Whilst operators are highly motivated by the commercial opportunity offered by LatAm jurisdictions as the sector’s next boom markets. Regulus Partners warns of the perils of not executing a native approach to service ‘new world’ customers…
Peru and Chile are likely to be joining Mexico, Colombia, and Argentina (province by province) as major LatAm countries which are offering domestically regulated online gambling. As Brazil makes progress, domestic online gambling regulation could relatively soon cover over 75% of the continent’s population.
While there are still significant political and regulatory hurdles to overcome, we see this as a major step-change in global accessibility and online gambling growth potential. Critically, however, the old .com model is unlikely to work, in our view, as Mexico and Colombia demonstrates.
Mexico has had domestic regulation linked to land-based operations for some time, but it was only after 2017 that international brands started to formally enter the market. We believe that the domestic market is now worth c. US$700m, with an additional ‘grey’ market of some c. US$100m. These sound like big numbers, but there are three issues. First, online revenue per capita is less than US$6, meaning US-European means of stimulating or channelling market demand are not all that effective, especially for smaller or non-local brands. Second, ‘Local Hero’ Caliente has c. 70% online market share, which demonstrates the power of local brand and operations as well as meaning the addressable domestic market outside the leader (which has clearly grown the segment) is a dangerously small c. US$200m. Third, there is little to stop the higher value players which tend to be early adopters of online gambling from continuing to engage with the grey market, meaning ‘traditional’ online offers are caught between a local juggernaut and abundant offshore competition.
Colombia has generated a very similar outcome from a different evolutionary pattern. Open domestic licensing was formally opened in 2016 and the market has grown to c. US$300m, up 160% since Covid-19 policy disruption. The domestically regulated Colombian market therefore now represents just less than US$6, just like Mexico. Moreover, the market is dominated by local operators Winner Group Cirsa (WPlay, Sportium) and Corredor Emprasarial (betplay), with Rush Street as a credible external #3 (over 10% share). However, this again leaves under 15% share for all others, or less than US$50m in absolute terms.
Perhaps the biggest lesson for LatAm lies in the Old World countries which discovered the New. Despite broadly similar economies, levels of digital adoption, and levels of Covid-19 policy disruption, the localized Portuguese and Italian markets have more than doubled revenue since 2019. However, Spain, which historically had one of the most liberal markets in Europe and has since faced advertising restrictions less severe than Italy, has barely grown its online market in 2021 after a relatively lacklustre 2020 (+14%). Perhaps tellingly, Spanish online market share is far more international, with local companies not yet firing on all digital cylinders (ironically partly because with such a focus on LatAm gaming, there was no clear market, infrastructure, or operational dynamic for successful digital investment until recently for the Spanish landbased gaming leaders).
The ability to offer all products cheaply in an online gambling market is far less relevant to growth than the ability to engage and entertain a critical mass of customers outside the dedicated hard-core of users in a manner they will respond to, in our view. Good value ‘.com’ products may channel heavier users well (an important fiscal-regulatory goal), but experience suggests that it will not engage existing retail or new mass-market customers, meaning market size can quickly plateau. However, it should be pointed out that Entain’s recent performance in Brazil (+111% cc for 2021 after a +56% 2020), as well as its acquisition of bet.pt, suggests that International groups can get the localization point both strategically and internationally (Entain’s former local Spanish partner Sportium is now wholly owned by Cirsa, it came via Ladbrokes, which had questionable digital capabilities even in the UK; by contrast Betboo, a local Brazilian business, was GVC’s first external acquisition from 2009 for just US$4m up-front and maybe a large part of the local operational if not brand success). Similarly, Betsson recently acquired Inkabet (Peru) for US$25m, in what might prove a very shrewd long-term deal despite its relatively small size.
Peru and Chile have an average reported GDP per capita of US$6k and US$13k respectively, putting them in the same ballpark as Colombia (US$5k) and Mexico (US$8k). If we apply a US$6 per capita average expenditure to the potential Peru and Chile markets, we get to US$300m of the addressable market combined, likely split 50/50 between the two countries given Chile’s wealth advantage on a lower population.
While all new markets are welcome, it is perhaps hard to get excited over such a small incremental TAM, especially if 70%+ of the market gets dominated by Local Heroes if they grow the market, or stalls like Spain if they are not present or insufficiently localized. By contrast, New York alone is optically adding a similar level of revenue in just its first quarter of trading (but this is mostly bonuses and taxed to extinction: small economies that work are nearly always better than big ones that don’t).
However, LatAm’s 620m people are likely to be able to provide secular digital adoption growth for a generation. If we compound a far from fanciful 25% average annual growth rate for a decade, we turn a current c. US$3.5bn TAM to a US$33bn market by 2032. Moreover, that is a realistic revenue TAM, that lands at a reasonable if stretching US$50 per capita; not fanciful tergiversations compounded by non-cash inflation.
It may take longer than ten years to get to this level and there will undoubtedly by economic and regulatory bumps in the road, but it is a reasonably likely direction of travel. Consequently, LatAm ‘alone’ (note 33 often federalized countries) can potentially largely resolve Europe’s growth problems and North America’s cost issues. Getting small, fiddly local markets right suddenly looks a lot more enticing. However, we would flag four key operational themes which are likely to decide success or failure, none of which will come easily to monolith online businesses:
- 1. High-value early adopters are already addressable and have already likely engaged; this is largely the current market and so it is dangerous to double count it with ‘market opening’ expectations (what the mantra of ‘regulation = growth’ usually gets wrong); the segment will grow, but with the economy, not with secular adoption, in our view.2. Every market will be heavily regionalized in terms of product, payments, and customer access; a ‘LatAm’ strategy is as doomed to fail as a ‘Europe’ strategy; in some countries this will break down below the national level, putting a heavy premium on deep market knowledge.
3. Large proportions of the LatAm population in all countries have limited digital exposure (especially to data-rich and so expensive apps) and are largely unbanked, how exactly these groups digitally adopt will have a big role in deciding whether market entry and growth strategies work after the ‘middle class’ wave of adoption which Covid policy responses have already done so much to accelerate.
4. Regulators might start open, but they are unlikely to stay open if LatAm is treated as an ‘emerging market’ from which to generate growth while neglecting socially sustainable best practice
After over a decade of faltering regulatory progress and stuttering digital adoption, LatAm is likely to be a major global growth engine for the next decade or so, in our view. Tapping into this growth will be considerably more complex than the ‘.com’ phase, however.