In this 3-part series, we will explore trends within the global and Australian gambling industry. In Parts 2 and 3, we’ll highlight 3 small-cap stocks on the ASX that we believe offer the best upside in a consolidating industry.
With the Melbourne Cup now behind us, Australia’s passion for gambling has been on full display. Known as “the race that stops a nation,” the Melbourne Cup highlights Australia’s love of horse racing and serves as a significant revenue generator for the gambling industry. Each year, Australians place over $221 million in bets on the Melbourne Cup alone, with many placing their wagers both online and at physical betting locations.
The gambling industry is one of the largest global sectors, generating an estimated $1.2 trillion in annual wagering turnover. With a high concentration of both traditional operators and emerging technology providers, the industry is undergoing rapid evolution. These shifts are fueled by increased regulation, technology innovation, and the emergence of new gambling verticals, each of which brings opportunities and challenges to the sector.
Australia represents a unique landscape within this global market, with some of the highest per capita gambling losses in the world, averaging around $1,276 per person annually. Australians spend approximately $25 billion each year on gambling, with a large portion of this attributed to electronic gaming machines (pokies), racing, and lotteries. Although the market is highly regulated and prohibits online casinos and in-play sports betting, the popularity of sports betting, online lotteries, and emerging digital platforms has kept the industry dynamic.
Regulation and Expansion
Worldwide, regulation in the gambling industry has increased significantly in recent years, both to protect consumers and to capitalise on the economic potential of legalised gambling. In the U.S., for instance, the repeal of the Professional and Amateur Sports Protection Act (PASPA) in 2018 has allowed states to legalise sports betting, creating a multi-billion dollar industry practically overnight. Australia, while a more mature market, continues to see regulatory adjustments.
In Australia, gambling is heavily regulated by each state and territory, with national oversight provided by the Australian Communications and Media Authority (ACMA). Gambling laws vary by state, and while sports betting and lotteries are legal, online casino games remain banned. Additionally, Australia imposes stringent advertising restrictions on gambling companies, especially for live sports events, and requires operators to enforce strict identity verification processes to combat problem gambling. This focus on consumer protection creates both barriers and opportunities for operators, pushing them to differentiate through compliance and service quality.
Despite regulatory restrictions, Australia’s gambling market has been resilient. Sports betting, in particular, has expanded in recent years due to the growing popularity of digital platforms. With around $1 billion spent annually on sports betting, operators continue to see opportunities to expand through increased digital offerings and innovative betting options, such as in-play wagering (where permitted) and micro-betting on specific outcomes within games. In response, some Australian operators are exploring offshore markets where regulatory conditions are more favourable, expanding their reach into less restrictive environments.
Technology Innovation
As gambling moves online, technology innovation becomes increasingly critical. In Australia, digital transformation has significantly influenced consumer gambling habits. While traditional in-person gambling via pokies and lotteries remains popular, online sports betting and fantasy sports are seeing considerable growth, particularly among younger Australians. Technology providers and operators are racing to introduce innovations that appeal to these digital-savvy consumers.
Key areas of technology innovation in Australia include in-play betting, mobile betting applications, data analytics, and AI-driven personalisation. In-play betting, which allows users to place bets during live events, has seen strong demand but faces regulatory hurdles in Australia, where live betting can only be conducted over the phone or in person. To navigate these restrictions, companies are investing in seamless app experiences and offering alternative betting formats that maintain user engagement without violating regulations.
Personalisation and data analytics are also transforming the gambling experience. By harnessing big data and AI, operators can tailor marketing efforts, personalise betting recommendations, and improve customer experience, all while adhering to Australia’s responsible gambling standards. Evolution Gaming, Genius Sports, and OpenBet are examples of technology providers supplying operators with real-time data feeds, betting engines, and tools that enhance engagement and personalisation. These solutions help operators optimise their platforms to meet evolving consumer expectations, creating a more engaging and user-friendly environment.
Margin Compression for Operators
Profit margins in the gambling industry typically range from 10% to 20%, but rising regulatory costs, advertising restrictions, and heightened competition have compressed margins for operators worldwide, including in Australia. Many operators face pressure to maintain profitability while complying with complex regulations and bearing high tax burdens.
In Australia, operators are subject to a range of fees and taxes, including the point of consumption tax (POCT), which taxes bets based on the location of the bettor rather than the operator. This tax, introduced to capture revenue from online betting, has created additional financial strain for operators, especially those with high levels of competition. To protect margins, operators are adopting more efficient technology solutions, automating risk management, and focusing on customer retention to reduce customer acquisition costs.
Another impact on margins is advertising restrictions. Australia has strict rules on gambling advertising, particularly around live sports and TV broadcasts, which limits operators’ ability to promote services during prime sporting events. To adapt, operators are shifting focus toward digital marketing channels, utilising data analytics for targeted campaigns and focusing on creating a differentiated experience to build organic growth rather than relying solely on advertising.
Consolidation
In recent years, the gambling industry has seen a significant wave of mergers and acquisitions, as companies seek to scale and capture greater market share. This consolidation is reshaping the competitive landscape, particularly in Australia, where larger players like Tabcorp and Sportsbet dominate. Smaller operators, often challenged by regulatory costs and competitive pressures, are becoming acquisition targets for larger, better-capitalised companies. Consolidation provides companies with economies of scale, access to larger customer bases, and the ability to spread regulatory compliance costs over a broader revenue base.
For investors, this M&A activity presents unique opportunities. Consolidation generally results in a more stable industry structure, where larger players are better positioned to navigate regulatory challenges and capture market growth. Smaller, innovative companies that excel in niche segments are often acquired by larger operators looking to diversify and bolster their portfolios with new technology and capabilities. In the Australian market, we expect continued consolidation as both global and domestic players seek to secure market share and build scale.
Emerging Verticals
The gambling industry is expanding beyond traditional sports betting and casinos, with new verticals like esports, fantasy sports, and blockchain-based gambling gaining traction. In Australia, esports and fantasy sports are particularly popular among younger audiences, opening a high-growth market segment for operators. As esports gain legitimacy as a spectator sport, companies are capitalising on this trend by introducing esports betting options and fantasy leagues.
Blockchain technology is also making inroads, with cryptocurrency-based betting platforms offering transparency and enhanced security for users. While Australian regulations currently limit certain blockchain-based gambling activities, consumer interest is growing, especially in decentralised betting platforms that offer transparency and anonymity. Operators that can adapt to these emerging trends have an opportunity to capture a younger demographic and diversify their offerings beyond traditional sports and pokies.
Fantasy sports are also gaining momentum in Australia, with platforms like Draftstars and Moneyball leading the charge. Fantasy leagues allow players to form their teams and compete based on real-world sports outcomes, adding a layer of strategy and engagement that appeals to sports enthusiasts. As more Australians engage with fantasy sports, operators have an opportunity to drive cross-promotions and expand their user base.
The TAMIM Takeaway
The Australian gambling industry is a dynamic and evolving market with high levels of consumer demand and unique regulatory challenges. While regulatory compliance and competitive pressures present headwinds, the sector remains highly lucrative, particularly for companies focused on digital transformation and innovation.
For investors, the technology provider segment offers attractive margins and less regulatory exposure, making it a compelling area for growth. Additionally, nimble online operators that excel in personalisation and digital engagement are well-positioned to take market share from legacy incumbents. As industry consolidation continues, these operators may become acquisition targets, allowing them to benefit from both organic growth and potential exit opportunities.
In Parts 2 and 3 of this series, we will delve into specific ASX-listed small-cap stocks that TAMIM believes have substantial upside potential. These companies are poised to capitalise on industry trends like technology innovation, regulatory expansion, and emerging verticals. Stay tuned as we reveal our top picks for investors seeking to navigate this vibrant and high-potential sector.