Sizing Up the Competition

## Sizing Up the Competition – Finance – iGB

In this second chapter of the column, Tom Waterhouse of Waterhouse VC argues that Evolution’s size in the live casino sector makes it a key component of the Waterhouse VC portfolio.

**Home > Finance > Sizing Up the Competition**

**Sizing Up the Competition**

Since gaming operators have historically struggled to stand out through their offerings, we believe that the operators who can attract customers at the lowest price will become the leaders in the American market.

Many American-only operators have quickly reduced marketing spending, focusing more on profitability. In contrast, operators with size in non-American businesses, such as Flutter and 888 Holdings, are able to fund their American marketing with profits from their global operations.

For instance, in 2021, Flutter Group generated $1.23 billion in EBITDA (£1.02 billion/€1.18 billion), which included a $300 million EBITDA loss in the US. In contrast, DraftKings (an American-only operator) lost $676 million and will continue to need capital infusions. Given the current valuations of high-growth companies, this could lead to significant dilution for existing stakeholders.

Churchill Downs is a recent example of a company that not only reduced marketing spending but also decided to leave the sports betting business entirely in February.

The digital sports wagering and online gambling sector is a highly competitive arena, with numerous new entrants vying for a piece of the pie. Many are striving to secure the largest market share in each jurisdiction, seemingly unconcerned with short-term or even long-term profitability. This is the sentiment expressed by William Carstanjen, the chief executive officer of Churchill Downs.

The advantages of being a major player in the gaming and betting industry extend beyond companies that directly cater to consumers. While we focus on the most innovative small businesses that supply other enterprises (such as Voxbet), certain segments of the industry require significant scale to thrive.

Live casinos represent one such segment. In live casinos, games like poker or blackjack are streamed live from actual casino tables using video feeds. Companies that develop these live casinos then sell them to major operators like Flutter and DraftKings.

The inception of live casinos can be traced back to the mid-2000s, and their growth has been exponential since then, fueled by the proliferation of smartphones and advancements in streaming and communication technology. According to the Malta Times, the live casino industry is experiencing rapid expansion, growing at an annual rate of approximately 31%. Simultaneously, games that rely on random number generation are expanding at a rate of 15%, while traditional casinos are actually contracting by 8%. We anticipate that live casinos will remain one of the fastest-growing segments of the gaming and betting industry due to ongoing technological improvements and enhancements to the player experience.

Evolution is an ongoing process.

Development, a publicly traded Swedish enterprise (STO: EVO), operates in two business sectors: Live Casino and Random Number Generator (RNG). Development’s Live Casino segment generated €264.5 million in income during the initial three months of this year (an increase of 44% year-on-year), while the RNG division brought in €62.3 million (an increase of 1.8% year-on-year). The €19 billion company boasts a client base that includes nearly every major online gambling operator, with income distributed across the following regions: Nordic 7%, UK 7%, Rest of Europe 33%, Asia 32%, North America 11%, and Other 10%. Development dominates the global Live Casino market, holding a market share of approximately 70% among 41 providers.

The difficulties of Live Casino include delivering live broadcasts globally without delay, maintaining technological leadership, continuously training on-camera personnel, constructing complex multi-functional studios, maintaining customer support and chat moderation across multiple languages, and managing risk and monitoring. (Listen to Development’s Chief Product Officer, Todd Haushalter, explain “Why Live Casino is So Hard?”). By overcoming these hurdles daily, Development has established a significant advantage over its competitors.

Development is one of the industry’s top-tier suppliers. We’ve spoken with numerous Development clients who have stated that the company’s product quality in both Live Casino and RNG is industry-leading. Development’s superior products and service levels have driven the company’s exceptional income and profit growth.

Live dealer gambling houses are a vast, highly lucrative industry as fixed studio expenses are high, while variable costs to support extra players are low. For instance, Evolution’s “Lightning Roulette” live dealer offering can be utilized by practically an unlimited number of players at the same time due to its multi-player expandability.

Consequently, Evolution’s EBITDA margin has risen from 45.3% in the first quarter of 2019 to 70.3% in the first quarter of 2022. As Evolution continues to grow in the flourishing North American market, the enterprise will profit from substantial economies of scale and margin expansion in the area.

In 2021, Evolution’s North American operations produced €114.5 million in income, representing 10.7% of group income. Evolution has seven studios in Europe, three in the United States, and one in Canada. In 2022, two more studios will launch in Europe, and a new studio will open in Connecticut, USA. The business is expanding rapidly in North America at a rate of 70% annually. Evolution is a core holding in our portfolio, reflecting our focus on high-quality B2B providers.

Since its beginning in August 2019, Waterhouse VC has generated a total return of 1,997% as of May 31, 2022, assuming all distributions are reinvested.

Please be aware that the information above concerning Flutter, 888 Holdings, Churchill Downs, DraftKings, Voxbet, and Evolution is based on publicly accessible information about the companies and should not be considered or interpreted as financial product advice.

Waterhouse Venture Capital puts money into businesses such as Flutter, 888 Holdings, Voxbet, and Evolution. This document is solely for informational purposes and should not be taken as investment counsel. You should always consult with a financial expert who can provide personalized guidance.

Subscribe to the iGaming newsletter.