I’ve been spending a lot of time learning about the online gambling space lately. To understand online gambling, though, I had to understand the "land-based" gambling ecosystem first.

There are many players - so explainer thread below

1/ There are two types of companies in gambling: B2C and B2B. B2C actually interface with end customers (gamblers). B2B provide products + services to B2C companies.

2/ We’ll start with B2C companies. In industry parlance, they're called "operators."

They are responsible for marketing to end customers, and in the offline world, actually operating the casinos, betting shops, racetracks, etc.

3/ First type of B2C are lotteries, which are typically run by gov’ts in order to generate revenue outside of taxation.

In the US, lotteries are run by individual states (45/50 states run them), while in other countries, they are run by the national gov’t.

4/ Examples in the US include the MA Lottery, NY Lottery, and Powerball (multistate lottery).

Foreign examples are Norsk Tipping (Norway), Svenska Spel (Sweden), and OPAP (Greece).

5/ Some lotteries, like OPAP, are actually publicly traded. Their financials are interesting to look at, since they are literally monopolies - OPAP’s EBITDA margins were 60%+ on EUR 622m of 2019 revenue!

6/ OTOH, lotteries can’t be purely profit-maximizing since they need to serve the public interest. OPAP hasn't grown significantly for years.

Fun fact: Baupost used to own 5% of OPAP.

7/ Next up is sports betting. Until 2018, sports betting wasn’t legal in the US except for a handful of states, so this industry developed mostly in Europe.

Some of the large players, and their market caps:

William Hill - $4bn
Entain - $10bn
Flutter - $34bn

8/ The model is simple: they run a bunch of betting shops, where you can walk in and make bets on sports games. You can also bet over the phone, and today, on the Internet as well.

9/ Operators set the odds on bets so that over time, they will make money. These are the “Vegas Odds” you hear about. But since sports outcomes are inherently less predictable than other times of gambling, like card games, there is more volatility in earnings game-to-game.

10/ Since the Supreme Court struck down PASPA in 2018, allowing states to legalize sports betting, there has been a rush by states to do so. Why? Tax revenue.

11/ The enthusiasm has been matched on the operator side. Everyone and their mother is looking to get into US sports betting b/c the market is HUGE.

Some prominent operators in the US now are William Hill, Entain (thru BetMGM JV), DraftKings, and FanDuel.

12/ On to the casinos. I don’t think they require much explanation. Casinos make money both through games and hospitality (hotel, drinks, food, etc.)

Some prominent players, and their market caps:

Wynn: $12bn
MGM: $15bn
Las Vegas Sands: $40bn

13/ But MGM, for example, doesn’t design and make its own slot machines. They outsource development of games to B2B providers.

Some examples, with market caps:

Scientific Games: $4bn
IGT: $3.5bn
PlayAGS: $196m
Galaxy Gaming: $43m

14/ For casinos, B2B providers offer both “public domain” games like poker & craps, as well as proprietary games. They make money both on product sales (machines + spare parts) and services, like CMS and game operation.

15/ They also serve lotteries, providing instant lottery products and hardware/software to run lotteries.

16/ In this value chain, most of the value accrues to the operators, not the B2B providers - just compare the relative market caps of the two categories of companies.

17/ Why? The real differentiator for casinos/lotteries is their brand, location, and license to operate in an area. By and large, games are not differentiators - they are commodities.

I point this out because the paradigm is different in online gambling - will cover another time

18/ Last thing I want to touch on are regs/licensing. Gambling preys on people’s psychological weaknesses, so it is important that some regs are in place to prevent abuses.

19/ This means you can’t just set up a casino or sports betting operation - you need a license from the appropriate jurisdiction. This is important because licensing rules were designed for an offline world, where you need a physical operation.

20/ As more gambling moves online, the legacy ecosystem I described above, including operators, B2B providers, and regulators, need to adapt.

There are some massive shifts underway as a result - which is really exciting as an investor! More to come later.