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Winning Post 03 – 06 – 16

The Draft Gambling Act in Poland – will it succeed in its Objectives?
Poland is the latest EU Member State to engage in the process of modernising its online gambling laws. The government has published a draft Gambling Act with clear and sensible objectives. However, the proposed structure of the market, with a high sportsbetting turnover tax and a continued ban on casino games, threatens to undermine those objectives. We demonstrate that in order for the Polish government to fulfil its objectives, it needs to reconsider its policies.
On 2 June, the Polish Ministry of Finance published a draft of a new Gambling Act. It is understood that other Ministries and industry stakeholders have been invited to comment. The draft lists three main objectives, which are:
  • to ensure the highest possible level of protection for Polish citizens against the potentially harmful effects of gambling
  • to reduce the scale of the so-called “grey market” in the gambling sector; this is particularly relevant in the online sector where over 90% of online betting and gaming is understood to take place on ‘.com’ (not locally licensed) websites
  • to increase tax revenue by enlarging the scope of permitted products and increasing the level of online gambling through licensed (and therefore taxed) sites
in practical terms for the online sector, sportsbetting will stay legal, though with no change to the current 12% sportsbetting turnover tax. Online poker will become legal (though run by the Government rather than the private sector). Other online gaming (casino, slots, etc) will remain prohibited, however.
The Polish government’s overall objectives are clear and sensible, and should be supported by all stakeholders. However, the structure of the proposed market contains two key flaws that will undermine those objectives, as international precedent shows: a (high) sportsbetting turnover tax and a material range of banned products.
Tax needn’t be taxing
A 12% sportsbetting turnover tax is a problem both in terms of scale and where it is levied. Turnover taxes are levied on amounts staked and are therefore a direct tax on consumers, reflected in the price of bets. Non-locally-licenced operators will not be subject to this tax and therefore will have a material price advantage over the regulated market: this will encourage all price-sensitive customers (a significant number, even more significant volume) to move away from locally licensed operators.
Taxes on companies’ revenue (effectively player losses) are far more efficient, as the customer does not (directly) notice them: licensed operators paying tax on revenue can therefore compete with non-locally-licensed operators on a level playing-field in terms of price, significantly reducing the risk of a ‘.com’ market. The problems of a turnover tax are greater the higher the rate, since the price distortion is even greater: that 12% is very high for sportsbetting can be seen since in Ireland the rate is set at 1%, in Germany 5% and in France 9.3%; even at the much lower rate of the last mentioned markets ‘.com’ markets are material (in France over 50% of the market is ‘.com’, despite strict enforcement). Further, the Italian experience earlier this year showed that the move to revenue tax helped to grow the betting market by 21% in Q1; in large part because more consumers were using locally licensed sites, and therefore enjoying greater protections.

It is worth giving a practical example of why this price distortion matters so much. The odds on Poland beating Northern Ireland on 12 June are 1.66 on many bookmaker sites. This means that if a player bets 50 PLN on a ‘.com’ site and Poland wins, they will get 50 x 1.66 = 83 PLN (ie, the original bet plus 33 PLN in winnings). If the same player made the same bet on a Polish licensed site, the 12% turnover tax has to be paid regardless of the outcome of the bet, and so locally licensed operators deduct the 12% (6 PLN) from the bet; the player is therefore only actually betting with the remaining 44 PLN. This means the maths is: 44 x 1.66 = 73.04 PLN. Why would a player bet on a Polish site to win 23.04 versus bet on a ‘.com’ site to win 33 – an enormous 43% difference in winnings? Customers will not play through locally licensed and taxed sites, or at least not in any numbers. Further, Poland’s winnings tax on players will make using locally licensed sites even less attractive.

Banning products fuels ‘.com’ supply

The second change that is needed is to allow all core online products, that is to say: include casino and slots as well as sportsbetting and poker, which typically represent c. 50% of an online market in terms of revenue (eg, in the UK slots alone represent 37% of total online revenue according to official statistics). If these products are not provided, players will find them anyway on non-locally-licensed ‘.com’ gambling sites, in spite of any attempts at blocking and sanctions. Further, while are on those sites, customers will be tempted to try sportsbetting and poker, creating further leakage. We recognise the social policy concerns with casino-style gaming, but these concerns are better addressed with additional responsible gambling controls within a regulated framework, rather than pushing customers to non-locally-licensed supply.
The objectives can be met with simple changes in policy
There is a positive side, however. It is actually very possible to achieve the Polish Ministry of Finance objectives highly effectively, if the draft legislation is re-structured. Both the United Kingdom and Denmark share the same objectives, and they achieve them: high levels of player protection (including for casino, slots), over 90% of play on locally licensed sites (not the other way round); the highest levels of online gambling tax in Europe on a per capita basis (with the UK charging 15% of revenue and Denmark 20% of revenue), and; both countries have EU-compliant regimes.
The Polish government therefore has a simple choice: it can either achieve its objectives, or it can follow its draft policy – it cannot really do both. Given how clear and sensible the objectives are, it is the policy that should change.
UK: In Parliament: a quite Wrekin politics
Parliament wasn’t sitting this week – but the politics of gambling carried on regardless with Mark Pritchard (Cons, The Wrekin) tabling three Parliamentary Questions.
Eschewing the well-worn concerns around FOBTs and TV advertising, Pritchard chose more long-term and reflective subjects – the extent to which remote casinos had cannibalized land-based gambling; cost-benefit analysis of online gambling; and whether it might now be time to take a serious look at regulatory modernization.
Pritchard also enquired after the fate of Britain’s Triennial Review, which went AWOL shortly after Sports (and gambling) Minister Tracey Crouch began her maternity leave in February. It’s a question that stand-in minister David Evennett has looked increasingly uncomfortable in ducking – but with larger affairs of state looming, it’s odds-on that enlightenment will continue to elude the industry.

DCMS is scheduled to publish its response on Monday

UK: BHA regulatory issues: a Lohnly job…

The BHA remains seemingly friendless among the press and commentariat, despite attempting to ‘make things right’ by ordering an immediate review of its disciplinary processes and procedures after the uncovering of serious failings within the department, made (very) public several weeks ago.
CEO Nick Rust broke the policy of silence on the matter with a public statement, which announced the review and the instruction of two QCs to undertake the project: Ian Mills QC, will assess former cases heard by potentially conflicted panel chairman, Matthew Lohn, and; Christopher Quinlan QC will review disciplinary process.
However, rather than reassuring commentators, or quietly putting the issue to bed, this news was met with further criticism, including demands for someone within the BHA to be made accountable for ignoring the fact that Lohn’s potential perception of bias, due to being previously instructed for billable work by the BHA, which was brought to the attention of the legal team at the sport’s governing body over a year ago.
The reputational damage experienced as a result of recent coverage are undoubtedly serious, meaning the quality of the review, trust in its findings and transparency in any changes made are now very important not only for the governing body but the sport as a whole. Critical to success, in our view, is demonstrating transparency and clarity in procedures, which will help to dismiss the image of an ‘arrogant old boys club’ which detractors are currently making much hay with.
UK: Football Sponsorship: Ladbrokes pen FA deal
The UK Football Association announced on Friday a deal that will see Ladbrokes become its new official betting partner from 1 August, replacing William Hill, which had held the partnership since 2012. The deal also see’s Ladbrokes take over in-stadia betting rights, replacing Betfred, which has been operating inside Wembley since 2007.
Football advertising and sponsorship has become a clear marketing focus for operators within many regulated markets, a strategy that has of course been driven by customer behaviour over the last few years, with football’s share of wallet increasing with most operators. The strategies have also been designed to effect customer behaviour, with football advertisements appearing alongside coverage of other sports, most notably horseracing.
Ladbrokes’s deal, which covers England internationals and the FA Cup, must therefore be seen as a major boost for the firm, especially given the worldwide exposure that those matches receive (175 countries broadcast the FA Cup, for example). Success for England in the upcoming European Championships, will surely be a major positive for the value of the deal, albeit (we suspect) a somewhat negative one to immediate sportsbook P&L.
The deal also demonstrates how hard it has become for smaller operators to grow their market share, and new operators to break into the UK market when competing against the major established brands, both in terms of marketing budgets (where tens of millions are needed), and the ability to convert sponsorships into customer acquisitions – the strength of the Ladbrokes brand should lead to CPAs far below what a new entrant could hope for with the same product, coverage and costs. We suspect that Ladbrokes have judged the value of this sponsorship well, given the fact its CMO – Kristof Fahy – was CMO at previous sponsors William Hill from 2010 to 2015.
Czech Republic: online legislation: onshore regulation likely in place for next year
The Czech Republic’s Senate has voted in favour of a bill to allow the local licensing of remote sportsbetting and gaming, with a relatively sensible revenue tax of 23% for most products, rising to 35% for VLTs (showing the UK still to be one of the most low-tax gambling jurisdictions in Europe). ISP and payment blocking will be added, with the new laws coming into force in January 2017 (although the licensing process will start sooner). The Finance Ministry is expecting the majority of operators currently active in the market to get licensed (which is logical given the framework), with only a dozen or so expected to be black-listed and blocked.
US: New Jersey Bad Actor regulation: “Shades of grey”… or  “We will judge you by your actions”
Last month New Jersey’s DGE director David Rebuck published a helpful clarification of NJ’s views on bad actors in terms of remote gambling activity in grey markets:
“When a government agency attempts to divine the intentions of another sovereign agency through a critical evaluation of local circumstances and resulting actions or inactions any conclusion reached is fraught with the likelihood of error or misinterpretation.”
OK so far? In common with some other leading jurisdictions, DGE is saying that they are not expert in the law of other places. He cites EU specifically, where a member state may be in dispute with the ECJ over the legitimacy of its licensing law (and there have been a few of them), as a good example of impenetrable opacity.
But then:
“The [DGE] will individually examine each jurisdiction in which a New Jersey applicant or licensee is active to determine whether the Internet Gaming activities are objectionable.”
Not so good. On the one hand, its clearly an issue to be somewhere if that government has “taken affirmative, concrete actions to actively enforce laws that prohibit online gaming, or have issued unequivocal official pronouncements that online gaming is not legal.” On the other hand, the first such prosecution would damage all those who were previously sanctified by the inaction; and, in an apparent reversal of the sensible starting position, DGE will determine which is which.
Worse, several of the major grey markets – for example Canada, Russia, Australia – have no extra-territorial reach given to them in their federal statute book. So they will not be able to demonstrate the illegitimacy of unlicensed eGambling activity by prosecution of offshore operators. The current threat in such places is just a black list, which many leading operators choose to ignore. Other grey markets have clear prohibition in their law but no clear record of prosecution – British Columbia, Norway or Sweden are examples.
Given recent taxation proposals in some leading prospective eGambling markets, its not hard to see why the unlicensed approach remains attractive to some – unless DGE’s hard eye is on you. This month alone, Russia has proposed adding 18% tax and £400k p.a. “fees” to licensed bookies existing duties. Greece is introducing a 35% GGR tax, and Poland has a similarly punitive turnover-based tax. Portugal, Holland, Italy and Spain are already implementing similarly high levels of taxation. Tax at this level is logically irreconcilable with the regulator’s stated aim (in Holland and Denmark, for example) to limit unlicensed operators’ activity below 20% of the total market. What makes the prospective imposition in Russia at least manageable for operators may be the relaxation of advertising constraints for licensees, giving them some sort of commercial edge over their (untaxed) unlicensed competitors (albeit raising a further round of concern over problem gambling controls).
The proud New Jersey Department of Gaming Enforcement is not used to being marginalised but the gambling market it protects is relatively tiny, when compared to the grey market activity it tries to define more closely. Although any clarification on propriety is welcome, the strength of DGE’s position, possibly unknown to it, comes more from the prospect of interaction between regulators on suitability than from gatekeeping its own market through the proxy of judging shades-of-grey market behaviour. UK’s Gambling Commission peered over the rim of this crevasse at the time it introduced POC taxation; happily for all, they did not jump (into any clear commitment).
South Africa: online legislation: back on the back-burner
Land based Casinos, Lotteries, Bingo Halls and Sports Betting (online and shops) are legal in South Africa. However online casinos, poker and bingo, are not locally licensed, and it does not look like it will become legal anytime soon. It is illegal for a resident of South Africa to play on offshore sites. However, this is not strictly enforced (or even at all).  One of the first draft laws to legalise online gaming in South Africa was published in 2008. Not only did this law not have the support of the Department of Trade and Industries (the responsible Ministry), it was also a confusing and bad law. Fortunately (and unfortunately), it went nowhere.
The official opposition to the ANC (the current ruling party), the DA, proposed a law to regulate online gaming. This was rejected by the National Assembly. In the Assembly the law was criticised for attempting to take food away from families and to increase white-collar crime(!). In general, there is a lack of enthusiasm within the government to regulate online gambling. In addition, the ruling party is also unlikely to even support a bill it was in favour of if it was proposed by the DA.
That said, it is worth offshore sportsbook operators securing a betting license in South Africa to offer online sportsbetting (and potentially shops). This market is currently growing rapidly and it still relatively untapped; more (responsible) investment into online sport betting could also drive sensible liberalisation over time.
Corporate Updates: Bogata NJ and MGM
MGM has acquired 50% of the Bogata Casino in Atlantic City from Boyd Gaming for around US$900m. The Bogata is the best performing of AC’s casinos. In addition, MGM will be in a position to expand its online gambling presence in NJ with the licence that Bogata already possesses.
This is a return for MGM into NJ (after famously choosing Macau over the struggling state in a major regulatory spat) and will allow the business to look to expand into other markets around NJ as opportunities open up for online gaming (Pennsylvania) and physical casinos (east coast). MGM, prior to this acquisition only had casinos in LV, Macau and its National Harbour project in Maryland.
Corporate Updates: CVC acquires Sisal
CVC has bought Italian gambling operator Sisal for €1.0bn, adding to its gambling portfolio of Sky Betting and Gaming and Tipico (German betting shops). Sisal has a long history (70 years) and strong distribution in the Italian market (#2; 45,000 points of sale; €787m revenue in 2015), though its product and channel mix is currently weighted toward lower-growth areas (lottery, gaming machines, betting shops, horseracing). These growth issues are partly reflected in the price, which is 26% lower than the €1,348m acquisition price of the previous PE owners in 2006.
Corporate Updates: Playtech acquires Funtactix
Playtech has continued its bolt-on acquisition strategy with the addition of social and mobile games studio Funtactix. The acquisition was too small to be announced officially to the market, but with offices in New York and LA as well as Israel, the addition adds to (supply-side) geographic diversity as well as product, studio and brand depth.
Corporate Updates: NYX acquires Betdigital
Continuing the theme of bolt-on acquisitions. NYX has acquired UK-based sports betting platform provider Betdigital, to strengthen omni-channel and games development capabilities. While the deal has a potential price tag of £24m (2.51x EBITDA earnout), the current business is relatively small (total assets under 5% that of NYX), and so likely added for expertise rather than revenue.