How To Build USP That Makes Cash Ruthlessly?
I’ll examine how company Evolution built a ‘moat’ against price cuts. This company is really profitable. The net profit rate (net profit/sales) was 58% in 2022. This is amazingly high. While online casino operator DraftKings always makes a loss, the net profit rate is negative, and the biggest casino operator in the world Las Vegas Sands is also making a loss before tax.
Since Evolution is an online casino company, you may think this company is like Stake.com or DraftKings. That is wrong. The company is a B to B online live casino game creator and offers its game to Stake.com and other online casino operators. It doesn’t operate B to C casino itself. Just selling the game to casino operators it created. Then you think it is like game companies like Nintendo or Take-Two Interactive. That is not correct either. The company is actually more like an online secretary company in Philippines.
I had no clue about the business, but when I divided personnel expenses by company employee numbers, I found something interesting. The expense was €290 million and the number of employees at the end of 2021 was 13,400, and 17,000 at the end of 2022. Suppose the employee increases at a constant rate in 2022, the average employee in 2022 was (13,400+17,000)/2=15,200. So, the average salary was €19,053, which is one-third of US GDP per capita.
Then I found many of the company’s studios are in east Europe. Their live Casino tables are in Malta, Latvia, and Georgia. imagine a blackjack casino table livestream from Malta. The income is not high and in these countries, gambling is legal and gambling policies are stable.
So I concluded, that the business model is getting cheaper labor in lower-income countries and making them dealers of online live casino tables like blackjack, (one table only handles 7 or so players, Evolution offers more than a thousand live casino tables at the same time) and selling it to people in higher income countries. So the business model is exactly like a secretary company in Philippines. Because each dealer handles a small number of players online and talks to them. But those players spend way more than secretary service because people tend to become generous when they go to a casino.
Lower salaries and higher revenue are the recipe for the very high net profit.
Thus this company is not so much about making creative cutting-edge games, but offering great operation is the key. The company is almost dominating the online live casino industry.
There are several reasons for the domination.
First, it bought out some of its rival live casino companies in the past. So there are very few rivals remaining. You can see that from the Balance sheet of the company, the amount of Goodwill is huge.
The Goodwill represents the premium paid by the acquiring company. For example, if you buy A company paying $120 and the price of assets that A company has is $100, your Goodwill amount will be the difference of $20. Anyway, in 2022 the total assets were €4.4 billion and Goodwill was €2.3 billion, more than half of the total assets. They paid that overpriced amount (hence the tremendous amount of Goodwill, you can see how much they wanted to kill the competition) to eliminate rivals and establish the dominance.
Second, this business is difficult to emulate. The business model is very simple, but they have to actually go to East Europe, make casino sets, hire talented people in the areas, and educate them to make great dealers. Running a live casino is tough. Making it difficult to participate in the industry for newcomers.
So, the USP of the company is operating a live casino itself because it is the almost only company that offers a live casino.
I will analyze the USP of Evolution that brings the high-profit margin. If you want to know more about USP analysis, please read my Toys”R”Us article.
The target: True gamblers who want to play gamble every day. Also, sociable people who want to interact with other people. They love the atmosphere of a casino.
The problems: there are real land casinos and normal online casinos (not live casinos, computer dealers).
Real land casinos: the cost of going to a real casino is high. Going to Vegas takes time you have to stay at the hotel. The hotel is expensive, everything is fancy price. The minimal bet is from $5. You can’t enjoy gamble unless you are super rich or super broke.
Normal online casinos: the bot plays with you. Everything is just a digital bit. Players are alone and sad. The worst thing about it is they can’t see the physical dealer. It can easily rig the game, can’t trust it.
Target’s ideal situation: they can get an authentic casino experience every day. That gives them a big dopamine release in their brain, making them great gambling addicts. Their life is about gambling. All their life is surrounded by gambling, 24/7 gambling.
Evolution’s solution(USP): Live online casino. They don’t have to pay for fancy stuff like hotels or Champagne. They can do it anywhere. They can play casino from their comfortable house. They can interact with other players and dealers on-site. The casino set and physical dealers provide an authentic casino experience. They can see the physical dice or card movement giving authenticity also trustworthiness. The operators are shuffling cards behind the table, players can trust the casino. That gives a secure immersive experience.
Also, they can bet from $0.5. normally minimal bet is $5. So, this makes them play longer with lower seed cash. The casino is open 24/7. Gambler’s heaven.
The price is the same, I mean players can get the same return from casinos like Blackjack. Which do you choose, an exciting live casino, or a normal online casino? The uniqueness makes a lot of repeaters. That is why the live casino market share in all casinos is increasing the fastest (Compound Annual Growth Rate 2018-2022 was 21.5%). Hence the sales growth.
I want to see the dismantled business number of Evolution.
If you want to understand a business, look at the numbers because numbers don’t lie
The total casino industry in the world was €480 billion market in 2022, and 5% is now online live casinos. I estimate Evolution accounts for 60% of live casinos. But it doesn’t become Evolution’s sales directly, it is casino operators’ (like Stake.com) sales. Evolution earns its revenue through a fee based on the total sales made by casino operators using their games.
The casino operators’ sales from Evolution games are estimated at 480×5％×60％＝€14.4 billion. And Evolution’s 2022 live casino revenue was €1.2Billion, so Evolution’s fee rate was estimated as 8% (1.2Billion÷14.4Billion) of the total sales of casino operators.
According to financial statements in 2022, the casino operators were 87% of all employees, they have 15,200×87%=13,224 operators. One table needs one dealer. Additionally, I believe that tables need non-dealer operators (like card shuffler video shooter, or checker) who handle multiple tables simultaneously, so each table requires 1.5 people. Evolution is operating the business 24/7, so 24 hour=3.4 people×7 hours (suppose dealers work for 7 hours, so 3.4 dealers are needed for a table to fill a 24 hour shift) and employees only work for 5 days a week. That makes 1.5×3.4×(7 days÷5 workday)=7.14 people needed to operate one table. In financial statements, they say they have 1300 tables in 2022 and 1000 tables in 2021 so the average table in 2022 is (1000+1300)÷2=1150. 1150×7.14=8211. A casino show like Crazy Time needs way more staff. Suppose it needs 20 staff. 20 people × 3.4 (24 hour/7 hour)×7 days÷5 workday=95.2 people needed to make the show. If there are 30 that kind of games, that means 95.2×30=2856. The total (8211+2856) is kinda close to the company’s operating staff number.
Players pay €14.4 Billion in a year, which means €40 million a day, €1.6 million an hour. €1.6 million÷1150 tables=€1,429 per desk per hour. That is very feasible. Gamblers are very “generous”. One player easily bet €300 in total in one game. And each desk can have an average of 5 players. In an hour there are at least 20 games.