How Portugal became Europe's surprise package

On 29 April 2015, the face of the Portugese gambling market was given an extreme makeover by lawmakers. Online gambling regulation was passed into law with the introduction of the Regime Jurídico dos Jogos e Apostas Online (legal regime of online gambling). Portugal may have been some way behind its Western European counterparts such as the UK, France, Italy and Spain in regulating online gambling, but then it was never really seen as a hub of gambling in the first place.

There are currently only 12 regulated land-based casinos and one gaming room in operation in the country. Live poker can only be operated within land-based casinos. The gambling regulator, Serviço de Regulação e Inspeção de Jogos (SRIJ), which translates as the Regulation and Inspection Service of Games, is a somewhat makeshift regulator, as it is a component of the Tourism Office.

Improving figures

Like with most regulated online gambling markets, Portugal was never going to be an overnight success and the path to where it currently finds itself has not been a simple one.

When the market officially opened in 2016, there was plenty of scepticism within the industry about whether high gambling tax rates would be a deterrent for a vast majority of operators (more on this to come). Fast forward to 2021 though, and the picture appears far more positive than what had been feared. There are now 15 online gambling companies operating in Portugal, with a total of 26 licensees, including established names such as PokerStars, 888 and Betway. All three operators declined to comment for this article.

Having a population of around 10 million people will always mean Portugal will struggle to produce the overall numbers seen in some of Europe’s biggest countries, but performance on a per capita basis is strong. Evidence of market growth has become pertinently clear in recent numbers, and it has started to outperform its neighbour Spain in this regard.

According to a note from consultancy Regulus Partners, Portuguese gaming revenue per capita was €17.46 in 2019 – 10% higher than the rate in Spain. There was a more predictable uptick in numbers in Q3 2020 due to Covid-19 policy disruption, but for Q4, revenue jumped 77% year-on-year (YoY) and 37% quarter-on-quarter (QoQ), in comparison with 25% YoY and 20% QoQ rises respectively for Spain in the same quarter.

Regulus says the surge in player numbers seen in Q4 2020 carried over into the first quarter of this year. Despite being a less mature market, Portugal’s run rate revenue is now almost twice the size of Spain’s on a per capita basis, with per capita revenue of €37.46 versus €19.40 in Spain. So why has there been such a marked improvement? The note from Regulus Partners lists three main reasons for the recent positive results.

First, Portugal has, like the majority of countries, been subject to various disruptions as a result of the Covid-19 pandemic. The stronger volume of players that has been generated as a result of multiple lockdowns is in fact a general trend that has been seen across Southern Europe. The expected lag effect following the said lockdowns is taking more time to surface than anticipated.

Second, Portugal made changes to its fiscal policies in 2020, meaning the tax online sports betting operators have to pay based on their turnover was reduced from 16% to 8%. This could have played a part in operators increasing their marketing budgets. If they had made a significant attempt to increase revenue before the tax rate drop, this could have been self-defeating.

Third, the increased market size, with large operators entering, as mentioned above, has naturally led to greater revenue being generated across the market.

The second and third reasons were listed as potential tools to drive players away from the black market, which according to Regulus Partners, has been “baked into the system” as a result of the tax rates. The note did not come without warning however, as it mentioned Portugal’s blended tax rate on revenue still averages more than 40% and that competitive growth will put pressure on operating margins.

Let us dissect the segments of the report one by one. The obvious point to start is whether it really is the Covid-19 disruptions that can be tagged as the predominant force behind the recent shift in numbers and, crucially, whether the market will level out should Portugal continue to edge towards returning to normality.

Lorien Pilling, director at Global Betting & Gaming Consultants, provides quite a positive outlook in this regard. “Annual winter lockdowns to tackle Covid-19 outbreaks – the prospect of which is being raised in some countries – could mean Q4 and Q1 are given a boost in performance for several years to come,” he says.

Pilling did point out to EGR there was a seesaw effect between sports and gaming revenue last year, with the shutdown of sport and implementation of lockdowns leading to gaming prospering in Q2, and the opposite being apparent in Q3, when live sport returned. Q1 2021 was a different story altogether, as the lockdown combined with live sport being played could of course explain in part why we saw year-on-year increases in both fields.

Tax issues explained

Then there is the issue of breaking down the tax limitations placed on operators and whether this is now a minimised problem. The tax laws make a distinction between games of chance/mutual betting on horseracing and fixed-odds sports betting/fixed-odds horseracing betting. The former taxes at 25% of gross revenue generated by the operator, while the latter taxes at a rate of 8% of the turnover from bets made, but as mentioned above, this was previously 16%.

On top of this, if revenue from player-to-player contests within fixed-odds sports betting and fixed-odds horseracing betting is the operator’s only source of income, they must pay a levy of 35% on all fees they take from the contests.

Given the UK market, as an example, faced no direct online net revenue tax until 2015, when the 15% Point of Consumption tax led to high-profile mergers and consolidation in the market, that identifies how challenging it must be for a market to attempt to get off the ground at the rates Portugal implemented.

In 2019, the European Betting & Gaming Association (EGBA) took a public stand against the tax, citing a Portuguese media report which showed that 75% of Portugal’s online gambling players were based outside Portugal’s regulated market, with the black market thriving as a result of the tax regime. The EGBA called for the authorities to apply equal tax to all gambling sectors and help drive players away from unregulated markets. It is a particular point of interest as to how and why these tax laws have not prevented the recent market growth. A certain relaxation of the law in 2020, as mentioned by Regulus Partners, has played its part, with the percentage of regulated players in the country improving to 36%.

Ricardo Domingues is the vice-president of Associação Portuguesa de Apostas e Jogos Online (APAJO), translated as Portuguese Association of Online Betting and Games, a non-profit association that defends and promotes the interests of the online gambling sector. Further to Regulus Partners’ point about the relaxation of the tax laws, Domingues explains why this is particularly helpful for the market when compared with others.

Domingues tells EGR: “When it comes to the amount of tax, the tax on sports bets decreased in spring 2020, while the casino, betting exchange and poker taxes were increased to 25% on GGR.

“Although the 8% tax on turnover for sports bets is in fact at the higher end of tax levels, we observe a general trend towards increasing taxes: Greece adopted a 35% gross gaming revenue tax; just recently, Germany adopted a 5.3% turnover tax on slots and poker, and had already defined a 5% tax on turnover for sports bets back in 2012; Italy, the UK and Denmark also increased their tax percentages.”

Then there is the increased competition. While it is undeniable the market has piqued the interest of some industry heavyweights, a total of 26 licensees also does not exactly scream that the market is irresistible. Domingues remains confident the market will continue to expand though. He says: “If we look at the growth rates, it seems logical that additional companies see here a possible business case for them, since the implementing and operating rules are quite balanced, while responsible gambling measures are set at a very high level. For instance, customers are only allowed to gamble after full verification.

“At the same time, contrary to many other countries, sponsorships are possible, and a Code of Conduct on Advertising allows for some room for manoeuvre, while hard advertising laws like in Italy, Spain, Sweden and Lithuania do not,” he adds.

A cautiously optimistic outlook

So, where next for online gambling in Portugal? Will we see it as a cornerstone of the European market, or could recent results simply be classed as a good run of form that will have to eventually peter out? Referring back to Regulus Partners’ note, the consultancy does foresee a levelling of sorts, but that is not based on the idea of the ending of the pandemic.

The note reads: “If our assumption is correct and the Q4 2020-Q1 2021 growth is driven largely by taking a chunk out of the black market rather than a burst of secular growth, then the structural inefficiencies of the Portuguese market will likely reassert themselves. Growing from a 1.9x per capita performance gap from its nearest neighbour will be an increasing challenge, even with the perverse ‘help’ (in reported revenue terms) of a customer tax being baked into Portugal’s betting revenue.”

Pilling also takes quite a cautious stance but does not rule out a continuation of current trends. He says: “If the market continues to sustain the levels seen during the lockdowns, then some tier-one operators could look at the market again.

“However, the tax rate might make it difficult to be profitable, if they have to spend a lot on marketing upfront to secure a share of the market. A change in tax rate to move away from a turnover tax would be the real catalyst for interest in the market. But most tier-one operators seem to have their attention focused on the US at the moment.

“There continues to be an offshore sector targeting Portugal, partly because of the high tax rate. In general, the more competitive locally licensed firms can be, the less incentive there is for customers to seek offshore sites.”

The path to future success is clearly not going to be a simple one, but as some may have already come to learn in the past five years, the Portuguese online gambling market is not one to be underestimated.