Global Online Gaming Sector
PartyGaming operates in the global online gaming sector, a relatively small but growing part of the total global gaming market. To put the Group's performance in context and to provide some macro-economic background, it is helpful to first look at the scale and dynamics of the global gaming market before considering the global online gaming sector and then the key market segments within it that are of primary importance to the Group: poker, casino and sports betting.
The global gaming market
An independent estimate by Global Betting and Gaming Consultants ('GBGC') puts the global gaming market's gross gaming yield for 2006 at $279.0 billion, up from $265.5 billion in 2005. Online gaming is estimated to represent just 5.4% of the total, or $15.2 billion, compared with 4.7% ($12.4 billion) in the previous year.
Historically, North America has been the largest single gaming market and its residents are estimated to have generated approximately 35.3% of the total global gross gaming yield in 2006, followed closely by Europe (35.0%) and then Asia and the Middle East (19.3%). As the chart above shows, the passing of the UIGEA is expected to interrupt, albeit temporarily, the growth of the online gaming sector.
The global online gaming sector
Online gaming is a subset of the global gaming market but is one that has grown rapidly. Since the internet transcends geographical and physical boundaries, online gaming customers can log on to sites from almost anywhere in the world. The growth in online gaming has been driven by the increased spread and penetration of broadband services, by the popularity of gaming generally and by the online gaming industry itself that has continued to promote its services around the globe.
The adoption of the European Information Society 2010 Strategy ('2010') by the European Commission in 2005 was an important step in driving towards the objective of making the European Union a more dynamic and competitive economy. The deregulation of telecoms industries coupled with the growth in the popularity of cable as a medium have resulted in an impressive expansion of both numbers of broadband households as well as broadband penetration. Similar developments in other territories should provide further impetus for broadband penetration around the world.
As can be seen from the previous chart, revenues from the global gambling industry have delivered a steady compound annual growth rate ('CAGR') of between 5% and 6% per annum since 1998. Increasingly, gaming is recognised as being a mainstream leisure pursuit for adults to enjoy in a variety of different formats. However, while the enactment of the UIGEA has affected the size of the online gaming market in the US and the world as a whole, it has not affected the overall growth prospects for the online gaming sector over the next few years. The online gaming sector outside North America is estimated to have been worth approximately $8.0 billion in 2006 against $6.2 billion in the previous year, an annual increase of 28%7. Over the next few years, online gaming outside of North America is expected to continue to be one of the fastest growing segments of the overall gaming market, reaching $14.6 billion by 2010, implying a CAGR of over 16%. GBGC believes that the US will move to a regulated and licensed regime for online gaming within five years when it is expected to grow strongly.
Given the low barriers to entry and access to a large potential market, the online gaming sector has attracted a large number of operators and is highly competitive. As at 1 March 2007, CasinoCity.com, an independent casino and gaming directory, listed over 2,400 online gaming sites that were then open for business.
Whilst the barriers to entry are low, the barriers to delivering long-term success in this highly dynamic and competitive market are much higher. As a result, only a few companies have achieved real critical mass on a global scale and have continued to grow their revenue base through investment in product development, innovative marketing, customer service and increasingly sophisticated technology. The enactment of the UIGEA has also resulted in material changes to the structure of the gaming industry and particularly online poker. This is covered in more detail under 'Market structure' below. The online gaming sector has several, distinct segments. Currently, the largest segment is online sports betting, which in 2006, including North America, was estimated to have represented around 37% of total online gross gaming yield, followed by online casinos (29%) and poker (21%). Historically, the two most important segments for PartyGaming have been poker and casino. However, non-US facing sports betting is expected to become a significant contributor to the Group's future success following the acquisition of Gamebookers and the subsequent launch of PartyBets in November 2006.
Global online gaming figures above are sourced from Global Betting and Gaming Consultants www.gbgc.com