European opportunities: The good, the bad and the unclear

It seems the European single market is history. The dot.com era is dead and spotting the opportunities for growth and meaningful revenues is decidedly difficult. Frankly it’s no wonder everyone is setting sail for the new world over the Atlantic.

The European picture was a very easy one to paint as little as two years ago. For the most part it was one dominated by the UK at its centre with small but colourful markets in Italy and Spain providing some interest to the sides and a large slab of grey from the Nordics, Germany and pretty much everywhere else. Now? It’s a mass of confusing shades of black, white and grey that needs to be redrawn every few months. And what is even harder is trying to predict what it will look like a few years in the future.

Where then should operators be devoting their attention as they look to grow along with the great European online gambling experiment? It breaks down into markets where you hold an existing local presence or advantage, markets where the regulatory structure is commercially compelling and markets where you really can’t afford not to be involved. Markets such as France, Poland, Portugal and, for gaming, the Czech Republic fall into the former category, where it is particularly challenging to present a business case for entering without an existing brand or player base.

The markets outside of this can be crudely broken down further into: the good, the bad and the unclear. It’s in this context that “markets you can’t afford to live without” fall into the category of “the bad” and those with a compelling market and regulatory structure are “the good”, and the rest, well, that’s somewhat unclear. Here we take a look at some of the leading contenders in each category.

The good

Sweden
Population: 9.9m
2017 Revenues: €1bn (source: Lotteriinspektionen)
You don’t really need to make the case for Sweden. It’s hard to imagine the online gambling world without the Scandinavian nation and it has been the birthplace of some of the stalwarts of the sector such as NetEnt, Kindred and Betsson and remains the home of some of the more recent innovators such as LeoVegas and Casumo. The country of just under 10 million people punches far above its weight in terms of per capita spend and with a tax rate set at an entirely reasonable 18% of GGR, the new online sector looks very attractive indeed.

But that’s not to say Sweden comes without its downsides. It will be placing consumer protection firmly at the heart of its new regulatory environment, with a more restricted marketing environment than some are used to, and there will be some feeling out of the best practice way of operating in the early stages. Operators will need to take real care of how they market to players, how they treat those on the books and how they deal with problem gambling issues.

Much as in Denmark, another one of Europe’s “good” markets, operators will also have to contend with an unshackled monopoly looking to capture a big chunk of the newly regulated market. Svenska Spel is not one to be underestimated and has already signed marketing and payments and supplier deals to make sure it hits the ground running.

But even giving Svenska Spel a 20% chunk of the new regulated market would leave a market larger than Spain for the rest of industry to compete for. The extra regulatory burden and tax might be a price worth paying here.

Spain
Population: 46.6m
2017 Revenues: €558m (source: DGOJ)
Spain has moved from also-ran to a front-runner in the European space by virtue partly of its own efforts and partly of those of its peers. While the UK is pondering a tax rate increase, the Spanish authorities have planned to cut theirs to the more “standard” 20% GGR rate and are inviting new operators to apply for a licence in what remains a fast growing market. The country is slowly recovering from severe macro-economic issues and the wider potential of the market remains somewhat untapped.

A total market size of €164m in Q1 makes the entire Spanish market just over a third the size of Italy in the period, but with a market growing 29% year-on-year with 14.5% year-on-year growth in sports betting, 51% year-on-year growth in casino and 42% year-on-year growth in poker, it has plenty going for it. Spain then is still a market that feels very much in its early days, although one that is maturing a little.

This is not a mature market, however, and in terms of supply it’s not a market that is anything close to saturation point. From the big land-based operators we have the Cirsa/Ladbrokes joint venture in Sportium and Codere in sports while most of the casino and bingo operators are present in the market in varying shades of “good enough” style products for the most part. There is, you feel, a learning process still underway here. The sense is still that Spain is only just getting started.

The bad

Italy
Population: 60.6m
2017 Revenues: €1.4bn (source: E&K Gaming)
A surging market in the first quarter of the year with revenues over €400m put Italy on everyone’s radar and with sports betting and casino in rude health, a rising number of firms are looking to increase investment in the sector. But seemingly overnight, the new populist government in June introduced a total ban on gambling advertising as part of its larger bill aimed at radically reforming the nation’s economy called the Dignity Decree.

As written, and provisionally passed, the bill would outlaw all gambling advertising in all forms on all channels. No TV ads, no shirt sponsorships no online ads. Nothing. Just an endless void and the sound of 1,000 online gambling marketers crying out at once. This, it’s fair to say, has changed the attractiveness of the Italian market somewhat. The law has not, at the time of writing, received final parliamentary approval and there is a large carve-out for existing advertising contracts, although it’s not entirely clear how broadly this will apply and how it fits in with a hard deadline of June 2019.

But while it takes an extremely brave person to predict what will happen next in Italian politics, it does look as if the country is braced for a period of significant restrictions in terms of gambling marketing and advertising. This, clearly, is very problematic. For new operators entering the market the door is effectively slammed in their faces, while even for operators with a large land-based presence and strong brands it’s a major roadblock to future growth.

If growth rates drop substantially, customer awareness and gambling participation dips, which is the aim of the law after all, then it’s going to become a market with some big brands fighting against each other to maintain market share or even manage decline.

The UK
Population: 65.6m
2017 Revenues: €4.9bn (source: Gambling Commission)
While it would be disingenuous to portray Europe’s largest and most active online gambling market as “bad”, there is certainly a direction of regulatory trend that is tough to ignore at the present time. The UK probably had the lightest touch of all the major regulated markets, but that has changed: operators are in the midst of a major cultural shift with everything from acquisition marketing, to customer retention to general operating practices facing fairly radical change. And none of it is looking like it will lead to anything other than negative to short-term revenue growth.

The big-ticket item is obviously the impending rise in online gaming tax from 15% of GGR to an expected 20%. Beyond this, however, changes to operating practices are the biggest adjustment that need to be made, with operators being asked to take a far more proactive role in weeding out problem gambling and to have a much broader and deeper view of their customers generally.

Checks on sources of funds and affordability on VIPs are looking more commonplace, while operators are being pushed towards predictive technology, not just to recognise profitable players, but also problem gamblers, and cut them off before the problems escalate. Alongside this, it feels like a larger crackdown on gambling advertising is inevitable and there is the increasing impact of M&A on the sector to contend with too.

Operators looking to enter or scale up in the UK market face huge barriers with the multi-billion-pound, multi-brand operators buying up media, and their rivals, at an unprecedented scale. And even in the second tier we’re seeing a battle to keep the smaller fish from swimming upstream. There is no denying the scale of the opportunity in the UK, with revenues far in excess of anywhere else in Europe, but is it an attractive market in 2018? That’s less simple.

The unclear

Germany
Population: 82.7m
2017 Revenues: €1.4bn (source: E&K Gaming)
It’s tempting to just write a giant question mark under Germany and be done with it, such is the level of confusion around the future of the market. The court case against 888 seemed to signal a shift back towards more definitive drawing of the regulations around online casino but as yet the remarkably resilient status quo remains intact and plenty of operators continue to pour money into the region.

But what does Germany really represent? It’s a grey market where operators who wish to retain a white image have to pay VAT on casino revenues and a turnover tax on betting. It’s a market where the stakeholders have struggled to find agreement on online gambling legislation for over a decade and where the few licences issued are barely worth the paper they are written on. It’s also a market where most of the industry is banking on for some cash-flow positive revenue growth for the next couple of years and one where nobody is quite sure if regulatory progress is actually a good thing or not.

The biggest area of confusion surrounds the issue of online gaming, with online casino and poker technically illegal under the current reading of the Interstate Treaty, a ruling upheld in the recent 888 case. And there is a possibility that a move to a formalised sports betting regulated regime could also kill off the larger online gaming sector at the same time. This is not a view held by some of the larger players in the market such as GVC, but really it remains a bit of a guessing game here.

The Netherlands
Population: 17m
2017 Revenues: €370m (E&K Gaming)
The Dutch market has been a long time coming, and since it first hoved into view as the next big thing in online gambling we’ve had the launch of regulated markets in Bulgaria, Romania, Portugal and the Czech Republic. But on the face of it there is still a lot to be excited about. The Netherlands, with a population of around 17 million is roughly the size of Sweden and Denmark combined, has a GDP per capita higher than Germany and is one of Europe’s most cashless societies with a huge mobile penetration and substantial iOS usage. It’s also a market that has a historic and current propensity to gamble online.

Generally it’s only the constant threat of fines and legal action that keeps most of the major players out at the moment, but will this change post-regulation? A tax rate of 29%, assuming a high marketing spend and other start-up costs, will make it tough for anyone to turn much of a profit in the short-term. But it’s not hard to estimate the Netherlands as a market of some scale within Europe in relatively short order. If we give the Netherlands a similar per capita spend as Denmark had in its first post-regulation year then €600m in annual revenues is a quite reasonable expectation.

The long wait for the Netherlands to open may have cooled some enthusiasm for its potential but it’s hard to see many other markets that offer as much to the major UK and Nordic-facing operator giants. One thing is for certain: the analysts and forecasters will have done their sums and nobody is going to be caught on the hop by the Dutch market with over five years of build-up. And we won’t have long to wait to see which way the operators leap.