This time for Africa?

Nearly 20 years ago The Economist labelled Africa ‘the hopeless continent’, reflecting the wars, corruption and bad governance that stifled its progress and growth. Today, the magazine speaks of ‘Africa rising’ – and online gambling is one of many industries with a new focus on the world’s second most populous continent.

Africa is definitely on trend for online gambling executives. My inbox is full of invitations to gambling conferences from Nairobi to Lagos to Cape Town. The number of people who tell me they have been to look at lottery opportunities in Nigeria is surprising. The potential market size at over 1.2 billion people looks big, albeit some 40% of them are under the age of 15.

But how attractive is the market really? Talking to people who have set up betting companies in Africa, it is obvious that it’s not an easy task. With 54 different countries to potentially target, it is also clear that actually only a handful are realistic markets. Kenya, Tanzania, Nigeria and South Africa are the ones most often mentioned.

Outside the countries that are predominately Muslim, the good news is that governments seem largely sympathetic to the idea of taxing and regulating gambling, whether land-based or online.

The other excellent news is that financial processing seems to be a lot easier than one would normally expect in emerging betting markets. M-Pesa, the largest mobile payment service in East Africa, is happy to take betting transactions and other similar services such as EcoCash and DusuPay are establishing gambling divisions, aimed at helping operators take payments across multiple African countries.

The bad news is that the regulatory and tax regimes in most African countries are not ideal. The recent experience for operators in Kenya – where the tax rate jumped from 7.5% on gross profits on sports to 35% (down from a proposed 50%) – is an example of the inherent risks for operators. Where new licensing regimes are being put in place governments are looking for high fixed fees plus a sizeable percentage of profits as their cut.

African regulators also seem to be looking at creating their own set of rules for each country rather than copying existing rules in more established markets elsewhere.

A slow burner

Perhaps the biggest problems for new entrants into Africa will be cultural. My own experiences of investing in Africa have been mixed. About seven years ago I put money into an African investment fund on the basis that it was buying the third largest brewery in Nigeria; it was somewhat surprising to find out six months later they had bought a toilet paper manufacturer in Ghana.

I have had a better experience in Sierra Leone where I have a share in the country’s largest rice milling operation. But in both I have learned that often there is fluidity to the rule of law and an emphasis on personal connections and influence (especially on anything political) that many Western executives would not necessarily feel comfortable with. Some African methods of doing business also won’t necessarily sit comfortably with how European gaming regulators expect to see operators run their companies.

Speaking to operators in Africa, they say they are struggling to make a profit at the moment but they are establishing a base for the future. The main opportunities are currently in land-based operations, led by sports punters who bet relatively small stakes but are high margin customers, to the extent that anyone who only has a treble is considered a shrewdie and eight to 10 team parlays are an average bet.

Online is working for a small number of companies but the cost of acquiring high staking customers relative to the costs of getting money in and out makes it tough to be profitable.

My view is that Africa will be a slow burn rather than an explosion of growth. Local players will be the predominant winners and will eventually get snapped up by the big international players once they have achieved scale and core profitability and regulatory certainty.

I also think a lot of money will be wasted by international operators trying to launch into Africa on the basis that they can’t afford not to be there; rather like the amount of money that has been spent in the United States over the past decade as companies wait for the online market to eventually open up. In the long run, it will be a huge market but plotting how many years that will be is the tricky thing.

Joe Saumarez Smith is chief executive of Sports Gaming, an online gaming consultancy, and chairman of Bede Gaming, a leading developer of online gaming platforms and distributor of online slots and table games.