Fuelled by the accelerating transition from retail to digital gambling, high growth can be expected in this market in the next few years. The key question for investors is how to play this compelling game.


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Online gaming has been growing by an impressive compounded annual growth rate of around 12 percent over the last 10 years. Yet, this segment only represents close to 10 percent of the $400 billion world gaming market’s gross annual revenue.

Fuelled by the accelerating transition from retail to digital gambling, a high single-digit growth is expected for the next 3 to 4 years, with mobile gaming set to accelerate even faster.

The gaming industry can be split between three main actors: the operators, examples being Paddy Power Betfair, William Hill or Betsson; the suppliers, e.g., NetEnt, Evolution Gaming or Kambi; and the affiliates, eg., XLMedia or Catena Media.

«We see their advertising emblazoned on the shirts of famous football clubs»

The key question for investors is how to play this compelling market. The operators are well known; we see their advertising campaigns everywhere: on TV, on social platforms and emblazoned on the shirts of famous football clubs. While the operator retail outlet market is quite consolidated, the online market, on the other hand, is very fragmented.

With the barriers of entry being very low to the online segment, the number of operators has exploded over last couple of years. On top of that, the diversification of their offerings is very limited; hence, they have to continuously spend large amounts of capital on marketing to attract and retain customers.

Meanwhile, suppliers have the advantage of being able to work with many operators and therefore offer wide exposure to the market. But again, differences between them are limited. Companies can launch new ideas to remain ahead of the competition; however, this edge lasts often only for a few months, before the other players counterattack with a similar product. Furthermore, the most attractive companies in this part of the industry are well known and valuations expensive.

«They use performance-based agreements»

This leaves us with the affiliates.These companies generate traffic for their customers, gambling operators, often through a network of their own websites, which act as portals, through which, customers gain access.

Affiliates have a major competitive advantage, as they can be operator agnostic, and therefore offer a broad and efficient exposure to the digital gaming market. Very few of these companies are listed and their size is usually much smaller than the other actors of the industry. A key reason for this is that the affiliate market remains hugely fragmented; another, is their business model is generally poorly understood.

«This is a segment that could have high growth potential as the digital world expands»

They use performance-based agreements, thus their clients don’t have to spend a dime before the new customers become profitable. The most common agreement is a lifetime revenue sharing model where the affiliate shares 50/50 of the net gaming revenue generated by the user with the operator. Obviously such a business has its own related risks, but their attractive valuations, and the fact that they are operator agnostic, offers the most attractive characteristics to play the growing digital gaming market.

Within the affiliates, XL Media is offering interesting opportunities. The firm’s performance marketing campaigns are very successful in delivering players to the gaming operators. Furthermore, it is rapidly expanding its presence into the online social gaming area, diversifying away from pure gambling.

This is a segment that could have high growth potential as the digital world expands. Regulation and maintaining margins will always be potential headwinds within the gaming industry, but the industry’s resilience, demonstrated through the cycle, underpins the investment case.


Gerard Guerdat is a Portfolio Analyst at Syz Asset Management.


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