There has been a large amount of news flow surrounding the gaming industry over the past week.

On Monday last week (May 14) the US Supreme Court struck down a federal ban on sports betting. Gaming stocks rose.

Then on the Thursday (May 17) the UK Government (or the Department for Digital, Culture, Media and Sport) reduced the maximum stake on Fixed Odds Betting Terminals (FOBTs are a form of gaming machine found in betting shops) from £100 per throw to £2 as part of its Triennial Review of the gambling sector. Stocks fell initially, then rallied.

The first announcement was good news for the quoted gaming stocks, the second bad news.

The change in FOBT stakes will make a huge dent in the profits of the gambling companies, but this has been on the agenda for some time now.

The reduction in the maximum stake to £2 was the worst possible outcome (the Gambling Commission had recommended a reduction from £100 to £50), but the government’s decision had been leaked to the Times newspaper on April 24, so the dire news had been anticipated.

Also supporting share prices is the fact that consolidation in the sector is likely to become more prevalent.

We have already seen some of this, with Ladbrokes Coral recently taken over by GVC (headquartered here in the Isle of Man). GVC sensibly introduced some conditionality in its takeover terms. It offered potential uplift to the takeover price for Ladbrokes shareholders in the form of Conditional Value Rights, which would have paid a potential £800m in the event of a better outcome (like a £50 maximum stake).

In the event these have turned out to be worthless.

Attention will now no doubt turn to William Hill, which forecasts a 45% cut to gaming revenues as a result of the FOBT decision, and estimates that 900 of its 2,340 physical stores will now become loss making,

FOBTs have had a huge impact on gambling companies, the high street and gambling addiction in the years since they were first introduced in 1999. There are now 33,000 of them, and they generated £1.8bn in revenues for the gaming companies last year. Betting shops used to be about horse racing, but the contribution from the latter has dropped from about 80% to 20% as the FOBTs have gained ground.

At the maximum £100 stake, a player could lose £300 in a minute (each spin takes 20 seconds), so it’s understandable how they came to be known as the ‘crack cocaine’ of gambling.

The gaming industry fought hard against the stake reduction, arguing that 3,000 betting shops could close with possible job losses of 15,000. This may turn out to be an exaggeration given there will now be no limit on the total amount, or the time, spent on the machines (previously there were controls on both of these).

The change was perhaps inevitable, given cross party consensus, with the Labour Party also lobbying hard for a stake reduction.

The only problem is the loss of revenue. After the government introduced a ‘Machine Gaming Duty’ of 25% on these machines several years ago, government revenues from this source have grown to £470m per annum.

This will largely vanish, though the government plans to make up the losses by increasing another tax, called Remote Gaming Duty on remote online betting.

This is likely to rise from 15% to 20% in the Autumn Budget, which will affect some of the gaming companies based here.

Turning back to the positive, the news about the US Supreme Court permitting sports betting is a major plus for William Hill, which has made several acquisitions in the US over the past decade.

Previously, only a few states in the US (like Nevada) were allowed to permit sports betting, after sports betting was outlawed in 1992.

The Supreme Court decision means that any state will be able to legalise it in future, with New Jersey likely to be the first in line to do so.

There is no guarantee that the other States will follow suit, while stakeholders (such as sporting associations) will be looking for their slice of the cake. Also, there will be plenty of competition for the new services.

Consequently, earnings upgrades for the likes of Paddy Power Betfair, William Hill, 888 and GVC have been modest so far.

The opinions stated are those of the author and should not be taken as investment advice. Any recommendations may not be suitable for all, so please contact your financial adviser for further guidance. The value of investments can go down as well as up.