Global Gaming and Casinos Industry Specialist, Casino Business Review LLC

Howard J Klein

I am a 25+ year c-level executive of the casino industry in operations, marketing, international development and strategic planning. Currently, a consultant specializing in the casino space. Industry expert contributor and publisher of a subscription letter called "The House Edge". Extensive experience in marketing and development in the Asian gaming market while a senior executive at Caesars, Ballys Grand and Trump Taj Mahal.
Part of senior executive teams that valued acquisitions and mergers with companies in the casino, hotel, d entertainment rant  and restaurant space.

Global Gaming and Casinos Industry Specialist

Investing in Indian Cricket: Can the Likes of Dream11 Fill the Void?

Thematic (Sector/Industry)

India Consumer discretionary / Thematic (Sector/Industry)

<ul>
<li>Tencent's ((HK700) business model has generally grown through acquisitions of game titles, diversification of service lines like the cloud and streaming services. The Dream II move brings it into fantasy sports and beyond it, the real possibility of legalized sports wagering in India.</li>
<li>Fantasy sports is a stepping stone to real money sports wagering as has been the case in the US.</li>
<li>Last July, The Indian Law Commission, at the direction of its Supreme Court, issued a comprehensive, tightly reasoned, legal analysis of that country's jumbled existing gaming laws recommending that enforcement efforts to control illegal gambling had failed. It suggested that legalization had to be considered---though .it did not flatly recommend legalization.</li>
<li>India's gaming laws are left to the states, some of which already have permitted casinos, online "skill based" wagering in games like poker and rummy. Tencent' investment in a fantasy sports site like Dream I1 puts it squarely in the running for the next logical step: real money sports wagering.</li>
</ul>Valuing the shares of a company like Tencent by traditional buy and sell side analysis utilizes standard metrics such as forward earnings growth,  debt leverage market scale or share, sector potential, headwinds and tailwinds. For a company like Tencent, we are clearly in the territory of a stock that is so heavily covered, that teasing out unrecognized potential values is a significant challenge. As a result, we must assume, save being an actual fly on the wall at corporate strategic planning meetings, that most everything investors need to know about Tencent will find itself in the multitude of reports on the stock that emanate from analysts on a regular basis.In this insight we will lay out a scenario for a most recent Tencent investment that we think has been underreported beyond the straight news of the deal and its accretive potential to the company's longer-term growth.( Note: See fellow SK insight provider Curtis Lehnert's post: A Generalist's Guide to Tencent which is a broad stroke view of the company, its business units, and general performance profile). What follows is only our assessment of the deal as a move that could position Tencent for what we believe is a coming expansion of the online real money wagering space in India.Our thesisTencent has invested US$100m in one of India's top fantasy sports online sites, Dream II. We believe that that space, as it has proven to be the case in the US and the Eurozone, is one of the foundational elements eventually leading to the legalization of sports wagering in many states of India. Should the several states of India that now permit gaming on what they characterize as "skill-based" games like rummy, poker and fantasy sports sites migrate legally into full-scale real money wagering, then Tencent, for relatively modest money, has bought itself a seat at the table of a very lucrative potential feast. With its massive scale, online know-how and specific business units that play into that scenario---we think investor awareness of this potential is another strong reason to be in this stock long term.Tencent's dilemmaWe have looked at the company from an entirely different perspective than that of the normal appraisals the market gets from traditional sources of investment research. What we see in the Dream II deal is not just a buy into a successful departure from the company's core businesses.  Tencent has done 35 deals over the last year, clearly building its portfolio to assure itself possession of top performing games in the ongoing market. But it appears from much of the analysis of the company's moves, that the strategy has supported, yet slowed its earnings growth in many of its current sectors. Growing by acquisition in the video game space, for example, adds to Tencent's content scale but at some point will make a diminishing contribution per dollar invested, to earnings and growth. This reality runs through the entire sector where growth is expected to continue as a result of the demographic increase of the player base globally punctuated by the periodic strike of lightening of a new title that breaks through and becomes a blockbuster.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/063/560/original/charts.gif?1536676971" class="editor-image img-responsive" data-smartkarma-image-id="63560"></figure><div class="content-caption">Tencent is at a tempting entry point</div>So the question for Tencent strategic planners is this: Should we continue developing and buying games, video content,etc within the hermetic sphere of video content and services, or take a bit of a swerve into a space that holds the promise of exponential growth in the near future?In its investment in Dream II, Tencent has, in our view, taken this modest swerve into fantasy sports not only because the space in India, for example, has captured a portion of that nation's Cricket and Football fans, who are legion and quite comparable in their intensity to the huge US National Football League's fan base. Beyond that lies the prospect of a company like Dream II becoming the most natural heir to a possible legalization of sports wagering in the massive Indian market.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/063/561/original/7626-Currentsite.jpg?1536677043" class="editor-image img-responsive" data-smartkarma-image-id="63561"></figure>Above: Dream II's cricket fantasy site. Looks a lot like gambling.The synergies are not quite apparent but on closer examination, give us clues:<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/063/562/original/675.jpg?1536677168" class="editor-image img-responsive" data-smartkarma-image-id="63562"></figure>1. Fantasy sports sites already possess the player base of individuals interested in competitive sports "contest games" read: gaming. Nobody knows better than Tencent the high acquisition costs of customers are in the space. So wherever it can buy existing customers that fit its paradigm, it will. In this deal, it participates in the growth of fantasy sports and going forward, in that platform morphing into full dress real money sports wagering. Again, applying the fig leaf logic that governments around the world have used for online real money wagering. Sports betting can be seen as "a game of skill" since it requires a presumed knowledge of teams and their play records. Whether it is a game of skill or just something that gives political cover to politicians who okay legalization doesn't count. The ultimate result is that when and if, a fantasy sports online business like Dream II in India transforms itself into a real money online sportsbook, the revenue potential, in Cricket-crazy India could reach in the billions.2. Sports betting like lotteries appeal to the masses. While legal sports betting does attract a percentage of VIP players who regularly bet tens of thousands per week or per month on the outcome of sporting events, they represent a very small percentage of the total revenue-generating potential. Sports betting in a nation like India with a per capita GDP under US$2,000 per year is a pastime easily within the reach of hundreds of millions of Cricket fans. Betting on a game is akin to the cost of buying a lottery ticket. And that business goes on in tens of thousands of street corners in India every day, according to political figures who support legalization.2. Tencent has built-in technology in mass transaction processing in its WeChat unit. A sports betting platform is essentially doing the same thing: It is processing the transaction between buyer and seller. In this case, the product is quite simply, a bet. As its relationship with Dream II develops, it has the resources, the scale and the technology to move faster than most anyone in the sector, to ramp up from fantasy sports to sports betting.3. What are the realistic prospects for legal sports betting in India? Last July, under a request from the Indian Supreme Court, the country's Law Commission of India (LCI) a top-level panel of legal scholars, judges and legal history experts, prepared a comprehensive, tightly reasoned, highly detailed report on the entire issue of legalized gambling in that country. The study went deep into history, beginning in the mid 19th century when gambling was first officially outlawed. Carefully working through the evolution of gaming law over the centuries and up to the present, the LCI concluded that a) Efforts to enforce laws prohibiting gambling had proven futile over the centuries and remain so. b) It held that legalization was preferable to the continued fruitless efforts to control illegal betting.  c) The report aroused mixed reactions among the political class, forcing the commission to issue a follow-up statement that it did not defacto approve of legal gambling but had concluded that legalization was an option. Various forms of gaming are now legal in some states of India and the commission said that it was an activity to be banned or legalized at the behest of states, not the federal government.This study echoed a similar legal construct to that made by the US Supreme Court last May when it struck down a federal law that in effect, banned legal sports betting. Its decision turned on the same logic as that of the ILC, namely that it was for the individual state citizens to decide whether or not to legalize sports betting. Since that decision, there has been a massive scramble among casino operators, tech gaming companies and sports leagues to support legalization. Our best estimate is that up to 14 US states will legalize it within the next three years.We believe a similar pattern will emerge in India. Early this year, for example, The Stars Group (NASDAQ: TSG) ,the Toronto based world's largest online poker site, partnered with India's Sugal &amp; Damani, a privately held operator of lotteries in many Indian states (20,000 kiosks in operation) to license its PokerStars and FullTilt Poker content for India. The management of that company sees India as the single greatest potential for online gaming in Asia since China's ban appears to be permanent now.ConclusionTencent booked total revenue of US$10.5bn in 2017, of which 41% came from online games. The investment in Dream II is a clear departure from its core sector in video gaming content. We believe that the company's move presages a continuing strategy to diversify its content in video games and other services and educate itself into the fantasy sports business with a sound, initial investment in Dream II that has implications that in the not too distant future for a more profound participation in the online fantasy sports space as a prelude to what we believe to be the inevitable legalization of real money sports wagering in India. And because of that prospect is a bit off in the intermediate term, we do not think the market is baking this potential US$15bn Indian real money gambling market into its trade.


Tencent's ((HK700) business model has generally grown through acquisitions of game titles, diversification of service lines like the cloud and streaming services. The Dream II move brings it into fantasy sports and beyond it, the real possibility of legalized sports wagering in India.
Fantasy sports is a stepping stone to real money sports wagering as has been the case in the US.
Last July, The Indian Law Commission, at the direction of its Supreme Court, issued a comprehensive, tightly reasoned, legal analysis of that country's jumbled existing gaming laws recommending that enforcement efforts to control illegal gambling had failed. It suggested that legalization had to be considered---though .it did not flatly recommend legalization.
India's gaming laws are left to the states, some of which already have permitted casinos, online "skill based" wagering in games like poker and rummy. Tencent' investment in a fantasy sports site like Dream I1 puts it squarely in the running for the next logical step: real money sports wagering.
Valuing the shares of a company like Tencent by traditional buy and sell side analysis utilizes standard metrics such as forward earnings growth,  debt leverage market scale or share, sector potential, headwinds and tailwinds. For a company like Tencent, we are clearly in the territory of a stock that is so heavily covered, that teasing out unrecognized potential values is a significant challenge. As a result, we must assume, save being an actual fly on the wall at corporate strategic planning meetings, that most everything investors need to know about Tencent will find itself in the multitude of reports on the stock that emanate from analysts on a regular basis.In this insight we will lay out a scenario for a most recent Tencent investment that we think has been underreported beyond the straight news of the deal and its accretive potential to the company's longer-term growth.( Note: See fellow SK insight provider Curtis Lehnert's post: A Generalist's Guide to Tencent which is a broad stroke view of the company, its business units, and general performance profile). What follows is only our assessment of the deal as a move that could position Tencent for what we believe is a coming expansion of the online real money wagering space in India.Our thesisTencent has invested US$100m in one of India's top fantasy sports online sites, Dream II. We believe that that space, as it has proven to be the case in the US and the Eurozone, is one of the foundational elements eventually leading to the legalization of sports wagering in many states of India. Should the several states of India that now permit gaming on what they characterize as "skill-based" games like rummy, poker and fantasy sports sites migrate legally into full-scale real money wagering, then Tencent, for relatively modest money, has bought itself a seat at the table of a very lucrative potential feast. With its massive scale, online know-how and specific business units that play into that scenario---we think investor awareness of this potential is another strong reason to be in this stock long term.Tencent's dilemmaWe have looked at the company from an entirely different perspective than that of the normal appraisals the market gets from traditional sources of investment research. What we see in the Dream II deal is not just a buy into a successful departure from the company's core businesses.  Tencent has done 35 deals over the last year, clearly building its portfolio to assure itself possession of top performing games in the ongoing market. But it appears from much of the analysis of the company's moves, that the strategy has supported, yet slowed its earnings growth in many of its current sectors. Growing by acquisition in the video game space, for example, adds to Tencent's content scale but at some point will make a diminishing contribution per dollar invested, to earnings and growth. This reality runs through the entire sector where growth is expected to continue as a result of the demographic increase of the player base globally punctuated by the periodic strike of lightening of a new title that breaks through and becomes a blockbuster.Tencent is at a tempting entry pointSo the question for Tencent strategic planners is this: Should we continue developing and buying games, video content,etc within the hermetic sphere of video content and services, or take a bit of a swerve into a space that holds the promise of exponential growth in the near future?In its investment in Dream II, Tencent has, in our view, taken this modest swerve into fantasy sports not only because the space in India, for example, has captured a portion of that nation's Cricket and Football fans, who are legion and quite comparable in their intensity to the huge US National Football League's fan base. Beyond that lies the prospect of a company like Dream II becoming the most natural heir to a possible legalization of sports wagering in the massive Indian market.Above: Dream II's cricket fantasy site. Looks a lot like gambling.The synergies are not quite apparent but on closer examination, give us clues:1. Fantasy sports sites already possess the player base of individuals interested in competitive sports "contest games" read: gaming. Nobody knows better than Tencent the high acquisition costs of customers are in the space. So wherever it can buy existing customers that fit its paradigm, it will. In this deal, it participates in the growth of fantasy sports and going forward, in that platform morphing into full dress real money sports wagering. Again, applying the fig leaf logic that governments around the world have used for online real money wagering. Sports betting can be seen as "a game of skill" since it requires a presumed knowledge of teams and their play records. Whether it is a game of skill or just something that gives political cover to politicians who okay legalization doesn't count. The ultimate result is that when and if, a fantasy sports online business like Dream II in India transforms itself into a real money online sportsbook, the revenue potential, in Cricket-crazy India could reach in the billions.2. Sports betting like lotteries appeal to the masses. While legal sports betting does attract a percentage of VIP players who regularly bet tens of thousands per week or per month on the outcome of sporting events, they represent a very small percentage of the total revenue-generating potential. Sports betting in a nation like India with a per capita GDP under US$2,000 per year is a pastime easily within the reach of hundreds of millions of Cricket fans. Betting on a game is akin to the cost of buying a lottery ticket. And that business goes on in tens of thousands of street corners in India every day, according to political figures who support legalization.2. Tencent has built-in technology in mass transaction processing in its WeChat unit. A sports betting platform is essentially doing the same thing: It is processing the transaction between buyer and seller. In this case, the product is quite simply, a bet. As its relationship with Dream II develops, it has the resources, the scale and the technology to move faster than most anyone in the sector, to ramp up from fantasy sports to sports betting.3. What are the realistic prospects for legal sports betting in India? Last July, under a request from the Indian Supreme Court, the country's Law Commission of India (LCI) a top-level panel of legal scholars, judges and legal history experts, prepared a comprehensive, tightly reasoned, highly detailed report on the entire issue of legalized gambling in that country. The study went deep into history, beginning in the mid 19th century when gambling was first officially outlawed. Carefully working through the evolution of gaming law over the centuries and up to the present, the LCI concluded that a) Efforts to enforce laws prohibiting gambling had proven futile over the centuries and remain so. b) It held that legalization was preferable to the continued fruitless efforts to control illegal betting.  c) The report aroused mixed reactions among the political class, forcing the commission to issue a follow-up statement that it did not defacto approve of legal gambling but had concluded that legalization was an option. Various forms of gaming are now legal in some states of India and the commission said that it was an activity to be banned or legalized at the behest of states, not the federal government.This study echoed a similar legal construct to that made by the US Supreme Court last May when it struck down a federal law that in effect, banned legal sports betting. Its decision turned on the same logic as that of the ILC, namely that it was for the individual state citizens to decide whether or not to legalize sports betting. Since that decision, there has been a massive scramble among casino operators, tech gaming companies and sports leagues to support legalization. Our best estimate is that up to 14 US states will legalize it within the next three years.We believe a similar pattern will emerge in India. Early this year, for example, The Stars Group (NASDAQ: TSG) ,the Toronto based world's largest online poker site, partnered with India's Sugal &amp; Damani, a privately held operator of lotteries in many Indian states (20,000 kiosks in operation) to license its PokerStars and FullTilt Poker content for India. The management of that company sees India as the single greatest potential for online gaming in Asia since China's ban appears to be permanent now.ConclusionTencent booked total revenue of US$10.5bn in 2017, of which 41% came from online games. The investment in Dream II is a clear departure from its core sector in video gaming content. We believe that the company's move presages a continuing strategy to diversify its content in video games and other services and educate itself into the fantasy sports business with a sound, initial investment in Dream II that has implications that in the not too distant future for a more profound participation in the online fantasy sports space as a prelude to what we believe to be the inevitable legalization of real money sports wagering in India. And because of that prospect is a bit off in the intermediate term, we do not think the market is baking this potential US$15bn Indian real money gambling market into its trade.

Tencent's US$100m Buy into India's Dream II Fantasy Sports: A Bet on Sports Betting's Future?