The paradox of technological innovation is that it can either destroy or massively enhance an existing business model. No industry has seen the effect of this creative destruction better than bookmaking, with IT spending and marketing now seen as key to attracting bets placed on mobile phones. The recent deal between Ladbrokes (LAD) and Playtech (PTEC) underlines how important good technology is to bookmakers who are chasing an increasingly finite pool of sophisticated punters.
As soon as gaming technology company Playtech had received notice of a large cheque coming from William Hill (WMH) for its share of their successful online venture, it was clear that Ladbrokes would be free to negotiate its own agreement with the Israeli company. The resulting deal sees newly-formed Ladbrokes Israel take on 40 staff to beef up its digital marketing operations, as well as adding up to 200 Playtech games to its online casino offering. Playtech gets a share of sales if it improves online turnover - up to 27 per cent - while Ladbrokes limits the amount of investment it has to make upfront, while effectively lending its brand and reputation out for Playtech to exploit.
Whether the deal succeeds where Ladbrokes' self-help programme failed only time will tell, but the key to good online marketing for the gaming industry is how quickly so-called affiliates can be added to a bookie's network. Affiliates are paid agents that pass on potential punters to the bookmakers in return for a defined percentage of the resulting revenue. Ladbrokes currently offers a 35 per cent revenue share to affiliates for the lifetime of a punter's registration. It will look to Playtech's social media and online marketing skills to hugely increase the number of Ladbrokes' affiliates in order to catch up with William Hill, which is the market leader in this respect. Hills, incidently, offers revenue sharing deals of up to 80 per cent.
With such high levels of discount, it is not surprising that marketing spend across the industry is rocketing. The last sets of preliminary results told a similar story - marketing costs at William Hill: up 24 per cent, Ladbrokes: 30 per cent, Paddy Power: 56 per cent. The growth has been so explosive that companies now spend the equivalent of 25 per cent of net income just on marketing. And it isn't just the big boys, but companies such as 32Red, Betfair and Bet365 are adding to the general advertising noise punters now have to endure. Whether this situation is sustainable in the long run is questionable as industry players are already talking about "marketing inflation" in negative terms. This illustrates the other paradox about technological change - after a while the returns start to diminish.
