The road to regulation

Nick Nally, Chief Development Officer 8 talks to eGaming Review about the impact of regulation on the eGaming industry and what this might mean for the future.

 

By all accounts, some of the numbers being thrown around in terms of gaming revenues and yields on a global scale over the next few years are mouth-watering.  There is no doubt that the online sector of the gambling market represents one of the fastest growing sectors of the industry and this trend continues to accelerate rather than decline.  There are, of course, varying estimates as to the size of this global online gaming market – H2 Gambling Capital estimates that the regulated real-money market generates US$30bn in gross win globally and this market is set to grow substantially with the US market accounting for a significant portion of this in the coming years.

 

Not surprisingly and given the recent and current economic climate, many countries have latched onto this and have enacted regulation in order to tap into this lucrative and growing source of revenue.  To date, Europe has been at the forefront of legalised online gaming and we have seen a number of models employed across newly regulated markets in the region.  However, it is difficult to get the mix right in terms of a model that will foster growth and competition while also generating much-needed tax revenues.  Interestingly, across the newly regulated markets in Europe there are widely varying models being employed, which in a number of cases restrict competition and continue to drive customers to the ‘grey market’.

 

In all of this it is easy to forget the traditional gaming jurisdictions in places such as Gibraltar, Alderney, Malta and the Isle of Man, among others. In spite of the regulation taking place in some of the major European markets, many of these traditional gaming jurisdictions continue to prosper as a result of advantageous incentives or adapting models.  On our side of the business, we have come across all of the various arguments when it comes to picking a favoured jurisdiction, for example, favourable VAT, corporation tax or EU status to name but a few.  Some of these regulators, in recognising the challenges ahead of them, are beginning to develop models which take into account the challenges faced by operators and platform providers.  Some regulators will allow licensed gaming applications to reside on platforms which are located outside of the jurisdiction as well as considering future technological regulatory challenges such as cloud architecture and its effects.

 

The ability for operators and providers to cater for multiple markets on the one system is hugely important as it has major implications in terms of the financial viability of the project as well as the stability and servicing of such a platform.  After all it wasn’t that long ago that it was possible to serve a global market from one platform located in one data centre.  Nowadays, it is becoming much more difficult to service a global market with individual regulators dictating that architecture must remain within country, state or region.

 

This brings us nicely onto the US market – as alluded to earlier, the US market is expected to account for up to US$9.3bn by 2020 according to Morgan Stanley.  There are varying estimates as to the potential size of the market but it is clear that there remains a number of hurdles that need to be overcome across the US to realise these numbers.  However, the process has started with regulation of online in three markets to date – Nevada, Delaware and New Jersey.  After these states it is not clear which states will be next but some are saying that Florida, California and New York represent the next candidates and the numbers for these states will be much larger than any of the three markets already going through regulation.  It is clear however, that it will take many years for regulation to be enacted across the US and that there will probably be a number of states vehemently opposed to any online gambling regulation.  As with Europe, US states do and will continue to develop differing models from both a financial and technical perspective.  For instance, in Delaware, it is possible to place all gaming infrastructure outside of the state (but within the US) while for New Jersey, gaming architecture has to be within Atlantic City itself.  This places huge burdens on operators and content providers who need economies of scale, especially in new and unproven markets.

 

As a hosting and managed services provider, these regulations increase the risk on our own business.  For the past 15 years, Continent 8 has developed its footprint and product portfolio in tandem with the needs of the online gaming market.  When a new jurisdiction opens up it may or may not dictate that architecture sits within its borders – if it does then it is likely that we will establish a presence there in order to meet our customers’ needs.  Running a data centre business with centres in places such as London, Amsterdam, Paris and Frankfurt is a million miles away from running one with centres in Gibraltar, Malta, Guernsey and the Isle of Man – the latter being dependent upon a market which can shift at any point in time.

 

So where will regulation take us next?  I don’t think anyone knows for sure the day or the hour when a particular market will regulate online.  We are all aware of the UK Government’s plan to introduce a point of consumption tax at the end of next year.  What this will do to the market is anyone’s guess.  In turn other European markets will regulate but I believe that there will be no uniformity and each will act in their own interests.  We may see excessive tax structures which will likely drive operators out of markets and possibly increase unlicensed activity.  While a shared regulatory framework across Europe might be desirable, it is still likely to be some distance away.  When it comes to the placing of architecture to meet regulatory requirements, this is often an afterthought.  Where possible Continent 8 will endeavour to represent our customers’ interests by looking to consolidate infrastructure and take advantage of existing installations elsewhere, however, this is not always possible.  But this is extremely important in that it promotes healthy competition by reducing the barrier to entry and ongoing costs in a particular market.

 

As discussed above, the US is now on a path towards regulation of online gaming across many but not necessarily all states.  In terms of other regions around the world outside of Europe and the US it is generally agreed that Asia is a huge potential market. However, this is a region which is largely unregulated and where it is difficult to break into.  Continent 8 already has an operation in Singapore and is actively looking into other countries in the region at the request of our customer base.  After Asia, the next most popular in terms of requests is South America.  Again, the size of the potential market in South America is vast but the regulation is very thin on the ground at this point in time.  However, it will likely only be a matter of time before country-by-country regulation starts to take place and as with other regions, it is almost guaranteed to be different in every market and operators will have to choose their battles carefully.

 

As a data centre provider to the online gaming industry, we have to be nimble, agile and alert.  We have to be continually abreast of upcoming regulations, even acting as advisors to regulators in certain cases to represent the interests of our customers and the general good of the market.  We will continue to develop our product set to allow online gaming companies to operate across multiple jurisdictions and we look forward to the challenges ahead as new markets continue to open.

 

Article appeared in eGR Jurisdictions Report, 2013

Posted in Press Articles