The Nordics round table: Catena, RakeTech, XLMedia
Ahead of our Nordic Affiliate Conference, we rounded up top management from three of the biggest affiliate networks and consolidators in the region, Erik Bergman, chief strategy office of Catena Media, Michael Holmberg, CEO of RakeTech and Ory Weihs, CEO of XLMedia to gauge their reaction to the proposed Swedish opening and get their views on the current state of play in the Nordic affiliate space.
The Swedish government review has now recommended the opening of the online market to non-monopoly operators with a tax rate of 18% on GGR. What is your initial reaction to this news, and how do you see this scenario affecting affiliate activities and business models in the country?
Erik Bergman (EB): I’m positive towards the 18% GGR tax rate. The talk beforehand was of it falling in the range of 15-20%, but in my opinion the most likely scenario was 20%, since that’s how it is in Denmark. However, this is still a long way from being signed off by the politicians, so we will see where things end up.
“We have seen the 18% GGR tax recommended in Sweden to be very workable in other countries. As we have always said, a regulated environment is the correct one in the end” Ory Weihs, XLMedia
With regards to effect on the affiliate activities or business models, I don’t think much will change. This is in line with our expectations and in line with the UK and Denmark, which are markets that have a lot of similarities to Sweden.
Michael Holmberg (MH): We think it will be business as usual. The difference will be the tax, which we believe the operators will try to pass on to the affiliates. However, this will mostly impact the smaller affiliates and not us to such a large extent. We feel confident that our position as one of Sweden’s biggest affiliates in combination with our very good relations with the operators will provide us with an exceptionally solid base for further successful business development in Sweden going forward. We are also expecting PPC advertising through Google to really take off.
Ory Weihs (OW): My initial thoughts on this are very positive, as we have seen this to be a very workable tax rate in other countries. As we have always said, a regulated environment is the correct one in the end, creating a larger addressable market with more marketing methods available (paid search, video, social etc.). We believe affiliates with a strong tech foundation and multi-methodology approach will benefit from this regulation.
What are the most valuable countries in the region for affiliates in terms of average player values, and what impact did Denmark licensing online casino and betting have on player values and profits there?
EB: With regards to player values Norway is and has for a long time been the country with by far the highest average player values. Sweden is second and Finland comes in as the third. When it comes to Denmark, I unfortunately have very limited experience since it has never been a focus market for us.
MH: We have no experience from the Danish market but regarding player value, Norwegian players are worth most, then Swedish and lastly Finnish.
OW: We see many countries as high value, from the Nordics to the UK, as well as a few other European ones. The Danish regulation as a whole was a very positive development, as following an initial dip the market picked up and now allows for a wide variety of user acquisition methods to be used.
The last year saw a wave of M&A engulf the affiliate space Why is the consolidation play unfolding now, and why are Nordic-founded companies – both as acquirers and those being acquired – so prominent in this process?
EB: I don’t know why the consolidation didn’t start earlier. My best guess is that most affiliate businesses were started by accident rather than with a clear strategy, hence most people focused on running their own shows and didn’t hire a lot of people or try to acquire each other. When the industry started to mature, investors and experienced business people starting to see the opportunities and partnered up with the existing affiliates.
When a few larger acquisitions were undertaken and made public, everyone started to ask themselves the question: “Why don’t we do this?”, and more started doing it. A couple of years ago the multiples were really low and pretty much any deal that could be done was worth doing. Today, things have changed and the prices are, as you said, significantly higher, but there are still plenty of exciting prospects.
The reason Nordic-founded companies are so prominent is probably the same as why they are so prominent when it comes to betting operators. There is a strong culture of gaming and online businesses in Sweden, so before the acquisitions started, there were already many affiliates active in the region who came from Scandinavia. We have also seen experienced people from the operators move across to the affiliate side and then it went from there. It got a lot of exposure in the Nordic media and even more people got interested in the possibilities.
MH: Many of the big operators, such as Betsson and Unibet for instance, originate from Sweden, as well as leading game providers such as NetEnt and Evolution. Sweden has a strong history of producing successful entrepreneurs in the IT sector, as evidenced by globally known companies like Skype and Spotify. It’s therefore not that surprising that that the Swedes, together with their Nordic neighbours, also are very prominent in the industry of igaming affiliation.
“A couple of years ago the multiples were really low and pretty much any deal that could be done was worth doing. Today, things have changed” Erik Bergman, Catena Media
Regarding last year’s M&A, we think it just proves how young the igaming affiliate industry really is. What we are seeing now started happening10 years ago on the operator side. Catena Media’s entrance on Nasdaq Stockholm further accelerated this process, and had a strong effect on the public perception of our industry. It’s getting more professional with every day that passes.
OW: The gambling scene in the Nordics has always been one of the larger ones, so it is no surprise to me that strong affiliates and marketing partners have emerged here as well. There are many potential gamblers, many ways to try to reach them as well as operators to send them to. There have been many success stories that help smaller players gain trust.
The scramble to acquire the best affiliates is seeing some eyewatering prices and high multiples being paid for some very young businesses with very little track record. Is this not a risky strategy to pursue, or should we be looking beyond conventional valuation metrics when assessing these types of businesses?
EB: There have been quite a few deals where the prices have been over the top, if you ask me. That said, every case is unique and it’s all about weighing the risks with the rewards, getting to know the people behind the business and assessing its potential. The age of the business is of course relevant but it’s only one of many parameters, of which others can be far more important.
MH: We have completed 14 acquisitions in the last 24 months and our experience is that the multiples have been very stable. One thing you have to remember though is that smaller affiliates most often have worse deals with the operators than the larger ones, and that the multiples that usually get communicated in public are before synergies and optimisations have been implemented.
We don’t believe in looking beyond conventional valuation metrics; we try to focus on the underlying fundamentals and reflect any potential risks in our valuations.
OW: We at XLM are not dependent on acquisitions to grow and therefore might have a more conservative valuation matrix, as well as a generally safer and more solid approach. We choose targets that can really add value to us, to either one of our main two divisions. We focus on targets that we feel can be easily improved.
Scale brings with it the ability to take advantage of new marketing technologies (to optimise conversion, the funnel, automation etc.) How do you see this shift towards scale and technology reshaping the affiliate sector, and also how operators engage and work with performance marketers?
EB: Obviously the game changes and there are a lot of pros to being a big player with the synergies and data that brings. However, I still believe there will be space for the more old school, smaller SEO affiliates for quite some time to come. They have great experience when it comes to SEO and know their markets. In the long term, it will be tough for them to compete with big teams from larger affiliates and operators, but there is still plenty of time.
“The introduction of Google’s PPC advertising in Sweden when the market gets re-regulated will affect all affiliates that today get their traffic through SEO” Michael Holmberg, RakeTech
With regards to the operators, I think a lot of them will choose to work with a smaller number of larger affiliates rather than plenty of small ones. It will increase the prices per new player a bit, but will give them less overheads and more reliability. As in any industry, it all comes down to trust and it is a lot easier to trust a few important partners than tons of small ones.
MH: I believe SEO will always be important and as long as your sites really add user value, they will be relevant. And of course size matters with regards to being able to invest in technology, but also it is preferable for operators to work with larger affiliates since it is more convenient.
OW: As I have mentioned many times before, affiliates who do not embrace technology in developing a true technological edge and entrance barriers will be left behind. We now employ more than 80 developers and have been creating our optimisation and operational tools for more than a decade.
As a large affiliate/network, what do you see as the biggest immediate challenges ahead for your business and the wider affiliate sector in the Nordics?
EB: Right now, a lot obviously depends on the regulatory environment but since we will know a lot more about that in just a few days it’s hard to say anything more right now. Other than that, I don’t see many immediate challenges or many changes from how it has been the past few years. It’s more or less business as usual.
MH: The introduction of Google’s PPC advertising in Sweden when the market gets re-regulated will affect all affiliates that today get their traffic through SEO. We further believe that smaller affiliates will see lower margins as a result of the operators trying to push over the new tax on to them. However, from our perspective, this will just increase our possibilities to optimise small business that we might acquire on the Swedish market following a re-regulation.
OW: Mainly the understanding that the one-trick-pony affiliate with a few sites or a few media campaigns will struggle maintaining scale, especially the ones that have no real team or tech background.