Regulus Partners, the strategic consultancy focused on international gambling and related industries, takes a look at some key developments for the gambling industry in its ‘Winning Post’ column.
Ireland: betting duty – they never had it so good….
On Tuesday the Irish government announced a doubling of betting duty to 2% of turnover in its 2019 Budget (with exchange duty increasing by two-thirds to 25%) – effective from 1 January 2019. The likelihood of an increase had been well trailed as well has having cross-party support, though it was still treated with shock by the Irish betting sector. PPB announced that the increase would cost a further £20m (€23m) on H217-H118 pro-forma figures, suggesting little in the way of possible mitigation. The Irish Bookmakers Association, already describing the 1% turnover tax as ‘penal’ predicted the end of the independent sector as well as material closures among the chains – estimating 35% of Irish shops closing due to the increase (or c. 300 outlets). Ireland therefore joins the UK, Italy, Germany, Australia and Japan in tightening fiscal-regulatory pressure on traditional forms of mass-market gambling, as well as seeing online as a source of further tax revenue. So how did it come to this in Ireland (arguably more the ‘home of betting’ than anywhere), and is it the end for Irish betting as we know it?
Ireland’s fiscal-regulatory set up regarding gambling is largely driven by legacy. First, commercial gaming is not licensed, though it does attract VAT at an effective rate of 18.7% GGR (23/123) – this is paid but largely unrecognised as a sector tax since in theory VAT falls on the consumer (not in practice in gaming as price cannot be effectively adjusted). Second, betting duty has historically been hypothecated to supporting the Irish horseracing and greyhound industries. These command a state subsidy of c. €80m pa (2018), with horseracing getting a 4.7% increase in 2019 to €67.2m (80%, 20% to dogs). The fairly obvious problem with this figure is that the 1% turnover tax, even when applied to online, did not cover the cost (expected to yield c. €55m in 2018) – leaving Irish racing subsidised out of general taxation: hardly a sustainable position.
Betting in Ireland has also enjoyed a significant level of long-term tax reductions: betting duty was fully 20% of turnover before 1986, 10% until 1999, 5% until 2002 and 2% until 2006. Tax cuts and economic growth led to a boom in supply as well as demand, with customers getting much more value and the number of betting shops peaking at nearly 1,400 in 2008 (representing massive and unsustainable over-supply, not halcyon days, in our view). As we have noted elsewhere (see blog “Price Wars”), the two key issues with turnover taxes are their price distorting effects (albeit only at the keenest-priced singles markets at 2%) and the fact that they treat different products differently (eg, at 2% turnover: football in-play online = c. 40% GGR tax; SSBT in retail = c. 10% GGR tax). Horseracing, still by far the most popular betting product in Ireland, sits in the middle of these two extremes. Overall, the GGR equivalent of the tax will be c. 20-30%, depending upon product/customer mix, channel (to an extent) and value proposition.
Is a tax rate of 20-30% GGR equivalent too high? We think that is hard to argue, certainly at the lower end of the range most relevant to retail. There are issues with unrecoverable input VAT, but that is a problem for the gambling industry globally and not Ireland-specific. There are also issues with VAT as gaming tax not being recognised as an industry contribution, but that does not apply to retail (no gaming) and is a structural issue with how VAT/GST is perceived by Treasuries across the world. Was 1% turnover (effectively a c. 10% GGR duty) ‘penal’ – we really struggle with that also, certainly other consumer sectors in Ireland do not pay it, but other sectors do face a consumer price increase of 19% due to VAT, which does not apply to betting – the ‘real economy’ equivalent of a turnover tax (recoverable, but still effectively paid in full by the consumer whenever they buy goods or services). That Irish betting shops paid business taxes as well like all other businesses is hardly remarkable.
The position of Irish bookmakers highlights three things to us, from a policy standpoint. First, railing against a 1% turnover duty – among the lowest in the world by any measure – makes the reasoned opposition to almost any other point look questionable (and therefore easily discounted). Second, expecting the state to support horses and dogs without a coherent alternative (whatever stakeholders’ thoughts on the value or legitimacy of subsidies, or the overall cost of content) simply created a time-bomb, in our view. Third, the lack of an effective gaming duty, despite now being a core (offshore) online product for licensed domestic bookmakers, means that the levers available to policy makers were significantly reduced – making a ‘big but simple’ response almost inevitable.
The demand-side danger now is that a once over-extended retail sector will be cut to below the point of demand equilibrium, meaning retail-only bettors will lose access (though a 35% cut in supply would only take Ireland to 10% below the UK in shop density per head of population, while online is an increasingly ubiquitous replacement across demographics). More serious for Irish horseracing would be bookmaker attempts to reduce the effective tax rate by pushing much higher margin non-racing products (eg, football multiples), while also seeking to reduce horseracing content costs. Both are almost inevitable, in our view, but both can be mitigated by producing high quality, competitive horseracing from a well-funded base that Irish punters still love. The best mitigation all round, therefore, is for Irish bookmakers to work with Irish horseracing to ensure that the sector is producing high quality betting product (especially fewer short-priced favourites) as well as a high quality racing product (and, given its importance to the Irish betting market, to use all levers possible to ensure that GB is doing the same).
UK: In Parliament – Suicide Unlikely to be Painless
After the long summer break and the shorter recess for party conferences, Parliament returned in earnest this week; and the battle on gambling policy was re-joined in both the Commons and the Lords.
In case any of us had forgotten the mess that British gambling is in, we were swiftly reminded by the twin scourges of the industry (and Government policy), Carolyn Harris (Lab, Swansea East) and Lord Chadlington (Cons).
Predictably, Harris led proceedings with four Parliamentary Questions on Fixed Odds Betting Terminals. She found three different ways to ask when the stake reduction (from £100 to £2) would take effect as well as enquiring about the Government’s assessment of impact on jobs. On a related point, Harris also sought clarification on how much revenue an increase in remote gaming duty would bring in (at 18%, 19% and 20%).
In the upper chamber, Lord Chadlington enquired about the merits of establishing a national strategy for the prevention of gambling-related harms, suggesting either that he is unaware of the National Responsible Gambling Strategy (currently nearing the end of its three-year term) or that he doesn’t hold it in very high esteem.
Lord Chadlington went on to enquire about the proportion of Police call outs involving gambling-related mental health issues. The Tory peer may have made his name in the stereotypically superficial realm of public relations but his interest in gambling-related harm is both long-lasting and deep. More than any other parliamentarian, Lord Chadlington has got to grips with the subject of gambling-related harm. Over the course of the last eight months, Lord Chadlington has submitted 36 written Parliamentary Questions on gambling policy, covering mental health issues, effects on children, isolation, crime, treatment provision and suicide.
It is critical that operators rise to the challenge on the subject of harm if the industry is to avoid getting swept away on a tide of public health concerns; and suicide is likely to be the most potent issue of all. Under current proposals, attempts will soon be made to record gambling involvement in coroner reports on cases of suicide; and GambleAware has recently commissioned a (fairly modest) study of the subject.
The pressure group, Gambling with Lives (set up by the bereaved families of gambling-related suicide victims) has quickly established itself as a force within gambling policy discourse and has attracted the attention of national broadcast media. Next month, it will host its inaugural parliamentary reception. The gambling minister, Tracey Crouch (Cons, Chatham & Aylesford) and the Deputy Leader of the Labour Party, Tom Watson (Lab, West Bromwich East) are believed to have accepted invitations to speak at the event; and it seems likely that they may be joined by Jackie Doyle-Price (Cons, Thurrock) who was this week appointed to the newly created role of Suicide Prevention Minister.
The causes of any suicide are often complex and where gambling is involved it is likely to be only part of the story; but in the current political climate, there is little room for complexity and low tolerance for nuance.
UK: esports – cutting through the hype…
The British Film Industry has released its annual Screen Business Report, which details the contribution of video games and eSports (along with other more obvious screen-based entertainment) to the UK economy (for 2016). While the strong, export-led and well supported video games business generated an impressive GVA of £2.9bn, eSports managed a paltry £18.4m. Certainly, some of this is timing, with material growth possible in the nearly two years that have passed from the basis period. However, it also highlights the fact that the eye-catching figures of prize money and total market estimates are global and tend to be dominated by Far Eastern markets (China especially). eSports might be big globally, but its economic contribution in markets that are easy to access for ‘Western’ businesses tends to be very small – an uncomfortable truth that has direct bearing for most gambling companies looking to monetise the issue. Another point implicit in the data is that the UK video games industry has a lot at stake for what might be a very narrow prize: behind the hype, protecting IP and minimising regulation is likely to be a much greater priority for games publishers than capitalising on the esports market – with gambling almost certainly a step too far for most…
Italy: ad ban challenge – right and wrong, or cause and effect?
Another example of complaining about a bolting horse is LeoVegas’s decision to take Italy’s ad ban to the EU (or at least attempt to via a complaint to the Commission, which could lead to CJEU scrutiny). LeoVegas’s case is robust on fundamentals, in our view: the EU has recognised advertising as an important component of domestic regulated gambling supply (which it is) and an ad ban has not been demonstrated to be an effective way of protecting players (certainly not blanket and certainly not on its own). However, In an attempt to take a slice of one of the few functioning domestically regulated markets in Continental Europe of scale, a critical mass of operators spent far more than was sustainable in an effort to gain a toe-hold: the result was an overheating market, more marketing visibility than was commercially or politically desirable and a dysfunctional tail that has more in common with the .com universe than an effective regulated market (none of the successful Italian companies relied on advertising – instead, trading off superior localisation, omnichannel capabilities and product). Indeed, this dysfunctionality has been revealed by a material shortfall in Italian prospective online licensees for the new regime: just 80 licences between 70 companies rather than the hoped for c. 120, because the tail has been so inefficient – with applications confirmed before the Dignity Decree was made public.
In this context, an ad ban as a ‘big but simple’ political reaction is perhaps unsurprising – and not one being resisted much, if at all, by incumbents (tellingly, the CEO of one of the biggest multi-jurisdiction omnichannel businesses is now calling for a pre-watershed ban in the UK, albeit largely aimed at TV football). With this political backdrop, will the EU listen to LeoVegas’s reasoned arguments for better ways to protect players? We doubt it – it is the wrong time and, worse, the wrong audience: the public, press, regulators and politicians need persuading – not the EC executive or the courts, or attempts to overturn broadly supported laws (outside elements of the gambling industry) are likely to lead to even more draconian domestic interventions.
Australia: POC and privatisation – Hobson’s choice?
Western Australia (pop. 2.6m, 11% total) has announced that it will privatise RWWA (c. AUS$330m revenue; 50+ year lease; almost certainly to Tabcorp – representing a potential 13% increase in wagering revenue) and set a 15% POC tax to commence next year. WA therefore joins SA, NSW, ACT and Victoria in adopting POC legislation, now covering (or about to cover) 97% of Australia by population and suggesting a blended rate of 11% GGR nationally. As has been well reported, this rapid take-up of state taxes comes on top of Federal GST (10%, part recoverable through the supply chain) and product fees (c. 20%; largely horseracing). Australia’s CB tax burden has now reached uncompetitive levels, in our view; likely driving greater levels of economic consolidation than consumer choice would demand, and thereby adding to black market leakage (along with the bans of gaming and in-play), regardless of the fact that that the majority of the taxes do not impact price (though mitigated in part because Australia is such a distinctive market in terms of product: expertise in in-play football, tennis and basketball counts for very little, even in the black market).
Not dissimilar to Ireland (see above), we see three underlying causes of this dysfunctionality. First, the state monopoly system could not cope with channel shift either commercially or legally (thanks to NT’s ability to provide ‘internal’ competition). Second, the absence of state taxes caused a fiscal and lobbying vacuum that was filled not by excess profits or over-supply (as in some markets), but by the sports bodies (horseracing especially), which became the chief ‘tax’ beneficiary of quasi .com fiscal status. Third, by railing against all forms of levy while a critical mass of Corporate Bookmakers ignored basic corporate and social responsibility, the sector made itself an easy (and easily justified) target. It is easy to blame other stakeholders or politicians ‘who do not understand’ – it is not politicians job to understand – once the politicians are involved it is usually too late for sophistication or even common sense: until the commercial gambling sector learns this lesson, the fiscal-regulatory casualty roster will keep mounting.
Australia: gambling advertising – Racing Hits Bum Note in Sydney
The large-boned lady has yet to belt forth, but the days appear to be numbered for betting marketing as we know it in Australia.
Plans by Racing New South Wales to use the ‘sails’ of Sydney Opera House as a billboard for the multi-million dollar Everest Horse Race hit the skids as protestors (including the veteran Aussie rocker, Jimmy Barnes) turned out in force to oppose the move.
It is difficult to conceive how anyone thought this particular marketing wheeze would end well; but this has been the story for online betting in Australia in recent years. The more hostile the environment has turned, the more operators have courted controversy. Given that there was nothing technically wrong with the planned stunt, the episode serves to highlight the risks to reputation where companies operate in the no-man’s land between the letter of the law and claimed societal expectations.
Global: snooker match-fixing – Jones and John suspended pending hearing
Jamie Jones, who reached the last 16 of the World Championship earlier this year, has been suspended by the WPBSA in connection with a match-fixing investigation. It is alleged that he was involved in a conspiracy to fix a match between David John and Graeme Dott in 2016. John has already been suspended (in May); there is no suggestion of wrongdoing by Dott.
This appears to be a significant move by the WPBSA. Typically, sports bodies will only issue provisional suspensions in such cases when the evidence is particularly damning and / or the individual concerned poses an on-going threat to the integrity of the sport. Jones is a relatively high-profile player, and the suggestion that he has been involved in fixing a match involving other players means that the detail of the case and eventual outcome of the hearing will be eagerly awaited by the sport, and anyone involved in protecting sports betting integrity.
Global: M&A Watch – The Stars Group / Sky Betting & Gaming; NEP Group / SIS LIVE; Scientific Games / Don Best; MGM / GVC / UAIC; Penn / Pinnacle.
The CMA has announced that it has investigated and cleared the completed acquisition by Stars UK of Sky Betting & Gaming.
NEP Group (global technical production outsourcing) has announced the acquisition of SIS LIVE, which will be rebranded as NEP Connect.
Scientific Games Corporation has reached agreement to acquire Don Best Corporation and DBS Canada Corporation, with the deal expected to complete in Q4 2018.
MGM and GVC have announced a partnership with the United Auburn Indian Community (operator of Thunder Valley Casino Resort) in California.
Penn National Gaming has received approval of its acquisition of Pinnacle Entertainment from the Federal Trade Commission, Nevada Gaming Commission, and the Nevada Gaming Control Board. The acquisition is expected to complete in mid-October