Stockholm syndrome: Making sense of Sweden's turbulent online gaming market

Regulated revenues. They’ve long been the ultimate goal for major operators given their perceived stability and long-term sustainability. In that sense, the Swedish market was supposed to be a shining example of the benefits of taxing and regulating online gaming markets. This year’s re-regulation was supposed to protect players, strip the cowboy operators from the market and ensure consistent sustainable revenues for the major firms and subsequent tax take. In other words, it was supposed to be win, win, win.

In an investor presentation in late 2017, LeoVegas foresaw a litany of benefits, including an enlarged overall market, more marketing channels, a smaller tail of competitors and decreased bonusing costs. The lone threat it predicted was increased competition from Svenska Spel. It nailed that one at least.

In February 2018, as the regulations were being constructed, the mood was still upbeat. The then-Cherry CEO Anders Holmgren told EGR in an interview: “We are cautiously positive to the proposed re-regulation. It will open up the market and increase transparency and options for players and create potential for companies with high ethical standards and understanding of sustainable business models.”

There was one condition that Holmgren added. “There will be a period of trial and error and I trust the regulators will be a benign watchdog in the initial period, trying to guide rather than punish,” he said.

It would be tough to argue that the regulator has been anything other than an iron fist in the seven months since the market went live. “They set out to be the UK Gambling Commission (UKGC) but they’ve gone too far,” says one Swedish gaming exec, speaking on condition of anonymity. “We all supported re-regulation but this is a mess.”

The regulator has now fined 15 companies – and two twice – for various breaches of regulation and, of course, stripped Global Gaming of its licence entirely. There are rumours of more fines on the way, but in the meantime the regulator must defend its decisions in court, with Global Gaming, Betsson, Gaming Innovation Gaming (GiG) and GVC among those which have publicly announced plans to appeal decisions against them.

Never mind whether the Swedish Gambling Authority (SGA) has the manpower and resources to fight multiple concurrent court cases, the fact it even needs to suggests the regulator has somewhat lost its way. Bear in mind the UKGC has never yet had to defend one of its decisions in court.

“The SGA should have just clarified the regulations,” says Martin Arnell, a senior analyst at DNB Markets. “If they just clarified them then everyone will follow that, but now the court will clarify the regulation and it gets complex.”

Pain points

The refusal of the SGA to clarify specific regulations was brought up to EGR by multiple operators interviewed for this article. “The regulator has not been able to answer simple questions,” said one Malta-based Swedish executive. “They hit you with a big fine or refer you to a 500-page licensing manual and tell you to read the rules.”

A case in point might be bonusing, where it is forbidden to offer economic incentives directly linked to games or products. “What if you hand out a ticket to a football match?” asks Arnell. “Is that directly linked to the game? Or is it something else? It’s very hard, almost impossible to answer.”

Another example might be betting on games where a majority of participants are under 18, which is prohibited. “What happens if half the players are over 18 and half under, can we offer betting then?” asks the anonymous Swedish exec. “What if two of the older players get substituted for younger players; do we have to freeze betting at that point? We’re happy to follow the rules but they have not been laid out clearly.”

According to Gustaf Hoffstedt, secretary general of the Swedish gaming trade association BOS, operators were even fined for offering bets on a game between two Swedish Division One football clubs where only one of the players was under 18. “You have such severe interpretation of the regulation and it is almost impossible to offer any sports betting at all because you cannot foresee when a minor may or may not appear in a football team of 11 players,” Hoffstedt says.

His warning about it being impossible to offer betting may seem hyperbolic but already one operator has stopped taking bets for fear of a fine – or worse. GiG announced in July it was freezing its in-house sportsbooks in Sweden as it awaited more clarity on what was and was not compliant.

“We find ourselves in an impossible position due to the lack of clarity in the Swedish gambling regulation,” said CEO Robin Reed. “We have to protect the company and its shareholders from potential penalties from such vagaries. This action was taken because, ultimately, it is critical for us to be compliant. We believe that the current rules for online sports betting are too open to interpretation, leaving uncertainty around whether an operator is in fact compliant or not.”

Reed called on the SGA to amend the relevant rules so they don’t leave room for misinterpretation, saying GiG was keen to collaborate on this. Reed also urged the association to suspend all sportsbooks operating in Sweden in the meantime.

Taking on risk

The decision to remove the risk of a fine is relatively easy for GiG. In its own words, sports revenues are “immaterial”, while their fine for offering betting on under-18s was SEK3.5m (£300,562). No other operator has yet followed GiG and suspended its sports offering but Hoffstedt says he expects others to do so, with the black market a potential beneficiary. “The punters will go elsewhere sooner or later when it becomes more or less impossible to function within the licensing system,” he warns.

Indeed, multiple sources said some of the largest operators in the market were already active in the black market, while smaller firms were also being forced that way by the cost of compliance. Regulated revenues are down roughly 15% year-on-year compared to the grey market last year, suggesting some players are being funnelled to black market sites.

“Is the market really down 10-20%?” asks Arnell. “Is that really something that we’ve seen in regulated markets in this industry? I’ve heard a lot of senior executives questioning these numbers, and implicitly suggesting there is a black market here that we don’t see in the regulator’s numbers.”

“It’s just not worth it for smaller operators to stay and be compliant in Sweden,” adds the Malta exec. “They will either look for other markets or go to the black market.”

Blurred lines

In the meantime, the regulated operators are left to deal with major uncertainty and hefty fines when they cross lines they don’t even know are there. The lack of communication even extends to warnings about fines. Hoffstedt recently wrote to the SGA on behalf of BOS telling the regulator he was “surprised and frustrated” to learn of the SGA’s decision to fine members without “prior warning”. Hoffstedt said several BOS members have asked for clarity from the SGA on several occasions without ever getting a reply, claiming the SGA seems “reticent to engage in a dialogue”.

“The regulator hasn’t provided the industry with an understandable interpretation of the regulation and those things should and could be avoided via a good dialogue” – Gustaf Hoffstedt, BOS

The experience is by no means limited to that one incident. Global Gaming CEO Tobias Fagerlund said he heard about the company losing its Swedish licence just eight minutes before it became public knowledge. The SGA sent out a press release announcing the revocation at 8am on 17 June, and Fagerlund said he received an email with the news at 7.52am.

“I got it eight minutes before it was released,” Fagerlund told EGR. “It was just pure luck that I was awake and could do the things that we needed to do, meaning close down Sweden and tell Nasdaq that it would be a good idea to stop our shares for trading that day. I was shocked,” Fagerlund added. “I wasn’t warned at all. We thought we had a good dialogue with the SGA. We ourselves made them aware of issues we had in January with deposit limits not working and we corrected them as soon as we could. The SGA is not really easy to speak with,” Fagerlund added. “That’s an experience that we share with many operators in Sweden.”

Stretched to the limit

DNB’s Arnell suggests the regulator might be understaffed given the size of the market, even having doubled headcount ahead of re-regulation. One Swedish exec, somewhat less charitably, suggests the SGA don’t truly understand the market, judging by the size of the fines dished out to various operators for the under-18s betting incidents. Hoffstedt also suggests the regulator is inclined to favour the former monopoly operators, Svenska Spel and ATG.

“I do think that the regulator is not as independent from the government as the Swedish constitution guarantees and I do believe that they receive a lot of pressure from the government to be harsh when it comes to the licensed operators,” Hoffstedt says. “We should bear in mind that the government still owns the largest betting operator themselves. I would say Sweden is still struggling when it comes to fairness in the market and the obvious solution is for the state to be focusing on legislation and regulation and not on running a commercial entity.”

The SGA for its part has invited operators to a so-called “information meeting” in Stockholm in September, suggesting it is aware of the criticism and wants to increase the dialogue between the two sides. The regulator declined to comment beyond already-published statements when contacted by EGR.

It’s also worth noting that the operators themselves are no angels. Firms have been pushing the boundaries of the regulation, whether by accident or design. “Companies tried to bend the rules in their favour which was naïve,” says the Malta-based exec. “It’s certainly not black and white.” The speed with which some firms have targeted the black market also speaks volumes.

Bear market

The fractious relationship between regulator and operators is just one strand of the story in Sweden and indeed the relationship might be less strained if operators were otherwise flying high. But they aren’t.

Through the first five months of the year, the former monopoly operators, Svenska Spel and ATG, accounted for almost half the overall market, according to tax data. The share price of large Swedish operators (Betsson, Kindred, Leo) is down an average of 14.4% year-to-date, while Global Gaming stands out among smaller firms, currently trading at just 12% of its all-time high at the time of writing.

While the potential leak to the black market is a factor, firms are also losing revenues to the rise of self-exclusion and the implementation of other responsible gaming tools including reality checks and spending limits. This type of thing is beneficial in the long term, but doesn’t look good when Q1 and H1 numbers come out.

“The high-value players have been really important for most companies even though they don’t want to admit that,” says the Malta exec. “I heard one firm took SEK20m from a woman who didn’t have that money. If they accept that kind of money now, they will lose their licence.” According to affiliate sources, the value of a Swedish player has dropped from €600 to €400 on the back of re-regulation.

Silver lining

As already noted, the lower LTV isn’t a cause for concern in the long term and is in fact needed for the industry to be sustainable. It also means that smaller firms are feeling the crunch because they don’t have the database to withstand lower player values, fuelling a widely held belief that the market will shrink down to 10-12 large operators in time.

“The big should get bigger,” says Arnell. “I’ve been covering this sector for 13 years from Stockholm and I still believe that re-regulation, if it comes with consolidation, could be a positive in the long run.”

By consolidation, Arnell doesn’t necessarily mean M&A but more organic absorption of market share into larger operators as smaller firms drop away. “When I talk to management in the big companies, it’s not like they are on the acquisition hunt,” the analyst says. “They are essentially waiting for the small firms to completely disappear. So why would they buy? Why should they buy a small operator when there’s nothing new? If they acquire a small operator, it has to be something unique and that’s pretty hard to find among the casino brands.”

Instead, Arnell says it is more likely we will see international operators try and buy their way into the Swedish market as it stabilises, such as William Hill and MRG, although that deal was timed poorly for the UK firm. “I would expect more deals when internationals buy in, although they are probably not in a rush because the Swedish market is in decline,” Arnell says. “The smart ones are waiting.”

When asked about specific winners, Arnell points to LeoVegas, whose monthly revenue figures are showing an upward trend, and Kindred, which announced recently it was aborting its Spanish plans to focus on Sweden and the US.

“Both firms could benefit from the closure of Ninja Casino and I think Leo is benefiting from being a bit of a younger company and more focused on digital marketing through Google for example,” Arnell says. “I would also expect to see some improvements from Betsson if you move a bit further out.”

Bounceback

Is the worst of the Swedish market behind it then? A good foundation would be more communication from the regulator. While it has agreed to one meeting in September, Hoffstedt and BOS want a lot more.

“If you compare the situation to Denmark, they had numerous meetings with the industry,” Hoffstedt says. “A dialogue is not just the authority giving information to the industry – it works both ways – the point is we learn from each other.

“I believe a large portion of the issues we see now is due to the lack of dialogue. The regulator hasn’t provided the industry with an understandable interpretation of the regulation and those things should and could be avoided via a good dialogue.”

That is a relatively easy fix and the questions around legal specifics should also be resolved soon enough, whether by courts or SGA clarification. The black market question looms but as the compliance specifics are cleared up, the largest operators look set to make hay and, this time next year, the share price woes and sky-is-falling narrative could be long forgotten. As long as the SGA complies, that is.