GAN’s long game paying off in the US

The corporate journey GAN (formerly known as Game Account Network) has been on has taken a number of dramatic changes in direction since its birth as a skill games provider 14 years ago, but one constant principle has guided the business during this time – a refusal to do business in anything other than wholly legal markets. And it's this patient approach that chief executive Dermot Smurfit believes will ultimately reap success for GAN in what he sees as the “wide open goal” of the US, spearheaded by the group's B2B social platform.

iGB North America: Refocusing on the US was always going to be a long game, but have you been frustrated by the reaction of the wider investment community to your strategy, reflected in the share price?
Dermot Smurfit: Their reaction has been totally natural. GAN's share price has been a proxy for the progress of regulated internet gaming in the US, in terms of sentiment. Effectively, when we went public in November 2014, we had this investor mandate to forget about Europe and just focus on the US because of the emerging regulated markets that were popping up, 38% of the floated share capital was issued to institutional investors, who subscribed to get access to regulated US internet gaming.

Looking back three years ago, our thinking was very much: “Wow, three states have regulated and gone live in the same year,  this is going to be one of those 'Hallelujah!' industry cycles where we expect a couple of incremental extra states to regulate and legalise every year going forward.” But it soon became apparent it simply wasn't going to happen, and the numbers coming in from New Jersey were way lower than pre-market expectations.

We are now into Year 3, 2016, and everybody is still sucking on void, as the US regulatory cycle didn't play out in the way everyone at the time thought it would. Our perspective on it since then is it simply takes more time for state-level regulatory processes to play out, as there are so many vested interests and stakeholders in the political cycle.

iGBNA: Were the projected numbers you put forward for New Jersey a big issue for investors?
DS: Our initial expectation was that US$200m would be generated by all the internet casino and poker operators in calendar year 2014, and only this year, two years on from the original forecast, will it reach that level. Our internal forecast is for New Jersey to get to a little under US$200m gross internet gaming revenue in 2016.

Back in those days, we were actually pilloried for having forecasts that were so low. Morgan Stanley was at US$450m, and there were some crazy dope-smoking billion-dollar forecasts for New Jersey. I guess we took a little bit of cold comfort from the fact that even though we were wrong, we were the least wrong! Skip forward to 2016, and the market is starting to deliver on the promise we identified back in 2014, and the growth rates are expected to continue. There's a lot of activity among existing stakeholders, with plenty of individual skins or seats available with each individual land-based casino licence for new market entrants. We think close to 30% growth over the next 12 months is perfectly achievable.

iGBNA: Why do you think New Jersey igaming has been growing so fast in recent months, even through the usually slower summer period?
DS: That speaks to the success of the market. Seasonality only applies to markets that have reached some level of maturity. We believe that New Jersey is still some way off maturity, which is why the seasonal cycle we see in Europe didn't manifest itself there this year. We have made enormous progress with our client Betfair, which has become the leading independent internet casino in New Jersey. If you look at the third quarter figures from the New Jersey Division of Gaming Enforcement (DGE), the growth in online casino is phenomenal. We had nearly 40% growth year-on-year in the third quarter of this year, and that growth pattern is continuing.

We are a believer in the critical mass of product. If you launched an online casino site in Europe, you would probably want 300 or 400 slots and table games online, maybe even more. New Jersey is only now getting 200 slots available on the website. That 's the inflection point we have seen the business go through. We all launched with 50 slots, which is not enough to get interesting, meaningful value from casino players. As well as product, consumer awareness that igaming is legal in New Jersey is still at an extraordinarily low level, relative to Europe. In addition, banking and geolocation issues have mostly been solved, with the general payment processing landscape far improved on a year ago. So you have a far healthier ecosystem for the customer to deliver value to the operators.

iGBNA: Your last results showed net revenue up 35% and a narrowing of the pre-tax loss. Has the GAN business now reached the tipping point towards profitability?
DS: That's exactly right. That's the position we made clear to the market as part of my own narrative on September 30. We believe that after effectively three years of horizontal travel in regulated gaming and 'Simulated Gaming', we are at the point where GAN can begin to generate not just positive EBITDA but positive cashflow in 2017. That's a major inflection point and probably going to be a very strong catalyst to the share price, when we update the market in April of next year.

iGBNA: The B2B model has failed to gain traction in the pure social casino space. Why is it apparently proving more successful when tied to the bricks 'n' mortar casino environment?
DS: In a nutshell, we believe most of the value in the social casino market in the US is generated by genuine casino patrons, people who have a huge propensity to visit and play at bricks 'n' mortar facilities. Partnering with these major US casino operators' properties gives us access to that audience of casino patrons, the vast majority of which are already playing social casinos online and report playing a dozen social casinos in any given monthly period.

When their local casino moves online, particularly with a component of integrated rewards, then there's a massive incentive for them to deflect some of their activity and all of their spend in favour of the local casino. In 2015, we reported average revenue per daily active user (ARPDAUs) of US$2.32 for the full year, way in excess of the typical ARPDAU you would find in the local casino of US20c to US50c, which just speaks to the VIP nature of authentic US casino patrons.

So when you attach the US casino brands to a US casino product with a lot of games that are recognised, genuine, authentic slot machines, table games and video poker games from the casino environment, and put those components together with the rewards program on property, you create this really powerful framework for the US casino patrons to respond to the B2B social casino, or what we call Simulated Gaming.

iGBNA: The big land-based suppliers with social arms, such a IGT and SciGames, have the games land-based patrons are most familiar with, but are not licensing the social versions of their strongest titles to B2B platforms. Is this an issue for GAN, and will this situation change?
DS: Not at all. If you add together Konami, Ainsworth, Incredible Technologies, there's enough recognisable land-based, Class 2 and Class 3 content to attract and appeal to land-based casino patrons. It's not a huge  number, but approximately 20%-25% of a typical casino slot floor by manufacturers is already represented on the GAN platform, together with incremental slot content portfolios from Net Ent and others. So we have a very strong content portfolio.

One of the things we do is survey the casino patrons online a lot to ensure we understand what they like and dislike about the gaming proposition. Our approach needs to strike a persuasive balance between, “Hey, here's some games we know you recognise, but here's some others you haven't seen before that you may want to try and engage with.” So we think the content portfolio is a good mixture.

When it becomes to what I call the Big Three – IGT, Scientific Games, Aristocrat – all three are in discussion with our clients for licensing gaming content for publication on-board their platform. We hope a deal will be done and announced before the end of the year, where the first US casino operator using GAN's Simulated Gaming platform announces their first deal with one of the big manufacturers.

iGBNA: You rolled out a virtual reality-simulated gaming casino for Empire City. VR has inspired as much scepticism as excitement in industry circles. What makes you convinced of its eventual viability as a product/revenue stream?
DS: VR is effectively an random number generated (RNG) project for GAN. We set ourselves a mission a couple years ago, when VR was emerging as a potentially viable casino platform, to try and figure why casino patrons would want to play on VR. Why is VR better than playing on a mobile phone or on desktop or on a laptop? The answer is scale. When you are in VR, you get a sense of scale that simply isn't available on your small mobile phone screen or your relatively small desktop, laptop or home computer screen. So playing slots on huge screens inside VR is what actual casino patrons disclosed to us as the most exciting aspect of VR. I don't think it's a user acquisition opportunity, but do think it can be relevant to on-property, VIP retention and other purposes.

We do however have a range of opinions within GAN on VR. Some think it's going to be most relevant to real-money gaming, and are excited about deploying it within New Jersey. The DGE has received a demonstration of our VR application, and we can and we probably will deploy it for real-money at some point, hopefully in 2017. This will be a downloadable VR application for New Jersey residents, typically 35-45 years of age, who over index on the average per capita income. If you are a VR enthusiast prepared to spend US$2,000 on a machine and US$600 on a VR headset, I think there's an opportunity there. It's not going to be the most lucrative opportunity but I do think it's a viable market and compelling for the operators we have already spoken to.

We are less sure about the application of the VR experience for social casino gamers. It's a very different demographic, but for the male-oriented real-money gambler in New Jersey who enjoys playing VR roulette, VR craps, VR blackjack as well as VR slots, we think there's a modest commercial opportunity.

iGBNA: On-premise mobile has been a hot topic of late. What has been the response? Are the casinos interested in it?
DS: Yes and no. Yes, we can do it  and can fulfill it for any of our clients who choose to buy and deploy the hardware, but the problem is that we are not a massive believer in on-property mobile gaming. The analogy that we like is that when you go to the movie theater or cinema, do you watch Netflix on your smartphone? One of the massive limitations in our view is we just don't see the consumer demand.

There are a number of viable locations inside a casino resort where you might want to gamble in your mobile phone – hotel rooms, by the swimming pool, the toilet stall in the restroom – but there aren't many. We think the consumer demand simply isn't there. It's something we can do, something we are doing for one of our casino clients. When it launches, we will announce it, and if it does something we will get excited about it, but we still think the case for on-premise mobile casino gaming has yet to be proved by anybody.

iGBNA: How has the absence in NJ of several of the biggest real-money online casino suppliers in the market shaped the opportunity and structure of the market and environment there?
DS: We think it's great! Their complete absence from the US market will continue to present incredible opportunity for GAN and its shareholders. We figured out a long time ago that the best direction to go in from the UK was west. We have a viable and vibrant Italian regulated gaming business, it's a content business not a platform business. While in the US, it's a wide open landscape.

You should perhaps also be asking the question, that as well as where are the Big 2 or Big 3? Where are IGT, where are Scientific Games, where are Aristocrat? These are major land-based manufacturers and yet not a single one of them is active in the platform provision side of the market in New Jersey or, to my knowledge, Pennsylvania. It's been left to other more nimble European companies. I think the Big 3 have been distracted by their social casino businesses, perhaps understandably.

I always identify that as a quite wonderful surprise, which afforded GAN to win the opportunity of some significant market share.

iGBNA: You are partnered with PARX in Pennsylvania. What are you hearing about the prospects for an iGaming bill this year, given the apparent unwillingness of the Senate to act?
DS: The House has got a piece of legislation, they approved it back in June this year, it's now waiting on the Senate. Maybe there will be better news flow today, tomorrow, this week. We will wait and see. We are confident that igaming will be passed by the Senate and passed into law by the governor. But the question is when will it happen? Does it happen early in the new year, regardless of the US$100m earmarked from iGaming? We know this isn't going to come from participation, as it's not based on the gross gaming revenues to be delivered, but on upfront licensing fees. So it could be done in principle any time in the early months of next year. For me that would be the most likely outcome, although I would be delighted to wake up tomorrow and read a great article about Pennsylvania deciding to regulate. That would be awesome.

iGBNA: Do you see any other opportunities beyond Pennsylvania, and how is GAN positioned?
DS: We think Michigan is the dark horse, a really interesting opportunity for regulated real-money gaming. There's a bill in the house which hands effective operational control to the land-based casinos in Michigan. It was originally thought not that long ago that the lottery controlled by Scientific Games was going to be the designated provider of igaming in the state, but that's no longer the case. It's going to be down to each casino to choose their platform, do their content deals and get up and running and so forth, so it feels like a relatively straightforward market.

[Greektown Casino operator] Jack Entertainment is our client, and through the 100% acquisition of Borgata, so is MGM today. So, we have two clients out of the three major commercial casinos in Detroit. We are going to be there, hopefully with lots of loud bells on.

iGBNA: The US business is up to 64% and necessarily commands the lion's share of investment. What does this mean for your European-facing business? Is it not a risk to put all your eggs in one basket?
DS: Italy for us is a growing market and we are very focused on it. But it's not the extraordinary opportunity the US still is. The US is a wide open goal. There are plenty more states to regulate. We don't believe Sheldon (Adelson) will be successful in shutting it all down.

Not only have we had to deal with the fact regulation didn't continue after 2013, we also built a very viable, and in many ways the most exciting, piece of our investment thesis, which is Simulated Gaming. The expected lifetime value of US casino patrons from Simulated Gaming is on a par with regulated real-money gaming in New Jersey, which is close to US$2,000 apiece, so you should be paying a lot of attention to what we're doing!

Myself and my shareholders have refused to do business in illegal markets since Day 1. We have definitely taken the harder path to building the business. But the patience and the stamina we have put in is paying dividends in the US. We expect to be the first B2B real money-only company to receive a full New Jersey license before the end of the year, which will be a massive achievement built on the heritage of the business.

We are trying to be a significant player in a brand new market where all the rules are different, the playbook is completely different, geolocation to age and ID verification and payments, it's a completely different landscape. If you are not in it and you haven't been in it in New Jersey, there's no way you can catch up, because Pennsylvania will adopt New Jersey's framework. Unless you are an existing real-money platform provider in New Jersey, you are not going to be relevant in Pennsylvania, or Michigan. You are just not going to be chosen.

So, we believe the bulk of our future opportunity and value accretion for shareholders is right here in the US. It's a very different business to Europe. This is an infrastructure business. We are laying down long-term relationships with long-term partners in key strategic gaming markets. Whether it's Oklahoma, Southern California or Florida. there are lots of key gaming markets where GAN is present or hopes to be present. It's laying down the pipes for future regulated igaming, but in the meantime we are going to make significant amounts of money out of Simulated Gaming.