Regulus Partners casts its eyes to Nordic affairs, where two recent legal judgements portray a fragmented future for European gambling’s most lucrative marketplace…
Two court cases decided last week affirm our view that Nordic grey markets are fast approaching some form of regulatory clarity. While Betsson won its case in Finland, Kindred lost in Norway, with the court ordering that Kindred must stop servicing the country.
Further appeals are likely and to some extent, these cases are just two more bumps in the road of a Nordic enforcement saga which has been running for decades. However, as we have often written in WP, .com operators face broadly three possible scenarios in Finland and Norway, with the most positive being the least likely, in our view. With the courts running out of road for operators we believe that legislative decision time is fast approaching.
The hoped-for endgame from .com operators is that Norway and Finland succumb to the EEA-wide choice of Point of Consumption legislation. Indeed, the new Finnish government has already suggested that the Veikkaus monopoly might not be fit for purpose, while a recent domestic study puts its online market share at c. 50% (we think this understates the size of the Finnish .com market). However, it does not necessarily follow that a licensing regime in Finland copies the relatively liberal models of Denmark and Sweden: high taxes, tough social responsibility provisions and possibly bad actor clauses (if a Finnish court does find against a .com operator) are more likely, in our view.
A tough regulatory regime is often simply a licence to lose money and so can be a worse commercial outcome than an outright ban. These are the three broad endgames: open licensing; restricted licensing; ban. We would put the likelihood of open licensing at c. 10% for Norway and c. 30% for Finland.
Norway seems to be making more progress than Finland in protecting its monopoly, which might have direct look-through in clarifying to Finnish stakeholders that there is a compliant alternative to ‘open’ licensing. After over a decade of dithering, remote gambling policy choices are being brought to a head in both Nordic grey markets because the existing law is clearly not fit for purpose for licensees, regulators or courts. We struggle to see how the status quo is sustainable for more than c. 24 months, which may sound like a long time off in terms of news cycles, but it is problematic operationally and almost a cliff-edge strategically.
The remaining Nordic grey markets matter a great deal to the online gambling sector overall. Combined, Finland and Norway represent c. €1bn of .com revenue (ie, excluding the Veikkaus, Norsk Tipping and Norsk Rikstoto monopolies, which have c. 40% share ex lottery). Much as with the Netherlands, it would seem from channel checking that enforcement weakness in Norway has been short-term and selective, with relatively strong underlying performance.
A full blackout or very tough licensing restrictions are therefore likely to cost the global B2C sector c. €500m in contribution while also being highly disruptive to B2B providers, with c. €450m at risk across content and marketing. Just as importantly, the Nordic sector has created a number of strong operators which continue to generate significant proportions of revenue from Nordics, and especially free cash flow from Norway and Finland.
Historically, the loss of one jurisdiction at once has been masked by growth elsewhere. Even the seismic loss of Dutch and German cash flow was delivered during the pandemic, which did much to buffer the immediate cash flow loss among more broadly based operators. However, with the exception of a handful of Nordic operators which have successfully pivoted into LatAm (eg, Betsson, GAN’s Coolbet), Nordic-facing operators tend to point towards relative maturity (eg, LeoVegas has not sustainably grown quarterly revenue from the c. €95m level since 2019; Kindred is under strategic review).
Given these dynamics, the disruption caused by the potentially relatively rapid loss of c. €500m of contribution concentrated into a dozen operators could be profound, in our view, and is likely to lead to the sort of ‘consolidation through desperation’ not seen since Bwin and Party leaned into each other to stagger briefly into the mobile age.
However, while during the 2010s companies could point to real secular growth even if they could not tap into it, during the 2020s capturing this growth has become far more challenging, while US over-promising (from most) combined with a global slowdown has made investors far more wary. The disruption caused by changes in Finland and Norway could very well mark the end of the European .com era.
Featured article edited by SBC from ‘Winning Post’ Sunday 11 June 2023 (click on the below logo to access the full unedited analysis of Winning Post).