Winning Post: The curious case of Portugal

Once deemed as an unworkable marketplace following its 2016 tax and regulatory reforms, Europe’s biggest operators are eyeing returning to compete in Portugal.

Regulus Partners examines whether Portugal can continue to defy expectations and maintain its growth appeal catering to an enlarged igaming marketplace, or will it follow the all-too-familiar script of other European markets, where growth is drained by high costs, competition, compliance and taxation.  

The Portuguese online gambling market has a habit of defying expectations. The regulatory regime that many commentators thought would ‘never work’ back in 2016 due to high and distortive taxes has proved resilient and attractive to its domestically licensed operators. Indeed, even in 2019 revenue per capita in Portugal of €17.46 (net of estimated bonuses) was 10% higher than in ‘liberal’ neighbouring Spain.

After a relatively stable start to 2020 and an anticipated Q320 boost to betting due to Covid-19 policy disruption, Q420 revenue leapt forward far more strongly than anywhere else of similar market maturity (+77% YoY, +37% QoQ; Spain comps: +25%% YoY +20% QoQ), underpinned by a surge in active customers (see chart below). Portugal’s Q121 results demonstrate that this is not just a flash in the pan (albeit a quarterly customer-driven surge usually lasts the following quarter vs. a margin-driven reversal).

Portugal’s run-rate revenue is now almost double that of Spain on a per capita basis (annualised €37.57 vs. €19.70; Q4 on Q4 as Spain has not yet published Q121 results). Entain’s previously rather bullish expectation of the market doubling in three years suddenly looks more credible. So what is happening?

The first point that we would make is to clarify what is not happening. Portugal’s active base of 770,500 customers represents 7.5% of the population. While this is a significant increase on the 2.6% captured at the end of 2018, it is still not in mass-market territory. For example, the UK equivalent figure is 15% and the majority of customers are solus bettors. In Portugal, the number of domestically captured customers who are solus bettors has actually declined from 50% at the beginning of 2019 to 35% now.

Domestically regulated players who use both betting and gaming has been a key driver of growth: from a relatively stable c. 17% Q119-Q220 to 36% in Q121, or +6ppts per quarter. Portugal’s growth spurt has therefore been driven by attracting more active gamblers rather than engaging a large number of more occasional bettors. This behaviour also gives a clue as to where the growth may be coming from, as we discuss below.

We believe that three things have combined to make the growth acceleration happen quite suddenly from the second half of 2020. The first and most obvious is continuing Covid-19 policy disruption, which is driving strong volumes in a number of Southern European countries with a greater lag effect vs. initial lockdown performance than perhaps initially expected (probably because underlying ecommerce also had more catching up to do: vide Italy ‘despite’ the advertising ban).

The second is that Portugal changed its fiscal policies in 2020 to remove the higher rates of tax for both betting and gaming, giving the larger betting-led operators especially an impetus to turn on the marketing taps (to start capturing revenue at the previous higher rate tax bracket of 16% of turnover would have been self-defeating). Third, after a period of limited domestic competition, the Portuguese market is now better served by a broader range of high quality domestically licensed operators, including Betano, 888 Betway and SkillOnNet for example.

These three factors are undoubtedly creating the conditions for higher secular growth. However, the last two are also likely to be materially improving channelling from a previously strong black market. The immediate higher spending and multi-product nature of the new customers also supports this hypothesis. Due to an 8% turnover tax on betting, a material and structural black market is baked into the system, but Portugal’s continued growth demonstrates just how small the cohort of price sensitive customers is on a country-by-country basis (in terms of actives if not turnover).

There is a sting in the tail to all this growth, however. Notwithstanding Portugal’s gambling tax reforms, the blended tax rate on revenue still averages over 40% (with material volatility caused by the betting turnover tax). With more brands now fighting for a local share of voice shown to be very lucrative by the previous oligopoly of Betclic, bet.pt (now Entain), Estoril Sol, and Flutter (PokerStars), marketing costs are likely to be increasing materially for all .pt operators. While overall ARPUs are up 12% YoY, the number of domestically regulated accounts per active is likely to be increasing at an even faster rate given that the number of credible licensees has roughly doubled.

Competitive growth is therefore likely to be putting pressure on operating margins, with local media companies and the Portuguese government being the biggest winners. Further, if our assumption is correct and the Q420-Q121 growth is driven largely by taking a chunk out of the black market rather than a burst of secular growth, then the structural inefficiencies of the Portuguese market will likely reassert themselves. Growing from a 1.9x per capita performance gap from its nearest neighbour will be an increasing challenge, even with the perverse ‘help’ (in reported revenue terms) of a customer tax being baked into Portugal’s betting revenue.

The quest for more domestically regulated revenue continues to make strategic sense for a critical mass of operators. This in turn is driving both adoption and channelling, which then makes markets big enough to justify more competition. But what was once a cosy divide between profitable protected markets and profitable .com markets (with a few outliers) is now being eroded from both ends. The optics of topline growth improve, but regulatory risk and margin pressure both continue to increase, in our view. In this sense, Portuguese exceptionalism is more a matter of timing than outcome.

Featured article edited by SBC from ‘Winning Post’ Sunday 13 June 2021 (click on the below logo to access a full unedited version)