Crouching Tiger, Hidden Black Swan

By Dan Waugh, Principal Consultant, Regulus Partners

When in 2003, the white tiger Mantecore sank his jaws into the neck of Roy Horn (of Siegfried & Roy) on stage at the Mirage Casino in Las Vegas, he unwittingly illustrated the problem with risk management in the gambling industry. A preoccupation with ‘on-model’ risks (such as security, high-rollers and cheats) can blind us to ‘off-model’ risks - such as losing the biggest draw in Vegas to a moment of feline displeasure (at an estimated cost of $100m).

The tale of ‘Mantecore & Roy’ was told by the author Nassim Nicholas Taleb in ‘The Black Swan’, as a parable for Big Data induced risk blindness in the banking industry; but it seems likely that what happens in Vegas must also have relevance for our gambling industry.

The application of technology to age-old games of chance has transformed our industry world-wide and the seductive new allure of Big Data is easy to understand in companies wishing to achieve greater operating efficiency (through reduced labour and expenditure more closely aligned with revenue). There is however a hidden danger that the more we come to believe that we can predict and control circumstances, the more likely we are to become blind to the possibility of alternative outcomes.

Indeed, it may well be that the serial inability of the industry to manage political risk effectively is a product of its obsession with ‘on-model’ risk management rather than a paradoxical anomaly – a fascination with statistical probability or form which causes us to lose sight of seemingly random events outside our direct control.

We have seen this most clearly in remote gambling where data omniscience and physical dislocation have resulted in the objectification of online gamblers, who are often classified as “accounts” rather than “customers”. The sector has been fascinated by the idea of “personalisation” (taking inspiration from Amazon amongst others) seemingly without noticing that the reduction of a human being to a series of clicks and transactions betrays a deeply impersonal outlook.

That traditional (land-based) gambling has been partly inured to this is down to an inherent culture of service (admittedly, not always good service), proximity to the customer and relative technological backwardness. Yet it is clear amongst the larger corporations in Great Britain that these are not badges of honour. Land-based operators want to be seen as ‘tech savvy’ too – and if that helps them to reduce labour costs (a perfectly natural preoccupation in a high-wage economy like ours) then so much the better. The push to multi-channel brands and the so-called ‘single view of the customer’ seems likely to accelerate this process.

The most obvious risk from all of this is to the consumer. Once the customer is objectified, the operative cares less about his happiness and well-being and may behave differently towards him (through marketing, use of bonuses, game design and simple duty of care). In its turn, this carries clear political dangers in terms of government intervention to address problem gambling (in terms of both perception and reality) but may also involve more fundamental commercial risks.

First, there is the danger that technology-driven change undermines the customer experience. It is not by chance that the betting shop’s fall from relative grace over the last decade has coincided with a decline in customer-employee interaction as machines have changed the economics and behavioural patterns of many shops.

 Second, the more our business decisions are determined by algorithm rather than consideration, the more we erode our own abilities to learn and understand rather than simply perceive – or as Taleb writes, “Technology can degrade (and endanger) every aspect of a sucker’s life while convincing him that it is becoming more ‘efficient’”.

Above all, we should be aware that the seemingly endless possibilities of Big Data may blind us to opportunities and threats by offering the illusory comfort of precedence. After all, Siegfried & Roy performed their act more than 2,000 times before Mantecore brought the curtain down for good.

Time for gambling to embrace uncertainty

By Dan Waugh, Principal Consultant, Regulus Partners

One of the fundamental characteristics of gambling is its simplicity. Its rules are constant and its outcomes unambiguous – there are no shades of grey between red and black – only the occasional hint of green. We win or we lose and we are left in no doubt as to why.

Perhaps this basic law of gambling has conditioned those who work in and around it to expect the same thing from real life. This at least would explain the reaction from many parties to the publication of the Responsible Gambling Trust’s suite of reports into harm and B2 gaming machines (aka FOBTs).

There was a palpable air of dissatisfaction when the research was presented and discussed at last week’s Responsible Gambling Trust Harm Minimisation Conference. The bookmaking industry had been hoping for exoneration; its critics for vindication. Neither side got exactly what it wanted.

The reports – which drew on an unprecedented array of machine and player data – contained a trove of insights into how people behave in relation to gaming machines. It was fascinating, thought-provoking, stimulating stuff.

Damningly though, it wasn’t simple or conclusive. There was no instant gratification; no unarguable implications for policy. Instead – as is the nature of good research - there were further questions for the data and the call for more and different data to be assessed.

If there were feelings of disappointment with this outcome, its roots lie in the curious compact which spawned the research. Quite simply, the research was part of a Westminster fudge – a means of dealing with political concerns not wholly related to the subject matter. The RGT’s acceptance of its role within this fudge was presumably the price it was willing to pay in order not simply to justify the expense of the project – but more critically to add political weight to calls for the gambling industry to provide access to its data.

While Derek Webb’s Campaign for Fairer Gambling has drawn attention to concerns of harm in relation to B2 machines, it seems probable that the main societal (and so political) issue is far more visible and visceral. The way that machines have changed the economics of the betting shop (combined with the passing of the old demand test) has led to their clustering on Britain’s high streets – sometimes with the same operator running several shops within spitting distance of one another.

At the same time that the shops have become more visible, their character has also changed. The shift from over-the-counter bets on horse-racing to machine play has eroded the betting shop’s perceived value to communities. Indeed, some of the most damaging attacks on the industry have come from those who loved it best – from the ranks of customers and employees.

The question of maximum stake sizes is at best tangential to these concerns – indeed there may be some validity to the claim that a reduction of stakes on B2s (in isolation) might lead to an increase in clustering.

Then there is the matter of lobbying by the rest of the land-based gambling industry, who seem opposed to the B2 principally because they cannot have them (or in the case of casinos, that they alone cannot have them). There is perhaps a degree of envy here but more powerfully a sense of affronted logic.

The maximum stake sizes on the main machine categories in Great Britain proceed as follows: 10p for D, £1 for C, £2 for B4 and B3, £5 for B1…..and oh, £100 for B2. It is the position of the stakes on B2 in relation to the other machine categories (and the phenomenal success of these machines) that irks here. It is this which underpins the BACTA position that if machines with £100 maximum stakes aren’t harmful, then all licensed gambling operators should be allowed them.

The logic is simple to grasp – but it is only logical viewed through the prism of industry self-interest. Government is unlikely to see that the answer to the FOBT issue lies in their further expansion. It may be ‘unfair’ but life – as with gambling – is unfair.

It is difficult to believe that B2 machines would have been encompassed within the Gambling Act 2005 had the framers of the legislation known then what we know now – but the genie escaped from that particular bottle some time ago. As Professor Peter Collins wrote in 2003: “It is always easy to relax regulations and increase the availability of commercial gambling opportunities, it is extremely difficult to cut back the supply if it is decided that, for whatever reason, there is too much gambling”.

The fact that the research did not provide the resolution that some had hoped for need not negate its value – if we are prepared to engage with it in a spirit of honest inquiry. This means resisting the urge to draw selectively on its findings in order to support pre-existing positions (and critically being mature enough to know that absence of evidence is not the same as evidence of absence). It means being prepared to embrace uncertainty and ambiguity; to ask questions in order to feed curiosity rather than as thinly veiled means of making statements or scoring points (as happened all too often at last week’s conference).

It also means ensuring that research is used appropriately, rather than being harnessed to the needs of politicians. It will be interesting to see whether the pleas of NatCen’s Heather Wardle are heeded - to institute a long-term programme of progressive research in place of these large-scale but ad hoc studies.

Carl Sagan, the astrophysicist wrote: “It seems to me what is called for is an exquisite balance between two conflicting needs: the most sceptical scrutiny of all hypotheses...and at the same time a great openness to new ideas. Obviously those two modes of thought are in some tension. But if you are able to exercise only one of these modes, whichever one it is, you’re in deep trouble.”

Consumer behaviour in relation to gambling isn’t rocket science but it is complex. The RGT research offers the entire gambling industry a glimpse of the shape of things to come. How the industry embraces this new age of disclosure and regulatory data-driven policy-making is likely to influence its ability to stay out of further trouble.

Juggling the tectonic plates - what makes for a good chief executive in the gambling sector?

By David Loveday

Every time a chief executive role becomes vacant in the gambling industry the rumour mill cranks up and even new betting markets are released by competitor firms with a list of possible names - ranging from the plausible to the outright fanciful. (My name appeared in the runners and riders for the Ladbrokes job in the list compiled by Paddy Power last week – I will leave you all the speculate where my odds of 11/1 place me on that spectrum).

Given the nature of the gambling industry, it should perhaps be no surprise that this type of high-profile speculation is an important element of the make-up of the sector, and it may even be one of the contributing factors behind the lack of talented individuals entering the sector from the outside.

But there are other reasons that can be identified behind this lack of supply of new blood.

First, expectations on the part of stakeholders in gambling companies tend to be sky-high and they generally eclipse the reality of what is actually possible and achievable (partly due to the growth-driven nature of small-cap; partly the lure of attractive cash flow and partly due to an over-simplification of regulatory and technology issues). Second, this is a sector which fairly neatly divides between companies which cut their teeth in unregulated markets (with an extremely 'entrepreneurial' culture and risk profile) and those from heavily regulated backgrounds (with the equally challenging opposite culture akin to government or police).

This has led to a disconnect: while the balance between unregulated and regulated is now changing markedly, the expectations of stakeholders have yet to catch up. The job of the modern gambling chief executive is therefore to manage this tectonic shift, from whichever part of the scale the company is on. The sheer complexity of the task relative to the size of the companies might be another reason for the reluctance of big hitters to join the fray from the outside.

Given this backdrop there are, I believe, a number of attributes which contribute to the suitability and success of a chief executive in this sector. Different chief executives will suit different companies at various stages of their evolution. Businesses need to pick the right people with the right profile. Would you put an entrepreneurial/start-up guy in charge of a major PLC? Has promotion from within worked? Are left-field candidates ever given the time and support to get to grips with the sector's idiosyncrasies and complete the job?

A large part of the equation is understanding what the new chief executive will have to deal with once they have taken up the role and what it will take to handle the multi-faceted and rapidly changing issues that will inevitably arise. Here’s my brief rundown of what I think these issues are:

Management skills

Any new boss needs to be able to assess their inherited team then make sensible judgement calls. Bringing in an army of staff from a previous role is tricky and they have to deliver very quickly to be deemed successful. Harnessing the talent within is critical, as is getting this balance right. This point dovetails nicely with culture - do you break it, modify it or add to it? In an industry where a lot of companies are very similar (but are often convinced they are very different) you have to carry the troops and the senior management team along with you. Destruction or modification of a culture just for the sake of it is potentially dangerous and damaging.

Technology

Any CEO has to grasp the technology required and really understand how it can be a help rather than a hindrance, whether land-based, remote or, increasingly, multi-channel. Technology in this sector must be understood from the start. From a transactional point of view, the modern gambling company can be (and increasingly should be) hugely advanced and highly complex - and so, therefore, is the supply chain. The old adage of ‘leave it to the techies’ simply won't cut it any longer.

Regulation

The impact of regulation on  gambling can never be under-estimated. Regulation has to be understood, the CEO has to have a sure grasp of the issues, and all decisions in this regard need to be well thought through. I believe that here relationship building (rather than grandstanding, mudslinging or simply ignoring) is of vital importance; this sector can get political very quickly, so the ability to handle key governmental stakeholders is key, This is a key difference between gambling companies and other tech-driven consumer businesses; it is hugely dangerous to get wrong and often thankless to get right (keeping gambling off the public agenda is often the best outcome!).

Owners, board members and investors

Given the nature of the market all of these important factors are liable to huge change. They need to be understood and managed by the CEO as they evolve. Communications is key - to the staff, to the customers and of course to the owners. Strong communications can build confidence, especially if expectations are set at realistic levels and risks are properly articulated. The CEO needs to embrace this factor and lead this battle. Their profile and the perception of who they are in the outside world must be positive and accessible but also frank, grounded and carrying gravitas.

The competition

Competition is always fierce. The chief executive needs to know how to fight, defend, co-operate, destroy, merge or acquire the competition. To survive, every CEO has to be adept at this kind of combat and has to lead from the front in addition to being a player in the wider industry. All CEOs have read the art of war; in this sector as with any other the CEO must avoid fighting battles that cannot be won. They need to fully understand both their own and their company’s weaknesses as much as those of their opponents ranged against them.

 It all sounds like the CEO needs to be something of a Clark Kent and it is true that they will need to deploy extensive powers. For anybody who has never been a CEO, I can tell you now it is a lonely role. When things go well you get little credit (it would have all happened anyway!) and when things go badly it is entirely your fault.

Anybody who takes on the role of chief executive at any company will soon find out that there are consequences to having ultimate decision-making authority. But what really makes it a lonely job are the questions that can keep you awake at night, such as who is spinning you a line, who can you ultimately trust, and who among your staff are telling you things they simply think you want to hear.

The gambling market can be a brutal and unforgiving place, and reputations can be shredded if decisions go awry. As Napoleon well knew, every leader needs a bit of luck to carry them along, but it is my belief that a chief executive job at a major firm can be rewarding, and not just financially.