San Francisco, California (PressExposure) November 23, 2009 -- Carlo Gualandri is CEO of Gioco Digitale (GD), Italy's largest online gaming operator. GD was recently acquired by the Austrian gaming group, bwin, at a value of 115 million Euros. But GD wasn't always a big time player. In fact, just 27 months ago, GD didn't even exist. Gualandri tells us how he did it.
"During the golden years of the Internet, between 1995 and 2005," said Gualandri, "I had explored how companies could take advantage of the disruptive effect of the introduction of the digital age. I saw this in the worlds of media, telecommunications, finance, banking, and other business-to-business activities. I had a practical idea of the ways that online technology tends to change existing markets and open up significant new opportunities, especially when they come in touch with the full power of the Internet.
"This inspiration was only one half of the original idea for Gioco Digitale. The truth is, I'm not really a player. I wouldn't be one of my own customers. So I had only limited exposure to the gambling industry. I could see the opportunity but I knew I first had to study the market. This is when Carlo D'Acunto and I went to work for LottoMatica in 2005. Back at that time, Internet gaming was not yet legal in Italy, and LottoMatica did 99% of its business in the real world.
"This is where I learned the characteristics of the gaming market, about it players and also very important, about it regulations. There are a lot of laws and procedures surrounding gambling. So when the Italian government opened the online gambling market with the announcement that they would be issuing the first licenses to conduct online gaming, Carlo and I decided to put together our experience of what to do in the Internet environment with our experience of gaming. We eventually won a license, and so Gioco Digitale was born."
Gualandri and D'Acunto left LottoMatica in 2006 to found Gioco Digitale. They were joined shortly by the third founder of the company, Fausto Giomandi. "Giomandi is more of the creative, editorial part of GD. Today he's responsible for running all content and event activities for the poker room." Since then, many other talented people have joined GD as it has grown.
Betting the Company
Having talent and experience are important, but GD's success is based on its vision. "When we started in 2007, there were only two products that could be legally offered online in the Italian market: sports betting and 'Scratch-and-Win' instant lotteries. We understood the second product well because Carlo and I [helped build] built the Italian national instant lottery system when we were with LottoMatica.
"The key decision for us was to try to compete in new markets. We realized that it would have been very difficult to succeed just with this kind of betting, especially since there were already so many competitors. Not only did each of them have a powerful brand because they also managed hundreds of real-world betting shops, they also had a head start of months to years ahead of us.
"We started with betting because we had no other products we could offer. However, we decided to focus on the introduction of additional games where the playing field was level for everyone. There would be no precedent, no existing competition, because everything would have to be invented from scratch. So when we saw that poker was becoming a reality, we concentrated all the energies of the company in this direction. We wanted to be the first and most significant operator to launch an online poker room." It was end of 2007 when GD embraced the vision of focusing on poker.
Barrier to Entry or Opportunity
One of the greatest challenges for GD were the regulations set forth by the Italian government in order to enter the online poker market. These regulations call for a very stringent and complex coupling between the operator, technology system, and the government central system as a gaming transaction is only legal if it is recognized and approved by the government.
"This connection between the gaming platform and the government's central systems involves a number of issues so complex that it created a fairly unique market in terms of technology requirements that were required nowhere else in the world. Sometimes it seems that the Italian government has an unnecessary tendency to be very "Big Brother" when it comes to controlling gaming activities. But better to have a "Big Brother" government than to have a completely illegal environment like it is in the US, where online gaming is formally legally prohibited."
Understanding these involved regulations and implementing them were a primary concern for Gualandri. However, Gualandri recognized that these same requirements which were a significant barrier to entry for his team would also prove difficult for any company to address. As a consequence, Gualandri viewed them as an opportunity to move ahead of the larger players already established in other online gaming markets.
"At GD, we've always had a policy to internally develop the technology we were using. With poker, however, we realized we couldn't internally develop a product so complex in the limited time we had. We decided that we would invest and focus our development resources on building the environment that would make poker compatible with Italian regulations. At the same time we would have to source poker technology from someone who had the experience to build a major product that we weren't able to build ourselves."
Although tight on time, Gualandri and his team knew that they could not rush their decision because the future success of their company was at stake. "I would say we talked with all the potential suppliers of that technology that were available then. The normal way that software is sourced and provided in other industries - providing software that we could run and operate autonomously - is not the model used in the gambling industry. Most gaming technology providers only offer the possibility of licensing their software as a service. This was very important for us because we wanted to be in full control of our activities. That means being in full control of the technology and operation of the product.
"Typically what happens is that an operator already has customers because he's selling some other products, typically betting. He decides to offer poker to his customers as well so he goes to an operator who's running a network, and he will pay for it with revenue shares or with part of the profits generated by his client on that particular game. "This model was not compatible with our plans because we wanted to have full control of a network and not depend on anyone else to 'make decisions' for us. Secondly, we wanted to become a network ourselves, to be the one who - and actually we've done this in our market - offers the possibility to have a less experienced operator delegate the management of their poker product to us so we'll be able to make money not just on our own clients but also a small percentage of the revenues that are generated when another operator brings his client into the network. This would be very difficult or impossible to do by licensing or entering into service agreements with an existing network."
Not wanting to lose control of their operation or give up a significant portion of future top-revenues, GD decided upon the Foundation platform from CyberArts. "Few technology providers actually work with you, giving the technology and help required to run the technology autonomously. We can also be a very difficult client because we understand the technology behind the brochure. CyberArts emerged as the most major scalable and feature-rich product. They also offered us a licensing model that was familiar to us. That's why we decided to go with them."
Italy's First Online Poker Room
Integrating the poker and regulation applications required a significant amount of code development by GD to ensure compatibility and compliance with Italian regulations, as well as to integrate the appropriate financial gateways and marketing systems. "CyberArts provided the poker foundation but it needed modifications to be able to connect to our platform and to the government systems. And I have to say that the possibility for us to develop our systems while CyberArts developed in parallel allowed us to deliver a product much sooner than anyone else, even very important gaming software companies that started more or less at the same time we started." The end result was that these competitors were only able to bring their products to the market months later than GD.
"This is really a testament to what you can achieve with small groups of talented people. We were really able to be very effective and to the point in our development activity by exchanged technical information with CyberArts via conference calls, email, Skype, and other online collaboration tools without meeting in person. It was a continuous development process because the last thing we did in the evening was send CyberArts project updates and they would continue working in a different time zone. The whole project was actually managed by a small group of people on our part and on CyberArts' part. In fact, the first time the technical teams met was almost six months after the product had been on the market. And we did it on schedule, without losing too much time to travel, long meetings, politics, and things like that. This has been a very important part of the results that we've achieved."
Gioco Digitale was the smallest among the players in the poker market at the beginning of 2008. Estimates projected the total market at 400 million Euros, and they had only a few months head-start on the larger players. "After we launched, we saw that the initial response of the market was overwhelming. We decided to actually push as hard as we could and focused the entire company in this direction. The project took us just over 6 months, and we invested all the money we got in the first and second rounds of financing in advertising and marketing to push the growth of the product. We actually bet the company, hoping that the poker activity could generate cash fast enough to be able to pay the company bills."
By the end of 2008, it became clear that the market estimates had been wrong by a factor of five: the market had actually reached 2 billion Euros. "Having a market many, many times bigger than the highest estimate created a number of peculiar situations. The first months were spent continuously ordering new servers and activating the technical infrastructure to cope with the increased traffic and activity from the all users that we were acquiring. We also had a frenzied ramp-up in customer service. Those were the two main parts that needed to be continuously upgraded.
"After the first month of poker operation, we basically stopped looking at our business plan and started running operations by instinct with no time even to sit down and do a little bit of reasoning. Four months after launch we had reached the financial target we had set for well into the third year of our business plan. We had become the largest online operator in Italy."
The Local Advantage
Gualandri attributes much of the success of GD to understanding the local market. "Complexity creates the need to take a very, very local approach. It is a mistake to look at Europe and see just a single market. The key factor in entering every single European market is having a very close relationship with the market. This means that if Italy invents some strange technology requirement, to succeed operations must be able to be very effective in solving and managing that requirement."
From Gualandri's perspective, this understanding goes beyond regulations and technology, extending out to the market and product level. "Italians want to be approached in a particular way through advertising and the gaming experience. Typically a local operator who understands this can be much more effective than an international operator. This has happened enough times that I can say with certainty that the local operator, the local attitude, and local management have absolutely been a key factor in our own success.
"Most of the other operators had much less support building their platform to meet the Italian regulations. We were able to take on the challenge of addressing and solving this very complex task before anyone else because we were an entire company devoted only to solving this problem. The other operators treated entering the Italian market as one of many projects. They had to rely upon consultants and so it took many, many months to be able to solve these issues.
"If someone decides to be serious about a local market, they really have to bring local talent and resources on board. Globalization works only up to a certain extent because it has to be merged with a significant dose of local understanding and capabilities. This is clearly proven by the fact that in most local markets, the leaders are the local players, not the big multinational, European, or global players.
"However, localization too only works up to a certain extent, especially when it comes to economies of scale and the capacity to invest. I would say a truly successful operation can't avoid being a mix of these two factors. Thus far, we've played an important role by being local and because of that, we've been able to act faster than most of our competitors. However, GD could gain much from the efficiencies of a global organization. For this reason, we have decided to join bwin so we can merge all of the advantages of being a local player with the positive characteristics of being a global player. In this way, we will bring together the best of the two models and carry GD to its next level of potential."
The Future of Poker in Italy
So what's next for Gualandri and GD? "Actually, I consider myself not having finished any work. The acquisition by bwin is an important decision, but I'm still in the process of growing the company. It's obviously been satisfactory for the shareholders, and now they've finished their role. It has been satisfying as well for all the managers. But we will not just continue working as if it were yesterday. We've given even more commitment and will be managing not only GD but also be taking charge of all the gaming activities in the country. We'll actually be managing more or less double the business. Finally we'll also be involved at the corporate level to work on national projects across Europe.
"This is an ongoing project, and I think that the decision to abandon independence and join a very big group at this time is, in my view, the best way to ensure the continuation of the company and the possibility of continuing to compete in a market that is becoming more and more aggressive.
"It's the best thing for GD and the people that work for the company."