888, Ladbrokes and the future

HUM4N correctly predicted that 888 would soon become a target for acquisition as it was rapidly dropping below critical-mass and being weakened by diversification. It was also HUM4N's view that the strong land based gaming firms like Ladbrokes would act to improve their 'e' performance reinforce their brand differentiation by leaving networks in favour of their own unique platforms and products.

Ladbrokes were already moving to a limited exclusivity within the Microgaming network for poker and they are one of the very few operators who have increased their player yield by focusing on retention rather than numbers growth. They might not be too impressed with 888 Poker's performance where the opposite has been true. Q4 results will be interesting following an aggressive advertising campaign to add players.

Was the continuing trend confirmed in the 888 Current Trading comment in the Q3 Interim report where it was stated that for October player numbers increased by over 20% but revenues by only 16% in spite of higher deposit levels? Our view is that TOI (profit) from poker will most likely decrease again. The chart above shows previous spikes in player numbers made little impression on financial results.

This provides Ladbrokes scope to consolidate these newly acquired players with their retention skills recently reinforced by the recruitment of Gary McIlraith and Stephen Vowles bringing even more focus on CRM and Client Experience. Their interest will be to bring critical mass - liquidity - to proprietary products and await acquisition opportunities to extend geographically.

So one could imagine that following acquisition Ladbrokes leave the Microgaming network and stop the growth and maybe retrench the 888 network. Logically they should have no interest in B2B business so parts or all of DragonFish may be sold on or closed.

The deal doubles Ladbrokes Online size  bringing it to about half the size of Bwin.party but more concentrated geographically. It leaps them ahead of William Hill - for the moment. The deal confirms the consolidation trend towards powerful brands and heralds increasing pressure on the networks.  No surprise, the major players will be PokerStars, FullTilt, Bwin.party, William Hill and Ladbrokes. And some more predictions:

1. William Hill will buy Playtech whose revenues come from a small family of operators.

2. Bwin.party will consolidate to a common platform and discontinue B2B activities.

3. Bwin.party will phase out their networks (maybe by buying up some of the skins) in favour of branded operations. The Ongame network could well be sold.

4. Bwin.party's strength will be sports betting, its weakness Poker. Cost savings from eliminating duplicated activities will be largely absorbed by branding consolidation and integration.

5. If the Bwin.party deal does not run smoothly one of the land based gaming companies will buy them within two years.

6. Network operators will have increasing difficulty as liquidity reduces and margins erode - expect some consolidation which will give significant short term payoffs but not solve their problem long-term.