Strategic consultancy, Regulus Partners, focused on international gambling and related industries, taking a look at some of the key challenges the gambling industry faces in its ‘Winning Post’ Column.
UK: gambling regulation – nothing minor about age verification changes
The GB Gambling Commission has confirmed a tightening of age verification rules for licensees to protect minors. From 7 May (three months), licensees will need to age verify all players either through a third party of by direct ID checks before allowing customers to deposit or even play free games or use bonuses. This replaces a far less strict verification minimum of 72 hours after withdrawing, with no requirements on play. These changes merely codify best practice for some operators (although it would represent a material change if the rule were to be retrospective on all current actives vs. new customers), but it is likely to represent a significant change for many licensees and, especially, customer user experience. We believe that this change will have three important impacts on the GB market and a potentially significant one on wider regulatory development: growth is likely to slow further, organic consolidation is likely to increase, licence risk has almost certainly increased, and; (potentially) liberal regimes are likely to be increasingly thinking twice about avoiding strenuous regulatory interventions.
We estimate that the GC’s change will have about a 2ppt impact on GB remote growth – a figure that would have been marginal only a couple of years ago, but now represents a material delta on waning demand. The cause of this slowdown is not in driving behavioural change in the majority of customers, which it is unlikely to, in our view, but in the habits of the heavier user, in gaming especially. Trying a near unheard of casino on a whim / in response to a big sign-up bonus is the reason why heavier users often have more than a dozen accounts each. Equally, casinos with low levels of brand development and product differentiation (most, by far), tend to have material gaps down in signup to deposit and then first-time depositors to continued play (over 50% of ‘actives’ is not uncommon). This spend was easy to come by in the old regime and few players would bother to withdraw their depleted balances (and those that did might find it unnecessarily difficult as a ‘retention tool’). That cycle is now, if not broken, sufficiently disrupted as to diminish that level of ‘over-trading’ significantly.
The disruption of ‘easy’ signup of harder gamblers will inevitably hit the ‘long tail’ of supply much harder than established brands. In betting, this represents only c. 10% of supply, but in gaming a much more significant c. 40% (and with promiscuous harder gamblers forming a key part of the 60% of more consolidated revenue also). We believe our 2ppt estimated revenue hit will overwhelmingly fall in this 40% of gaming, implying a c. 10% negative impact on ‘long tail’ casino revenue (already struggling to grow). The flip side of this impact is greater market share for more established brands, but of a smaller pie: further organic consolidation.
A final GB-specific impact is that the Commission is likely to be watching for breaches very closely. Implementation time is relatively short (albeit the required systems are essentially already in place) and for many operators this will represent a commercial requirement to change marketing strategy at just as much as a regulatory requirement to change verification processes. Mistakes are almost bound to occur, but the regulator is unlikely to be lenient on such a high profile (and essentially common sense) issue. If there was one licensing change likely to catch operators out and have them in licence review territory, we would say this was it.
Finally, the UK has been a posterchild of liberal fiscal-regulatory regimes. This change follows a series of tax rises and (voluntary) advertising restrictions which collectively thoroughly test the central premise of the hyper-liberal model. If gambling operators wanted to point to the UK as a haven of effective self-regulation based upon operators commercially incentivised to behave themselves, then this latest change erodes that position further. The key to a liberal regime surviving the test was a mature licensee environment (in the sense of behaviour) – the series of increasingly severe interventions in the world’s most mature online gambling market (in the sense of development) demonstrates that we are still not there yet. In our view this makes both existing liberal regimes increasingly under threat, while the likelihood of newly regulating POC markets choosing open licensing and light regulation is also diminishing.
UK: In Parliament – Bishop’s Move to 10% Levy
The question of how much Britain’s gambling operators should pay for the treatment of gambling-related harms has been a constant theme of policy discourse ever since the Government ducked the levy option in last year’s legislative review.
This week, the Rt Rev Alan Smith upped the ante by suggesting that a levy be instituted to recapture the £1.2bn alleged cost of gambling harms to the NHS. We don’t currently know how much the gambling industry contributes to research, education and treatment (as contrary to myth, GambleAware does not enjoy a funding monopoly) but guess it is likely to be in the region of £12m on a voluntary basis. This rises to around £30m once regulatory settlements have been added – although a large chunk of these funds are currently unspent. It seems likely therefore that – at least with respect to problem gambling treatment services – current funding is inadequate; but there is a variety of views about what the figure should be.
Last year, the Gambling Commission’s expert advisory body, the Responsible Gambling Strategy Board appeared to indicate that funding may need to rise – over time – to as much as £76m (with around £60m for treatment services). Separately, the Labour Party has advocated a levy of 1% of gross gambling yield (or about £120m a year, depending upon how National Lottery contributions are considered).
The bishop’s proposal goes substantially further but poses a number of questions. The £1.2bn figure is derived from a report produced by the Institute for Public Policy Research in 2016, which concluded that the range of costs to the NHS from gambling harms was likely to be in the range of £260m to £1.2bn. So how certain are we about the true level of costs – and should we automatically pick the top end of the range?
Then there is the question of how much of the £2.9bn in gambling duties which Her Majesty’s Revenue and Customs currently collects should be injected into the NHS for treatment purposes. HM Treasury will probably be mindful of the fact that sticking operators with a 10% levy is likely to cause the collapse of large parts of the licensed gambling industry – from bingo club operators struggling to get by to high-end Mayfair casinos already paying 50% of their revenue to Exchequer (and unlikely to burden the NHS given the international nature of their customers). It is also likely that a 10% levy on top of the 21% rate of remote gaming duty (which takes effect from April) will result in significant leakage to unlicensed operators. The Church of England may quite legitimately ignore such considerations – but others must consider the best interests of the consumer and of the economy.
We might also wonder how a one-hundred-fold increase in funds would be spent, given how little is known about the effectiveness of different modes of treatment (and the complications of comorbidity and heterogeneity). The NHS could clearly use the cash but without a clear idea of what specific treatment services are required, the chances are that it would simply compensate for central funding cuts and so do little to address gambling harms.
Finally, there is the question of how much attention policy-makers ought to pay to those who have such a loose grasp on the facts of gambling-related harm (contrary to the bishop’s claims, there are not “430,000 gambling addicts” in Great Britain – more on this next week). We have a vague recollection that there is something in the Christian faith about not bearing false witness – but perhaps Parliamentary Privilege offers sanctuary from spiritual as well as secular laws.
The noble prelate is right to raise the issue of funding – particularly given current confusion on the matter – but he and others in Parliament need to be more careful in how they present their facts, particularly if they are serious about conducting their own review of gambling legislation.
UK: Regulation – O (Big) Brother Where Art Thou?
Compared with last year, this week’s ICE expo was a mercifully quiet and relatively uneventful affair. Twelve months ago, everyone was talking about the Gambling Commission’s off-piste sermonising on the subject of girls in bikinis. This year the, main topic of discussion was the regulator’s decision to join the Pole Dancers Union in boycotting the event entirely.
The new interim CEO of the Remote Gambling Association, Wes Himes voiced a widely-held view when he publicly criticised the regulator for its decision not to attend the annual gathering of licensees, suppliers, regulators, researchers, lawyers and harm prevention experts (amongst others).
British licensees in particular appear confused about the nature of the relationship that the Gambling Commission aspires to and the extent to which it wishes to understand the industry it regulates. Concerns had previously been expressed with regard to the apparent segregation and marginalisation of operator-led measures within the proposed national harm prevention strategy.
On the other hand, the ‘Hot Shoes’ initiative (where members of the Commission team spend time work-shadowing licensees) has been warmly welcomed along with last year’s collaboration workshops (which have yielded some impressive research).
We probably have the public health lobby to thank for increasingly hermetic attitudes towards engagement with the industry – and we must recognise that some operators have created fertile ground for mistrust. However, in the interests of the consumer and of business sustainability, we must hope that ‘Hot Shoes’ wins out over cold shoulders.
UK: Regulation – Guardian Strikes Again
The latest in a long string of Guardian exposes on the gambling industry – this time on cross-selling practices in GVC’s betting shops – raised a number of larger questions of current and future relevance to regulation in Britain and elsewhere. The Guardian reported that staff in Ladbrokes and Coral LBOs were effectively being asked to bid for job security (once the £2 maximum stake on machines kicks in and the planned cull of shops begins) by maximising online cross-sell to customers.
The report – which contained ‘whistle blower’ evidence and does not appear to have been refuted – reflects the complexity of being socially responsible against a backdrop of being commercially dynamic in a period major structural change in the industry, with a backdrop of rapidly shifting expectations of what is ‘acceptable’. Only last month, GVC launched its ‘Change for the Bettor’ safer gambling campaign (following the launch of similar high profile campaigns by peers), with much well deserved praise from key stakeholders, including the minister. The speed with which the Guardian subsequently found its story may sadly reinforce the view that beneath a veneer of public relations, true cultural change has yet to take root (a view expressed a number of times during this week’s ICE Vox events).
The story also illustrates the fact that regulatory pressure can result in negative adverse consequences. Much of Britain’s gambling industry is facing tightening business conditions as the ability to generate revenue constricts and the costs of doing business (including duty but also investment in safer gambling and compliance programmes) increases. We ought not to be surprised if this dynamic results in corners being cut or unwise commercial decisions being taken. As we have observed before, continually beating up the licensed industry may seem like great sport – but it is unlikely to result in the best outcomes for consumers.
Of course, there is nothing wrong in cross-selling goods and services – when we go to the cinema, we are unlikely to feel moral outrage at propositions of popcorn. However, gambling is different. We know from prevalence surveys that participation in a large number of gambling activities is a fairly good predictor of problem gambling. For example, the likelihood of being a problem gambler (on a probabilistic basis) if one participates in four to six activities is eight times higher than if one participates in two or three. As a consequence, multi-channel marketing strategies (which certain operators have been highly open about pursuing) do appear to present specific risks that ought to be considered more closely. The direct link being made between losing FOBT revenue and pointing customers online is also a gift to those campaigners wishing to see more stringent restrictions on what is still a highly liberally regulated channel (at least in product terms).
At last month’s CMS Gambling Conference, the chief executive of the Gambling Commission, Neil McArthur, expressed discomfort in relation to his own experiences of online sportsbetting – and repeated attempts to push him towards online casino; so this would appear to be specifically on the regulator’s mind. In recent years, Britain’s licensed operators have tended to be so fixated on the issues right in front of them that they have struggled to focus even one move ahead. While energies are currently occupied by machine regulations and advertising freedoms, gambling businesses may do well to pre-emptively consider (rather than accidentally accelerate) a number of other challenges – including much vaunted ‘omnichannel’ cross-sell – that are starting to appear on the horizon.
Germany: gambling regulation – Gotterdammerung?
Germany’s many largely aborted attempts to domestically regulate online gambling have made Wagner’s Ring Cycle look like a model of light hearted brevity by comparison. However, German Minister Presidents are now threatening to sort out the current mess in a finally final way. There is logic to the timing mattering – the current 2012 Treaty is about to expire and only a short-term extension is likely to be acceptable as a fudge to keep things moving. The issue is that while a number of more liberal states are minded to include gaming in at least some forms, more conservative states are not – and agreement needs to be unanimous.
Our central thesis for Germany remains that a compromise treaty needs to open up the licensing system in order to get EU approval – that’s it in terms of material change. There may be a chance to regulate some forms of gaming, but we do not see this as odds-on and the range of likely product restrictions and taxes are likely to be such that it would no longer be a profitable vertical anyway. We recognise that we have been saying this for years and we have been consistently wrong. However, this/next year the chances of this actually occurring are significantly higher, in our view.
Germany is currently one of the most lucrative markets in Europe, though Novomatic (B2C and B2B) and Gauselmann (B2B) pulled out of online operations early last year. The best hope for the sector remains confusion and fudge in our view: any German regulatory model likely to get broad support across the Laender really is likely to look like the twilight of the gods…
Netherlands: gambling regulation – political micromanaging
The Dutch Senate has been asking some prima facie logical questions in the latest instalment of its tortured path to maybe getting domestic remote licensing. They wanted to know exactly how an illegal operator would be defined; how specifically will gambling advertising be restricted, and; what measures based upon administrative law can be used for blocking. These questions need written responses, further adding to time pressure and a very fragile consensus.
There is an extent to which Justinian legal systems work like this: nail everything down in a codified way so that businesses, bureaucrats and grateful burghers now exactly what they can and can’t do. However, the Dutch tergiversations also point to a bigger issue: if everything needs to be agreed and codified in primary legislation it will take forever, it will largely reflect opinion over evidence and if it ever gets in place it is likely to be both rigid and obsolete. Equally, the original bill was relatively liberal in scope and this is being systematically undermined in favour of a much more restrictive set of policies which will (deliberately or otherwise) favour domestic incumbents and potentially severely impede .com rivals.
The Netherlands has a regulator, and the most efficient and effective means of gambling regulation in our view is to empower the regulator and let them get on with it. However, this requires political trust that online gambling is broadly acceptable and can be effectively policed. Unfortunately for the remote sector (and at least partly because of it), for too many politicians in too many countries the evidence to the contrary seems to keep piling up.
Spain: online gambling – Q4 figures rather eggy
As the curate politely if obtusely observed, it is hard for an egg to be good in places. So it is hard to hold on too convincingly to the positives in Spain’s official Q4 market figures. 10.7% growth YoY to €189.5m was in line with expectations and against especially tough betting comps (€99.9m, -2.7% YoY) while gaming continued to exhibit growth across all product verticals (+31% YoY overall). However, despite continued aggressive marketing support (50% revenue, net of bonuses; + 45% YoY), likely in part driven by the tax decrease and early ‘responses’ to the licensing window opening, the number of actives actually fell YoY by 8%. This suggests a market which might be capable of growth but that is far from sustainable from a net contribution perspective for the vast majority of its licensees. From a top-down perspective, positioning in Spain still appears attractive in terms of macro trends and liberal regulation. However, from a bottom-up perspective, too many operators seem to have decided that is the case in an undifferentiated way, causing overheating and potentially signs that the market could start to disappoint.
Australia: horseracing – jiggery-pokery
Racehorse trainer Darren Weir has been excluded from racing for four years following an investigation into misconduct by Racing Victoria – notably his admittance to the use of tasers known as ‘jiggers’ in training for the purpose of increasing performance. The high-profile arrest, by Victoria Police, of Weir and two others connected with his business on betting related corruption allegations resulted in no charges pending further investigation.
This result is a stark warning to all participants that no one is above the law in terms of investigation and prosecution, and also that racing will take great steps to protect its reputation from both an integrity and welfare point of view. While this, like the case of Al Zarooni’s eight-year ban for the use of steroids, is a good deterrent to potential cheats, it does not provide retribution to those to have potentially lost out through this conduct – particularly as it is unclear how long it could have been going on. Owners of horses which could or should have won fairly have lost out on prize money, prestige and possibly stud fees – this having potentially far reaching consequences for the breed.
UK: horseracing – equine flu may highlight a more serious problem…
Racing in the GB has been suspended until at least the 13 February (with the loss of 23 meetings in that time) following an outbreak of equine flu. It is thought the virus is a mutated strain, due to vaccinated horses being affected as well as unvaccinated with confirmed cases in France and Ireland as well as the UK, it is unclear where the virus could have originated.
Over 100 racing yards in GB have been ordered into lock down in order to prevent the virus spreading, and testing is occurring on all potentially affected horses – so far resulting in three confirmed cases.
While the UK’s looming exit from the EU might be playing a part in the BHA’s sensibly cautious approach, (the importance of disease prevention and management is instrumental in the attainment of any third country gaining import/export rights to the EU; although HKJC has already confirmed that it has the procedures in place to keep accepting horses and test them at source), the main issue is clearly welfare.
The main issue for racing fans and bookmakers is likely to be how long this lasts and particularly whether Cheltenham will be put at risk (either abandoned or with a materially restricted number of runners).
Cheltenham was last fully cancelled in 2001 due to Foot and Mouth, which also disrupted racing for c. five weeks. Tellingly at that time UK retail bookmakers were able to show international racing, dogs and virtuals – and more than covered the gap with higher margin products: retail betting revenue actually grew YoY during the period for all the major operators.
However, back then even though racing was a bigger part of betting, bookmakers were also much more on the front foot (with FOBTs in their infancy and the bookie-Treasury delivered tax change to GPT soon to be implemented) – now, the tools to mitigate are probably stronger but the operational ability is probably (relatively) weaker, especially in retail. Nevertheless, bookmakers are likely to suffer far less (if at all) than racing even with a disruption period measured in weeks, putting further pressure on the long-term value outlook picture rights (with a ‘fair test’ black out vs LCL/BF’s partial competitive disadvantage) and raising the stakes further both on moves to broaden the base of the Levy to international racing and the outcome of the current IP-related court battle between ARC and SIS.
Racing is still a very valuable betting product, but if the bookmaker trading results due to the impact of equine flu are anything close to Foot and Mouth, then focus on providing a really high quality betting product vs. expecting value to be transferred for legacy or political favour reasons will be all the more crucial to racing’s future, in our view.
International: horseracing – sheikhen, but sufficiently stirred?
Sheikh Mohammed’s horseracing operations, Godolphin and Darley, have announced significant cuts following a global spending review. Two further senior executives have left the business (following the departure of its Chief Executive John Fergusson last year), with long standing sponsorships of the Irish Oaks (30 years) and Yorkshire Oaks (29 years) also casualties. While there are rumours that further race sponsorships may be cut in France and Germany, this has yet to be confirmed.
Sheikh Mohammed and the entire Maktoum family have been very significant supporters of British racing since the 1980’s, with an increasing investment of approximately £2m in sponsorships, support of a sizable workforce and opportunities for British and International runners in the UAE season – with huge prizemoney and incentives, as well as accounting for nearly 1% of all GB runners. This loss of support, while perhaps ‘small’ in the scheme of the things, is a potentially worrying sign for the future of the industry.
The sport is a fragile ecosystem that essentially relies upon very wealthy people being happy to spend significant sums of money for very uncertain returns; while the make-up of this group is bound to change, an effective ‘replacement cycle’ is critical. Which group of individuals would be willing to step into the space left by Godolphin, and what racing is doing to ensure that this replacement cycle is intact and encouraged, is perhaps not as clear and as planned as it needs to be.