Why iGaming is not doomed, but doomed to be like the airline industry

Last week, a post on LinkedIn that the iGaming (real money online gambling) industry is in trouble gained traction but the article missed the reality of the iGaming space. Rather than doing poorly, the industry is becoming normal. In many ways, it is following the evolution pattern of the airline industry, which grew from a highly profitable business that succeeded largely due to regulation and barriers to entry to a very challenging business where only good companies do well.

Trouble is a relative term

Rather than being “in trouble,” the iGaming industry is suffering from unrealistic expectations. William Hill, an iGaming stalwart that was called out in the post, for the first half of 2019 had online revenue of over $425 million. While they do not report EBITDA, a similar metric would have shown an EBITDA profit of about $285 million.

The Stars Group, another industry behemoth, has seen its stock price hammered in the past year, announced EBITDA (earnings before taxes, interest and depreciation) of over $236 million and a margin of 37.1% last quarter. If you annualize that profit (EBITDA), it suggests earnings of nearly $1 billion. The performance of the other top gaming companies (Paddy Power, GVC, etc.) is in line with Stars and William Hill.

The numbers above show that iGaming companies are not hemorrhaging cash or on the verge of bankruptcy. They are still profitable large entertainment companies. They are not going away. There are very few companies in the world that would not take $1 billion in profit and a 37% margin.

So why is the iGaming business described as in trouble? Why are the share prices of most of the companies near 1-year and 3-year lows? Why are CEOs getting replaced faster than Tom Brady throwing touchdowns?

The negative sentiment is driven by high expectations, excessive debt, bad habits and a new business environment. The sentiment is also realistic, it reflects the reality that iGaming companies face, particularly the legacy operators.

The high expectations game

The great numbers put up by iGaming firms since the first companies went live created multiple problems for the industry.

  1. Expectations beget expectations. The more the industry, and particular companies, grew, the more analysts and investors expected them to grow. The growth rates were much higher than other industries. Over time, growth is likely to revert to the average growth rate for all industries (reversion to the mean). Not only does this reversion disappoint investors but it also prompts the actors in the industry to make non-judicious decisions to chase unrealistic profit and revenue targets.
  2. High margins drive competition. The core of capitalism is that capital flows to where it will have the biggest return. Capitalism creates an efficient allocation of resources. When there are “excessive profits” (an economic term referring to profit levels above the average for other industries), capital will flow to that industry, either financing new entrants or providing growth financing for existing companies. Capital will flow in until this expansion of supply drives down margins to “normal” levels. This phenomenon is shown by the hundreds of slots providers that are visible when walking around ICE or any gaming conference.
  3. High expectations creates high debt. High expectations are not limited to investors. Companies themselves believe the growth will never slow. They then use this expected growth to project cash flow that justifies acquisitions (for example, GVC’s acquisition of Ladbroke Coral). When the growth fails to materialize, financing the cost of the acquisitions becomes a challenge.

When the reality does not meet expectations, particularly if the expectations do not shift, successful companies will be disappointing. Owners and investors will drive leadership changes, strategies will shift and new initiatives will begin often in an effort to actualize a future that will never exist.

It was too easy, too long

Another challenge facing the iGaming industry is that it has been too easy for too long. I had the luck of being in both the social and real money gaming spaces. One of the glaring differences is that for many years in real money gaming, particularly real money casino, it was very easy to make money. An operator could add slots to a website or launch a new app (they did not even have to build the slots as there are many providers with a huge catalog) and the more users they drove, the more money they made. The products were largely undifferentiated (in part as everyone licensed the same content) but the more that was spent on marketing, the more money companies made. Also, despite robust affiliate fees and seemingly high CPAs, it was relatively easy to grow products in a profitable way (unlike social casino where margins are wafer thin).

The ease of building a successful real money gaming company led to the high expectations detailed above. It also allowed companies to thrive without creating very compelling products. If you compare the user experiences of most iGaming apps, they are often years behind other entertainment or app offerings. Rather than optimizing the on-boarding funnel or building engagement loops to retain players, many Real Money gaming sites are little more than glorified spreadsheets. As consumers’ expectations continue to grow, this delta between expectations and what iGaming companies deliver helps drive the “troubles”.

The good times of the past have also allowed iGaming companies to stay in the past. It is probably the only industry that still talks about “mobile first.” Mobile is so integrated into virtually every other facet of our lives that even having to acknowledge that mobile is a priority highlights how far behind other industries iGaming has fallen.

What is next for iGaming


iGaming is evolving in a pattern similar to how the civil aviation industry developed. For many years, airlines and suppliers enjoyed very high profit levels as they were in a regulated industry. These companies grew into huge worldwide brands. While there were a few failures from the worst managed, it was a very stable business.

This stability led to an industry that diverged from its customers as it did not have to please them daily to survive. When the industry deregulated, these companies could not become customer friendly. They just did not understand their customers or have the right management in place. The airline industry still has one of the lowest levels of satisfaction of any consumer facing business.

They also went on a spate of mergers and acquisitions because of high expectations, creating debt service burdens that bankrupted many airlines (including huge global brands). The industry also experienced many challenger brands (Southwest, EasyJet, RyanAir, etc.) entering the market who displaced the legacy airlines.

While the iGaming industry is going in the opposite direction with regulation, it is following the path from where a few companies generated “excessive” profits to one with high levels of competition. It is also one where most of the legacy companies are not customer centric. Based on the lessons from airlines, we should not expect these legacy companies to improve their offering significantly (anyone fly BA lately), many of them will not survive including some of the largest (remember Pan Am) and industry profits will settle into much more normal numbers with some winners and some losers.

Key takeaways

  • There is significant negative sentiment around the iGaming industry, including depressed stock prices and frequent leadership changes. The reality is that the industry is still healthy with many companies enjoying solid revenue and strong margins, but the growth is not living up to expectations.
  • The industry is in this situation as the high growth and profits in the past led to unrealistic expectations that have driven more competitors and more debt and allowed companies to flourish despite products that are not centered around their customers.
  • Many of these legacy companies will fail to improve their offering significantly, many will not survive and industry profits will settle into normal multiples and growth rates.

Lifetime Value Part 27: How to know if your advertising is working (with benchmarks)

The key to any successful product, particularly a mobile game, is for your CPI (cost per install) to be less than your LTV (lifetime value of a customer). As long as it costs less to acquire a new customer than they are worth, you have a healthy business. Once the cost of acquiring a new customer exceeds the value of that customer, your product or company will languish and eventually die.

The challenge of computing LTV

While virtually nobody would argue the logic behind using LTV to drive your marketing, implementing it is not always easy. Many companies do not have a reliable LTV formula for all of their products or a data scientist (or team) to create one. New products also do not have enough data to calculate LTV.

Even when you have a reliable LTV calculation for your product, every cohort of user will have a different LTV. Players acquired one month will not have the same LTV as those acquired a different month. Players acquired through one marketing channel will not have the same LTV as players acquired through a different channel. Same can be said for country, marketing creative, platform and many other factors.

You will also not have enough data early in a campaign to calculate LTV reliably. However, you do not want to spend on unprofitable campaigns and you want to support good campaigns with more resources.

The answer to measuring campaigns reliably

The best proxy for understanding if your CPI is below your LTV is ROAS (return on ad spend). ROAS measures how much revenue a certain cohort of users generates over the first X days of acquiring those players (with X normally measured after 3, 7 and 30 days).

While it sounds overly simplistic, short term ROAS tracks very closely with your long-term return, thus whether CPI < LTV. You can be very certain if your 30 day ROAS is performing ahead of target, your acquisition is profitable. Moreover, I have found that even 3 day ROAS is very indicative of long term profitably. I have not yet come across a situation where ROAS has indicated a campaign is profitable for it to falter when analyzed after months or years. I am now very comfortable relying on 3 day and 7 day ROAS metrics to decide whether to continue, increase or decrease spend for a product, specific vendor or campaign.

Benchmarks to target

Without benchmarks, ROAS numbers would be useless. You need to know what numbers to target. As I have been in the social casino space for about five years, I am only comfortable providing social casino benchmarks. When evaluating a product or campaign, I target a 3 day ROAS of 5 percent, 7 day ROAS of 10 percent and 30 day ROAS of 20 percent. For other genres, such as hyper-casual (where you generate most of your return early), your targets would be very different so understand your space before making decisions (actually before launching a product).


What to do if you are missing your benchmarks

As with all metrics, ROAS provides guidance, not black and white answers. If your ROAS is slightly below the benchmarks, you may not have a problem, it could be noise. If one agency is outperforming another by 1 or 2 percent, again it may not be indicative, it may be luck (one caught an extra VIP). Conversely, if you are missing even by a little, it could be indicative of a deeper issue. A small miss also means that you should adjust conservatively until you see your 30 day ROAS numbers.

If performance is significantly behind ROAS benchmarks, then you need to find the cause. If it is across the board (all campaigns), then your product has issues. You either need to address these issues and improve retention or monetization (the key drivers of LTV and return) or not invest in the product. If the performance is worse on a particular platform, you need to dive deeper into your technical performance on that platform versus other platforms and how the user experience (CX) differs on the underperforming platform. If the underperformance is with a partner or channel, you should adjust your spend to focus where you have a stronger ROAS.

Key takeaways

  1. While the success of any product or company long term is ensuring its cost for acquiring a customer is lower than the value of the customer, it is difficult to calculate in the early days of a product or marketing campaign. ROAS (return on ad spend) based on the first 3, 7 or 30 days of a campaign provides a good proxy for whether the campaign is successful.
  2. In the social casino space (other genres may be different), the benchmark target ROAS is a 3 day ROAS of 5 percent, a 7 day ROAS of 10 percent and a 30-day ROAS of 20 percent.
  3. If your ROAS is underperforming significantly, you need to evaluate if you should continue investing in the product overall or in the specific marketing channels, while adjusting your marketing mix to optimize ROAS.