Power shake: Could a changing M&A market shake up next year’s Power Affiliates list?
First published at https://egr.global/marketing/insight/market-watch-could-a-changing-ma-market-shake-up-next-years-power-affiliates-list/
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The immediate impression looking at this year’s affiliate rankings is that the world’s a normal place. Better Collective’s still up there leading the pack (after all, who else could really wear that crown, even just on quarterly earnings reports). All the usual suspects seem to be covering the usual bases, in their usual positions.
Which is why, at first glance, the latest Power Affiliates chart is reminiscent of a quote from one of Michael Crichton’s better-known works. There is a pivotal discussion on statistics in the unabridged tome of Jurassic Park that (mainly for low-brow reasons) didn’t quite make it to the big screen. At one point, Ian Malcolm (the cool math guy) enquires about data studies of the dinosaurs, and the chief engineer replies showing a graph with a bell-curve of animal height distribution that appears to be a normal percentile for a healthy biological population. Malcolm points out that the graph’s apparent normality inherently implies problems with the system: since the park is a controlled environment and not the real world, it should not contain a “normal” distribution.
And incongruently, these are not normal times. Even before factoring in the inevitable dynamics this year, that will shape the charts 12 months from now, there was already an emerging trend taking shape. To put the magnitude of this impending shift into perspective, it’s important to break down the P25 chart and unpick the underlying subtleties.
One caveat before the dive – and a pre-emption to the inevitable raft of guesswork that this article will invoke. We’re signed up to NDAs with practically all the companies on this list (and more than half are our loyal customers), so kindly bear with the apparent loftiness of the discussion that follows.
It makes sense to start with the publicly traded entities. All floated affiliate companies have now issued their full 2019 earnings, and on trading performance alone there’s quite a divergence across the board. Year-on-year performance varies from single digit losses to almost double bottom line profits. Yet the share prices reveal an even more telling picture. Investor sentiment – put blatantly, which companies will survive the storm intact, seems largely bullish on enterprises with large cash reserves and diversified revenue streams. So, a quick glance at current stock prices immediately reveals that at least three existing public affiliate companies are now considered relatively ripe for acquisition given low share price alone. In other words, expect some takeovers this year, likely by non-affiliate, but publicly traded, companies. Also, looking at the short trading sentiment alone, it’s likely that at least one additional public entity will hang up the proverbial and call it a day.
Next, the privately held corporations. There’s been some good diversification on revenues, however a good portion of this category still receive quite substantial contributions from sports, thereby putting short- and medium-term returns at risk. Furthermore, many affiliates lack a centralised CMS (content management system) leading to excessive workload as and when regulatory changes filter through from operators -such as the UK credit card ban. This point rings true for most of the publicly listed affiliates that have failed to integrate the myriad websites they have acquired over the years. There are some short-term savings to be made by furloughing, but only if companies are based in countries that properly support such measures, such as UK, Germany, France, and Italy. Such processes largely do not exist in territories such as Spain, Cyprus, or Malta, so most corporations in these jurisdictions most likely need to fire and pay costly redundancy packages. Presumably, the stronger entities here should have sandbagged enough profits from previous times for rainy days, nay years, such as this. Expect the stronger contenders to promote higher revenue esports events that are directly correlated to previous sportsbooks, such as horseracing, football and Formula 1 whilst retaining their core casino devotees. This segment is highly ripe for acquisition and takeover, especially those with strong SEO focus across diversified markets. There will be a few (colourful) transactions happening later this year; sooner rather than later. Which will likely be followed by at least one closure….
Finally, a nod to the rising stars. Lots of good things happening here; some notable advances in new territories and brands. These aren’t necessarily ripe for the picking yet but will be very strong a year from now, once the (first) wave of panic has subsided. The acquisition force will be especially strong with these ones, particularly those who are strong on proprietary tech, and those who have demonstrated solid revenue pivots by promoting alternative sports and using machine-assisted (important note on difference in terminology here) content generation. But there will be cashflow and potential compliance issues with affiliates not using their own tech stacks, and/or high-volume low-margin acquisition strategies as operators look to optimizing bottom lines.
This, then, provides the context behind the anticipated disruptions for the coming year. Let’s face it – most of these underlying trends will not just be due to pandemics; despite claims to the contrary. As things stand, even in calm weather, affiliates cannot continue to increase revenues solely through player acquisition from (ever decreasing) new territories, followed by entire company and databases when those channels start to fade.
Given the oncoming legislative tsunami on severely limited bonuses and deposits (Sweden being the most recent example), it’s only a matter of time before CPA-only deals (likely followed by hybrid) are revised by cash-strapped operators. And when that happens the affiliate market risks contracting significantly as own brands seek to reduce their marketing costs; squeezing the shorts especially for low-margin, high-volume affiliation. The attitude of operators seems to be shifting towards using affiliate marketing for short-term brand building and then capitalizing on awareness using their own promotions. If this becomes the new norm, then expect a sudden dearth of campaigns promising €400 CPA and/or 35% revenue shares.
So, what can be remedied here? Almost without exception, all the affiliates on this list promote – as opposed to run – any betting services. Why not utilise good acquisition expertise to launch and run own microbrand casino sites? Some of our most valued affiliate-based transactions in the last few months have been hybrid operators, and for good reason. In addition to offsetting any imminent deficits from operator revenues, the net valuation of the business increases through independent and diversified business units as well as increasing broad appeal to future buyers.
Notwithstanding any tactical redeployments, it’s still highly likely that – for the current rankings on this list at least – there will be seismic shifts in the coming months. Until the next Power Affiliates ranking comes knocking, there will have been at least four mergers and/or acquisitions from this list. It’s also highly likely that at least two further companies will have insufficient cash reserves to weather the storm or have insufficient resources to pivot to the right revenue streams.
Make no mistake, beneath this 25-strong list of behemoths there is another steady rising wave of next generation affiliates, with strong tech, laser-guided seo and higher profit margins, that – perhaps intentionally – are very happy to sit under the radar biding their time for the foreseeable future. And when this incumbent normal has been disrupted, they will gradually rise to reclaim the land that is theirs. Not too dissimilar to the fox that stealthily crept back into my garden this morning.
Hence, channelling the inner Jeff Goldblum, this chart might have less dinosaur and more fox in 12 months’ time…