NO BONUS? NO PROBLEM

Far from being a disaster, a world without bonuses would be beneficial for both operators and affiliates, says Nick Garner, who argues that they are simply bad for business.

This issue I want to talk about bonuses, how they affect our industry and why I think a world without bonuses is a great idea.

I was an affiliate myself once. I was lucky enough to sell and cash out (living that dream!) and these days have a white label crypto casino called Oshi.io. A lot of my time is spent working with affiliates, hashing out deals and coming up with player incentives. In many ways, then, my experience is unique because I’ve lived on both sides of the line.

I should state right now that I hate bonuses – and I think every operator feels the same way. They’re just an expensive cost of sales that we have to deal with because that’s the way the system works. And if you’re an affiliate, in my opinion you should hate bonuses too. I’ll explain why.

ALL CASINOS AND SPORTSBOOKS ARE THE SAME

Before we get into the numbers, there is one thing that makes igaming unusual: the lack of diversity in UX and operator offering. After 20 years of evolution, igaming has settled down and there is now a consistent format for both sportsbook and casino. Of course, minor variations in offering exist – LeoVegas with mobile, for example, or Betfair and its exchange – but on the whole one operator is much like another.

There is a constant flow of igaming start-ups trying to reinvent what gambling means, but they’re going to find it difficult. Why? Because evolution is slowing while gambling regulation is constantly increasing and so the cost of change increases with it.

The upshot of all this is an industry that is not diverse and probably won’t change much from what it is now. When everything is the same, small things can create a huge differentiation – and with igaming these little things are brand and bonuses.

THE ECONOMICS OF BONUSES

Tier 1 operators: the big brands The annual reports of operators such as William Hill, Kindred or Leo Vegas list out cost of sales, usually a combination of gambling duties and the cost of bonuses.

Based on my research, Tier 1 operators spend about 18% of their gross revenue on bonuses. This may not sound like a huge proportion of their total expenditure, but if you’re doing a lot of advertising on TV and general brand building, you can afford to cut back on the bonuses you offer. Why?

Because big operators blast their audience with brand advertising to create clear differentiation in the mind of players. In reality, one Tier 1 operator user experience is basically the same as another; the difference is brand perception. Hence why there is so much TV advertising in the UK.

Tier 2 operators: everyone else There are something like 5,000 casino brands on the planet right now and 96% of those operators are going to be Tier 2.

If you are a Tier 2 or lower level operator, without the cash or the necessary local licences to be able to advertise, you are reliant on affiliates. Based on my numbers and what I know of other operators in my neighbourhood, affiliates account for about 25% of gross gaming revenue expenditure, or 35% of net gaming revenue.

What’s more, the reliance on affiliates goes even further than just direct sales. Affiliates act as a commission-only advertising network that helps create brand awareness. When your operator brand is so dependent on affiliates and that brand has no real resonance with the marketplace, you are left with bonuses as your point of differentiation. Even if bonuses are your differentiator, though, with so many operators pushing so many offers, we’ve even got to a point where there is a standard formula: the operator bonus. It’s almost like a commoditised marketplace has now become dominated by commoditised player incentives. The term I think of is ‘market congestion’.

AFFILIATE REVENUE SHARE AND BONUSES

Most of you reading this will already know the affiliate revenue share calculations but it’s worth explaining it for those not in the know.

Affiliates generally work on revenue share deals. The revenue that is shared is based on:

• Gross gaming revenue (difference between player wins and losses)
• Minus bonus costs (the Tier 2 operators, 25-35% of gross gaming revenue)
• Minus game provider fees (If it’s a casino, the people who provide the slots, etc.)
• Multiplied by the revenue share percentage agreed.

The average revenue share deal would be roughly 35% and as mentioned previously the total cost of affiliate revenue share for an operator is about 25%.

Now imagine there’s an operator who does not give out bonuses and converts very well for you. That operator is going to make you 25-35% more income than those other operators pushing bonuses.

The catch, of course, is, that players expect free money – and every player who wants free money is taking money from you as an affiliate.

THE TIDE OF REGULATION, TAX TAKE AND ERODING MARGINS

According to the GC, gross gambling revenue stands at roughly £14.4bn, with total gambling duties coming to £2.86bn; in other words, 19.8% of total gambling revenue goes to the UK government.

These are sizable figures, especially considering that before 1 October 2014 the Gambling (Licensing and Advertising) Act 2014 wasn’t in force and the government received no direct revenue from gambling.

Governments love tax money – indeed, we’re now seeing other countries regulate so as to get hold of that extra revenue.

Then there is player protection, which is a good thing, but imagine having player protection and tax revenue. Well, that’s a lovely combination for a government. And the interesting thing about increased regulation when it’s done pragmatically? More players want to gamble.

If a government takes 20% of gross gaming revenue, then something has to give, otherwise those operators will not generate profit. The choice is to either squeeze operating costs, affiliate costs or sales costs (in other words, bonuses).

If you are a Tier 1 operator, you don’t need affiliates as much as Tier 2 operators do: just look at Sky Bet and its appalling treatment of affiliates a couple of years ago if you want an example. (Ironically, because of UK government pressure, Sky voluntarily agreed to restrict gambling advertising on its broadcast network, thereby increasing Sky Bet’s reliance on affiliates once again. Talk about divine justice.)

My main point is that government tax take is only going to increase globally and that means less money for everyone else in the industry.

SWEDEN

Imagine a government that essentially kills off bonuses on the premise of player protection. Just think of all that extra revenue that’s now coming back into the igaming ecosystem! If the absence of bonuses is not affecting gross gaming revenue in Sweden, then 15-25% more gross gaming revenue is going back to the gaming operators.

Since governments ideally want player welfare and tax take, getting rid of bonuses is a very good lead into increasing gambling duties, while ensuring the wellbeing of players. With that in mind, we know the Swedish gambling authority started their ‘one bonus policy’ at the beginning of January and it has been very aggressive on banning unlicensed operators from trading within Sweden.

Basically, then, Sweden presents a good test case on whether bonuses kill off interest in gambling, and we now have a bit of data to see how this has affected traffic numbers for gambling terms in the country.

I’ve used a Google Trends report, showing three big phrases for the last 12 months in the Swedish market:

• ‘online casino’ (seems to be used a lot by Swedish players)
• ‘casino bonus’ (also seems to be used a lot)
• ‘gratis pengar’ (Swedish for ‘free money’; the search query brings up lots of igaming affiliate sites)

Incidentally, for those who don’t know what Google Trends is, it’s a free service that enables you to track the relative interest in a given phrase within a given country, territory or time period. The tool offers meaningful insights into what people are searching for and therefore some idea of real interest over time in a topic.

What does the chart (Fig 1, top left) tell us? That search volumes do fluctuate, so it’s important to look at the longer term trends.

‘Free money’ as a search phrase has tanked in popularity, but if you look at ‘online casino’, which is a great reference for the overall interest in that area, you can see it’s healthy. So far, then, the data says gambling is still alive – but let’s delve a little deeper.

To find answers, I used the Google AdWords keyword research tool from an account that runs quite a lot of spend through it, so the data is accurate (Google has disabled accurate keyword research information for AdWords accounts that were not active). I used Swedish-language keywords for the Swedish country territory and entered a group of free bet and online casino seed keywords. I then got a list of 721 phrases and looked at the previous 12 months’ history from March 2018 to February 2019. The average search volume for the previous 12 months was 1,660,635 searches per month for this keyword set. What does the chart (Fig 2, above) tell us? Well, it shows that gambling in Sweden is doing just fine.

At this stage the financial data hasn’t come through yet from the big Swedish operators, but my guess is that igaming will be healthy for the first quarter of 2019. Interestingly, when you look at gross gaming revenue in regulated markets such as the UK, there is definitely an uptick in gross revenues, probably because players feel safer and therefore are more likely to gamble – i.e. overall local licensing is fairly good for increasing gross gaming yield.

AS AN AFFILIATE, WHAT DOES THIS MEAN?

I had a look at some of the big affiliate sites in Sweden and how they are marketing various operators. For example, gratiscasino.se is a typical bonus listing site that ranks well in Sweden. According to Ahrefs, it ranks for 863 phrases in Google Sweden. When I examined how the site looked in June 2017 using the internet archive Wayback Machine, it wasn’t really any different from now (March 2019).

The upshot of this is that search volumes don’t appear to have changed much, and as more licences get offered to operators, affiliates will have more choice to work with. Moreover, the bonus listing system used by so many affiliates will still work because operators have one welcome bonus on offer.

In other words, not much has changed except that operators will have much more margin to play with now that bonus costs will have been cut by at least 70%.

WHAT IF OPERATORS COULD OFFER NO BONUSES?

Imagine a government announcing to operators, “You cannot offer any bonuses whatsoever,” and you’re an affiliate trying to market this. Let’s further assume it’s a watertight market such as Sweden (i.e. grey market operators cannot trade there.) Instead of lists of bonuses, then, affiliates would probably pick some other metric that players like, such as:

• Number of games
• Number of game providers
• Complaints or reviews
• Cash-out time
• Affiliate review score, etc.

If there is a pragmatic licensing regime in a country territory, the government knows there is a balance between player welfare and tax revenues. If a government decides to kill gambling like some have done with cigarette smoking, then that is the death knell for gambling. But in countries like the UK, Sweden and Australia, governments are generally fairly pragmatic: they understand the balance between the sort of gambling activity that takes place, how much money they take and player welfare.

BONUSES AND SLEIGHT OF HAND

A lot of people are terrible with mental arithmetic and that’s why bonuses work with most consumers.

When players are given ‘real money’ bonuses and they have to turn those bonuses over 35 to 60 times, if the house edge is an average of 4%, that means a player runs out of bonus money after 25 cycles. In reality, they occasionally get a big win and are able to churn their money through to cash out some winnings.

Knowledgeable gamblers know the sleight of hand with bonuses and generally don’t use them much.

FINALLY

The Swedish market is a nice case for my hypothesis ‘bonuses are bad for business’ and based on my research and experience as a white label operator, I would say it’s true: bonuses are bad for business.

As an affiliate, the big question is: will no bonuses hurt me? Looking at the Swedish market, so far the outlook is fine. In fact, if you’re an affiliate ranking in Sweden, you’re probably going to earn about the same revenue as before, because operators have to pay gambling duty now.

However, if the GC here in the UK decided on a ‘one bonus policy’ and didn’t dramatically hike gambling duty, your earnings would probably go up by 20%. The upshot? Bring on no bonuses!