lost faith.
Its comparative performance with the Nasdaq shows a worrying underperformance over the past year. While the Nasdaq is down nearly 12% on a one-year video, BETZ is down 45%.
Further reading
The crypto winter is here. “It’s a matter of time before greater losses materialize due to speculators leaving the space even as faithful crypto enthusiasts hold (or HODL) onto their coins. That means we’re at the start of another crypto winter.”
iGaming Next New York day 2
Playing the long game: Esports took the spotlight on Friday at the iGaming Next New York event with Seth Schorr, CEO at Fifth Street Gaming making the point that esports is more about future potential than current levels of betting activity.
“The numbers on esports-betting are irrelevant,” he said. “It’s about the opportunity of tomorrow.
Martin Dachselt, CEO, Bayes Esports, agreed that investing in esports betting was “investing in the future”. But he added a note of more urgency: “It already has a big impact on their revenue line.”
Money down: Ozric Vondervelden, a gaming industry fraud analyst, told attendees that New Jersey online players have access to $18,575 worth of welcome bonuses if they optimize every current licensed operator's best offer.
Tact: BetParx senior vice-president Matt Cullen said his company's strategy to date was a "tactful expansion". The sportsbook and iGaming operator is live in New Jersey, Pennsylvania and Michigan with sports-betting launch plans in five additional states.
He noted however that it would be a “tough fight” going up against the tribes in California.
Then you go and spoil it all: Laila Mintas, the ex-US CEO at PlayUP - current status TBD pending resolution of a legal dispute - suggested the SEC has burst the bubble on SPACs. “You could raise a lot of money through a SPAC, based on future revenues. But that led to the SEC stepping in and adjusting the regulations.”
Act responsibly: WE+M’s Scott Longley chaired a panel on the developments in responsible gambling during which Cait DeBaun, vice president for strategic communications and responsibility at the American Gaming Association, said the onus was on operators to take the lead on the issue.
Cait DeBaun: “If you’re making money in this game, you have a responsibility for responsibility.”
Reality check: Sen. Joseph Addabbo was keen to promote the idea that igaming regulation was just a matter of time in New York, saying it was a “natural progression and just a question of when”.
Addabbo also noted that in just the opening weekend, mobile sports-betting had generated more than retail sports-betting had since it launched in Jul19. However, as he said, most NYC residents had to drive two hours to Yonkers to place a bet - or “20 minutes to New Jersey”.
Playtech US vice-president Johnathan Doubilet was less bullish. He did, however, hold out hope of Indiana, Iowa and (possibly) Illinois moving relatively soon on the issue.
Addabbo also suggested the 51% tax rate - complained about this week by BetMGM on its investor call - was a “(former governor) Cuomo thing”. “We can look at that somewhere down the line,” he added.
Macau tax rumors
Mo money: Macau Legislator Chan Chak Mo was quoted in GGRAsia that the betting enclave could cut as much as 5 percentage points from casino operators’ GGR tax if they attract gamblers from outside of Mainland China. The current tax rate is 40%.
The move could be included in the current round of gaming law revisions.
The story suggested the local authorities believe Macau is too dependent on mainland China for its gamblers. The mainland accounted for 71% of visitor volumes in 2019.
Deutsche Bank suggested any reduction could see EBITDA gains for the top operators of anything between 12%-22% or margin gains of between 4-6 percentage points.
Startup focus - BroThrow
Who, what, where and when Founder and CEO Brady Sharp is the driving force behind BroThrow, having recently “taken the leap” and left a corporate finance role at Walmart to work on BroThrow full-time. The company is based in Fayetteville, Arkansas and started in April 2019. It launched its first beta test in November that year and soft launched its consumer-facing product in fall 2020.
Funding backgrounder: “We raised and publicly disclosed a pre-seed round of $135K in March 2021. We are currently working on raising a $2m seed round,” Sharp says.
So what's new? Sharp says he has started lining up pitch meetings and is “working through terms with some of them”. The immediate focus is to close the seed investment round and to start marketing and monetizing the platform.
“We’ll hire a lead engineer and marketer from this fund raise. We used a portion of the money raised last year to test different marketing channels during football season and we learned what worked - we’ll lean into those channels this fall.”
The longer pitch: For Sharp, betting startups fall into one of four categories. The first and “ostensibly most popular one” is the exchange model, merging the stock-market trading and sports-betting experiences. The second is social, gamified experiences, the third is the mashup of fantasy and sports-betting with the last being the utilization of crypto and/or blockchain tech.
Sharp says BroThrow sits at the intersection of two of these - the exchange and the social model.
“What differentiates us, in a word, is simplicity. Our big opportunity is to leverage this simplicity and continue driving low cost customer acquisition.”
Big four: Brady says there is “so much room to grow” outside the orbits of the ‘big four’ market leaders with “differentiated” player experiences. “As I learned at Walmart, a small number times a big number is still a big number.”
Brady says BroThrow “doesn’t play the house” and says it is the betting equivalent of Craigslist and Facebook Marketplace, sitting between buyers and sellers.
“We believe there’s value in these under-penetrated areas and will continue to focus on the middle of the country.”
Earnings in brief
Konami said revenues rose 9.9% to JPY299.5m while pre-tax profit rose 1115 to JPY75.2m as the company said it was “starting to see signs of recovery” from the pandemic, although current macro uncertainties clouded the picture. The bulk of revenue comes from digital entertainment which rose 5.3% to JPY204.2m while gaming and systems revenue rose54% to JPY16.6m.
Revenues for Chinese lottery services provider AGTech were up 52% to HK$35.2m, operating losses were down 72% YoY to US$1.6m. The group said going forward it would benefit from exclusive contracts with Alibaba Group and Ant Group.
The week ahead
Affiliate week: The major gaming affiliate providers take center stage this week with both Catena Media and Better Collective reporting on Wednesday. The latter will be asked about the recent reports of a £500m+ deal for Spotlight Sports Group. Also up this week is Sportradar.
Newsletter schedule: Wednesday, Thursday, Thursday pod, Weekend Edition.
Regulatory roundup
Boyd Gaming is suing Kansas over a provision in the just signed sports-betting law that would allow historical horse racing machines at a defunct greyhound track near its Kansas Star Casino. Boyd claims adding HHR machines to the long-closed track located about 15 miles from its casino violates its agreement with the Kansas Lottery. It is thought the lawsuit is unlikely to impact sports betting.
Business and community groups in California have thrown their support behind the California tribal sports betting proposal, calling the online sports betting initiative backed by commercial sportsbooks a "direct attack on California’s local, brick-and-mortar tribal casinos that would jeopardize California jobs and economic progress”.
In a vote late Thursday, the Minnesota House passed a retail and online sports-betting bill that would limit licenses to tribal operators but the measure is thought unlikely to pass the state Senate.
Partnerships
Caesars Sportsbook has been named the official sports-betting partner of the Indy 500 and the Indianapolis Motor Speedway. The partnership was launched this past weekend in time for Saturday’s GMR Grand Prix and includes the opening of an exclusive betting lounge. Chelsea Football Club have agreed a shirt-sleeve sponsorship deal with the cryptocurrency firm WhaleFin believed to be worth £20m a season. WhaleFin is owned by the Singapore-based digital assets company Amber Group.
Newslines
Piraten material: Germany has handed its first slot license to a company called Mernov which runs the Jackpot Piraten and Bing Bong brands. Mernov runs on the Alteatec platform.
Strive for payments: Paysafe and player account management (PAM) provider Strive Gaming have announced a North America-focused partnership that will see Paysafe integrate its deposit and payment methods into the Strive platform and offer players the ability to use its Skrill, Paysafecash and paysafecard eCash solutions.
What we’re reading
Soap opera: The Musky Twitter saga takes another turn. Matt Levine: “Elon Musk has made it very clear that the rule of law simply does not apply to him, and this has worked well for him. If he wants to ignore the merger agreement that he signed, he will.”
Life on Mars: The story of the ex-SS officer who was recruited by NASA after World War II and wrote the Marsprojekt, a novel about life as imagined on Mars. The planet’s inhabitants are governed by a council of 10 wise men and its super-wise leader. You’ll never guess his name…
Meanwhile, Sam Bankman-Fried, CEO of FTX, buys a 7.6% stake in Robinhood.
All in: Americans punt $125bn legally since the fall of PASPA.
On social
Dear Terra Community…
Calendar
May 16: GAN Q1
May 18: Catena Media, Better Collective, Sportradar
May 19: WE+M podcast, Acroud
Contact us
Scott Longley scott@clearconcisemedia.com
Jake Pollard jake@openmediaservices.com