Nick Nally, Chief Development Officer at Continent 8 Technologies takes a look at some of the significant regulatory events from the past year, and assesses how the industry will fare in the future.
A warm welcome to the 2014 edition of eGaming Review’s Jurisdiction Report. If one were to try to encapsulate the salient points of the last year in terms of regulation and the market, one could say that there has been an overabundance of talking but very little enacted legislation. In terms of regulation highlights, the past year has seen some movement in the US with the opening up of the Delaware and New Jersey markets while European and Asian operators (among others) are coming to terms with the impacts of the point of consumption tax while only this month, Germany has announced the 20 successful online sports betting licensees. Meanwhile, the last year has seen what some might call an unprecedented level of merger and acquisition activity within the gaming sector, predominantly in North America.
The numbers being thrown around for gaming revenues and yields on a global scale over the next few years are somewhat tantalising. 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 $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.
Given the current economic climate, many countries and jurisdictions have latched onto this and are looking to enact regulation in order to tap into this perceived 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 serve to restrict competition, and which continue to drive customers to the ‘grey market’.
While there is no shortage of column inches devoted to the upcoming regulated markets, 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. We have all come across the various arguments when it comes to picking a favoured jurisdiction, be it favourable VAT, corporation tax or EU status to name but a few. Some 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 are allowing licensed gaming applications to reside on platforms which are located outside of their respective jurisdictions 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 $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. The process has started but in terms of crude population numbers, only 4% of the market is regulated with various online games now legal in three markets to date – Nevada, Delaware and New Jersey.
The US market, however, is vastly different to that of the other markets and operators are having to come to terms with some core differences. It is a landscape heavily influenced by land-based casinos and the challenge for many operators is to how to partner with these groups. The casinos themselves are having to rapidly come to terms with the challenges of going online and with it there are many questions around things like technology platforms, marketing, potential cannibalisation of their customer bases and demographics. Equally however, tying licensing to land-based can bring its own set of challenges as we are seeing.
Outside of the casinos, there are other very interested groupings such as the tribal groups and state lotteries for example and all will likely have to be accommodated going forward. Nevertheless, the long road to regulation has begun and there are a number of large states looking like the next contenders for regulation. As with Europe, US states 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. It is hoped that as states do regulate, there is a pragmatic approach with regard to the utilisation of installed infrastructure in other locations. This is extremely important in that it promotes healthy competition by reducing the barrier to entry and ongoing costs in a particular market.
So where will regulation take us next? We are all aware of the UK Government’s plan to introduce a point of consumption tax at the end of the year and many companies are coming to terms with the effects of this in differing ways. In turn other European markets will regulate, but there will likely be no uniformity and each will act in their own interests. While a shared regulatory framework across Europe might be desirable, it is still likely to be some distance away.
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 but it is estimated that these countries will form some of the largest markets by 2020.
Going forward, there are many areas of opportunity for both operators and suppliers to the online gaming industry and they will have to be nimble and alert and choose their battles carefully. They will have to be continually abreast of upcoming regulations, even acting as advisors to regulators in certain cases to represent the collective interests and for the general good of the market.
Article appeared in eGR Jurisdictions Report, 2014