Italian job: Should operators be moving on from Italy?

Italy-facing operators received an unwanted gift in the days before Christmas last year, as news broke that the Italian government had approved a raft of tax hikes on various types of gambling. The budget was approved on 23 December, and rushed into action just over a week later, with online gaming taxes going from 20% to 25%, and the 22% tax rate on sports betting rising to 24%. The subsequent rise in costs could reduce EBITDA of Italian operators by as much as 20-30%, according to recent estimates by Regulus Partners.

The surprise attack, combined with the already-announced blanket advertising ban – due for implementation in July – has transformed the outlook for the Italian market. This time last year it was widely seen as a major investment opportunity for firms getting squeezed in the UK, with annual growth rates in excess of 20%, and what most of the industry perceived as sensible regulation. But the current government shows no sign of letting up in its anti-gambling policy. So do the twin pressures of rising taxes and restricted advertising mean companies will have to start looking elsewhere yet again for stable regulated-market growth?

The effects will be felt the hardest, as is often the case, in the tail of the market. Investec analyst Alistair Ross estimates around 20% of the market in both betting and gaming is made up of the tail, and these companies will struggle to establish any brand recognition without a proper marketing channel. Approximately 70 companies are fighting for that 20% share, according to some estimates. “I suspect that dwindles heavily,” Ross says.

One Italy country manager for a major European firm suggested that newcomers specifically would be forced to leave the market. “The people that are really in trouble are your Marathonbets, your Pinnacles, and your SportPesas. They’ve got a long way to go to get themselves out there. No-one knows who they are. The big problem with the ad ban is it allows established firms to carry on until July but it doesn’t allow any newcomers to do so.

“If it were me I’d be tempted to move on,” the exec adds. “Italy is incredibly competitive. No-one has a really huge slice of market – the leader in sports betting is on around 16%. And there’s established domestic operators and major international players like GVC, 365, Kindred. So for someone like Marathon, I’d be thinking let’s just cut our losses.” Marathon did not respond to an EGR request for comment, while Pinnacle said simply it was assessing the recent changes to taxation and advertising. SportPesa said Italy remains a key market and “an intricate part of our global growth initiative”.

Staying the course

Of course not all of the smaller players are expected to just up sticks. LeoVegas currently holds about a 1% market share but is understood to be committed to the market. Paddy Power Betfair was suggested by sources as another which could pack up shop after closing PaddyPower.it last year and seeing its sports betting share slide in the monthly Agimeg figures – in part because Exchange revenues are not included. However EGR understands the Betfair brand was profitable in 2018 and more of the same is expected in 2019 with the Exchange expected to benefit from an increase in matched betting and arbitrage as sportsbooks increasingly use bonusing to attract customers.

Elsewhere, 888 is also understood to be transferring marketing budget from the UK to Italy in a bid to have its voice heard before the ad ban comes down in full in July this year. And 888 is unlikely to be alone in this regard. Eilers & Krejcik Gaming said in a recent note: “We expect sports betting to become even more competitive online during the first half of 2019 as operators look to make the most of the transition period prior to the total ban on gambling advertising in June [sic] 2019.”

There is also likely to be some winners from all these changes, and the ad ban in particular. After all, if 20% of the market is in danger of disappearing altogether, there could be plenty of customers to be scooped up. The prevailing wisdom is that operators with retail estates will have a massive edge thanks to visibility and direct access to customers. “The digital brands will be hit hardest,” says Ross. “GVC is a winner because of that retail presence through Eurobet, and so is Playtech through Snai. The tax rise and machine duty looks bad now, but give it a year and those two will be clear winners.”

Playtech CEO Mor Weizer even admitted earlier this year the firm had been lucky with the timing of the Snaitech acquisition. “The market is very fragmented and we believe the advertising ban will position Snaitech to take market share,” Weizer said. “It will also allow us to accelerate growth because we believe small to mid-sized operators and some well-established online-only operators will eventually have to move out of the market or try and retain their existing player base.” These retail-led firms will be investing heavily in an omni-channel approach to push shop customers online.

The larger digital businesses are also predicting business to continue almost as usual. “At the end of the day there’s not a great deal of change,” says one digital exec, speaking off the record. “Instead of giving money to advertisers we’re going to give it to the tax man. Our product is good enough [that] we should grow by word of mouth, it will just be slower than it would have been”. Stars Group is another firm that’s well positioned, with its poker product acting as a natural acquisition channel that is somewhat advertising-agnostic.

Blessing in disguise?

Indeed, the unit economics for marketing in Italy are widely perceived as “horrid,” in the words of one local executive, and the advertising cutback might not be too detrimental for established firms in the short and medium term. As Regulus Partners put it in a recent note: “Since there was little evidence that demand was being successfully stimulated by advertising in Italy (unlike in more mature digital markets), there is little reason to expect a material reduction in revenue due to the ban.” Ross says profits are likely to rise in the near term for multiple firms.

SKS365, which routinely comes in neck and neck with bet365 at the top of the sports betting market, says it aims to build a “new, more solid and mature brand image” to position itself as the “primary betting operator for all players”.

SKS CMO Francesco Gaziano tells EGR: “Soon we will also present the new brand identity, that fully reflects the new spirit of our company: entertainment, safety, transparency.”

Snai could benefit from the advertising ban thanks to its retail estate

But it’s not all plain sailing for the bigger beasts of course. There is concern, particularly among domestic operators, about losing share to the black/grey market in part thanks to worse returns forced by the taxes. A lack of advertising also blurs the lines for customers about who is regulated and who isn’t. It’s one of the key issues raised repeatedly by the trade association, LOGiCO, but its warning has reportedly fallen on deaf ears.

“I’ve heard from several operators that they might just give back their licence and start again in the grey market,” says Marco Tiso, head of online gaming at Italian firm Sisal.

“That’s my main worry. I see a potential increase in the grey market and unfair competition versus regulated operators.

“The government has been very quick to create new laws to raise taxes and attack the industry but they aren’t taking any steps at all against the illegal market. This is the real enemy,” says Tiso. “You can enter a point-of-sale site, find an internet self-service station and play on a .com website. This isn’t being tackled. The government isn’t fighting this, so we want them to better understand the issue.”

Tiso also highlights more competition from social casino firms as an issue, with social slots and table games now being thrown at the top of the list by Google for searches on things like ‘online casino’. Tiso adds: “It’s a crazy situation. We pay taxes, we want to promote responsible gaming but we are attacked and the illegal market gets space and is growing.

Alternative options

So is there any respite coming? The international exec said operators had run into a “brick wall” in their dialogue with the current government, and the industry’s best hope was that the coalition was politically precarious and could come unstuck following European elections later this year.

“That said, once the genie is out the bottle, it’s very hard to get it back in,” he adds. “Once there’s an ad ban and high taxes it’s very unlikely to be reversed because the public perception of gambling isn’t very good in Italy.” He says the best hope is to get sports betting classified as a game of skill rather than chance with lighter advertising restrictions than casino as a result- similar to the system in Belgium.

Elsewhere, Tiso says Sisal is looking to other European markets for alternative growth opportunities. The operator recently applied for a Spanish licence, with Tiso explaining: “Spain and Italy are very similar in terms of regulation and behaviours. Perhaps in Spain we can do something good and then in other countries perhaps, we will see.” It’s worth noting that Spain is by no means immune from the anti-gambling trend sweeping across European governments and recently gave the regulator the power to compel operators to cease sporting sponsorships if necessary.

Ultimately though, while Italy-facing operators have been understandably vocal in their opposition to the tax hike and ad ban, the long term viability of the market is in little doubt. At present, around 15% of commercial gambling revenues come from the online sector compared to more than 50% in the UK for example. As Italian gambling follows the global shift towards ecommerce, the online gambling market should continue to grow, despite the headwinds, and perhaps some way below the 20%+ pace of recent years.

Operators with a land-based presence can expect to take market share, and the larger digital-only operators should continue to grow, albeit slower than before. The real challenge faces the smaller firms who are trying to establish themselves in the market, and these are the companies that may benefit from switching focus to pastures new. Buona Fortuna.