Winning Post – The complexities of the Asian market

Regulus Partners, the strategic consultancy focused on international gambling and related industries, takes a look at some key developments for the gambling industry in its ‘Winning Post’ column.

Asia: growth and regulatory enforcement – yin and yang
The Asian gambling environment is typically poorly understood by most Western stakeholders, yet its importance is growing, both directly and indirectly. This week Playtech’s H1 results illustrated how quickly key geographies and contracts in the region can change – and not for the better. Other noteworthy news from the region was the arrest late last week of 56 suspects alleged to have been involved in a US$1.1bn online gambling ring based in the Philippines and mainland China.

Arrests for involvement in gambling activities in the Asian region are large scale and commonplace, with numbers running into the tens of thousands of individuals (10,000 in Thailand alone over the World Cup) and tens of billions of dollars seized just year to date.  With visible regulatory tightening getting a lot of airtime in Europe and ‘grey markets’ finding renewed interest in boardrooms looking for easier money and growth prospects, it might be worth considering some of the dramatic changes occurring in markets perceived (dangerously, in our view) to be immature.

Playtech’s profit warnings have highlighted two separate issues in Asia which the company is at pains to point out are not connected. The first was a very much ‘ringfenced’ issue in Malaysia, which in 2011 was one of the group’s biggest exposures (8.4% of revenue, now somewhat diluted). Malaysian laws (dating from the early 1950s) were considered ‘ambiguous’ on gambling, especially with regard to online and offshore providers and so a large presence was able to be built up seemingly with limited risk. However, in September-October 2017 the Malaysian government took its periodic enforcement actions several steps further, promising to “wipe out illegal gambling once and for all”, with a dedicated committee and enforcement resources (police, media commission, ISPs) and this has continued into 2018. It should be noted that there has been no change in the law and that the Malaysian government has been sabre rattling on this issue for years (hence we suspect Playtech’s early and misplaced confidence of a return to ‘normality’). All that changed in Malaysia was a willingness to enforce ‘old and ambiguous’ laws and powerful, sustained disruption ensued – including online (which was a stated and properly resourced aim). It is tempting to see Malaysia as a ‘Playtech specific issue’ and directly it largely is. However, indirectly Playtech’s Malaysia woes should illustrate that a determined government can do a lot to disrupt even ‘online offshore’ grey market activity with old laws and relatively limited infrastructure. Any operator assuming that old laws and an offshore business structure are meaningful protection should reappraise this view. In this context, Playtech’s Malaysian issues have important lookthrough, in our view.

The China issue is different, and involves a broader market pattern. China has been by far the largest gambling market globally for some time (according to our estimates), though much of it is very low visibility (the visible bits: HKJC, Macau, and two lotteries, add up to almost US$60bn in revenue for 2017). Tellingly, China (3.6% revenue) was less than half the size of Malaysia for Playtech back in 2011 (much lower market share and a less ‘vertically integrated’ proposition than Malaysia, even then), though it is likely to have overtaken Malaysia given underlying growth even before the disruption started. Historically, gaming has also had a lower share of revenue than in the West since agent networks are better suited to betting. Asian betting is very big business (which is broadly recognised), which in turn has a significant impact on global betting prices, sports sponsorship and integrity (which is less well understood – especially we fear in the emerging regulated market of US sports).

However, it is worth noting that within these big numbers (and similarly large for the agent betting networks as for the visible pieces of the jigsaw, we believe), actual direct B2C online (rather than just online settled) gambling was relatively small. The Chinese government’s capacity to arrest people involved in onshore (typically agent) gambling is impressive, but this has hardly impacted the supply of agent-driven betting revenue (like similarly ineffective wars on illegal immigrants or drugs). What could be changing this, in our estimation, is a gathering shift of ‘direct B2C’, where consumers are looking for their own offshore (and increasingly mobile) solutions, rather than betting with agents or through affiliates. This puts considerable pressure on old business models (and makes EPL sponsorship even more attractive), while further opening up the market to ‘Western-style’ operations (though plenty of differences remain, especially for the small and/or unwary). Opening up direct B2C channels with a growing mobile-driven middle-class could create more opportunities (Playtech mentioned Stars Group, Evolution and William Hill as disruptors; bet365, BetVicor and Asian Logic have been successful for some time) – but with the caveat that Malaysia’s recent actions – and impact – then become potentially very pertinent (we find an assumption that the Chinese government won’t adapt its enforcement to a growing ‘direct’ online gambling market brave at best).

Equally China is not the only Asian country on this consumer shift and not the only one likely to adapt already aggressive enforcement against agents and local unlicensed gambling offers. We have already mentioned Thailand’s 10,000 arrests; Vietnam has been similarly active (including the arrest of a senior policeman earlier this year); 166 people were arrested in Indonesia (under 1953 law) over World Cup betting, eventually into offshore sites (via syndicates) – and a 55 person police-led football betting task force set up before the tournament remains active; finally, Duterte’s view of illegal gambling and threats even to the Philippine’s role as a hub needs little reprise. These actions are not divorced from online gambling – they simply attack (somewhat ineffectively) the largest and most visible current entry point. However, as consumers change, so will enforcement options.

Asian markets are changing fast, albeit at different rates and sometimes in different directions (and there is no ‘Asian market’ just as there is no ‘European market’, reference to such is likely to be a good early indication of failure). Commercially and strategically, this opens up opportunities for online/mobile-led businesses, who are likely to both win market share (at lower cost) and disrupt previously relatively protected incumbents from a competitive standpoint (running a network and managing ‘complex’ payments is not for the under-resourced, completely non-local, or indeed the faint-hearted). However, from a regulatory and enforcement standpoint it will (sometimes slowly, sometimes suddenly) turn a relatively niche activity into a key consumer battleground – risks will therefore be evolving (and in most cases increasing) at least as fast as the opportunities…

UK: Regulation – Monopoly! Camelot gets Spanked-a-lot while Park Lane looks to ‘get out of jail free’

Schadenfreude filled the air of British gambling regulation this week as the Gambling Commission announced details of separate licence reviews in the casino and state lottery sectors.

On Wednesday, the regulator announced that it was opening a review of the Park Lane Casino’s operating licence, following revelations that its Latvian owner, Vasilijs Melniks may face charges in Ukrainian courts concerned with corruption and money laundering. The Park Lane Casino, which is located in the Hilton Hotel Park Lane, opened in 2014 in an attempt to break into the ‘Golden Triangle’ of high-end London casinos. In 2016/17 it posted annual revenue of nearly £25m and impressive EBITDA of £5.5m. However, it has also been dogged with problems of regulatory oversight. In 2016, the Gambling Commission reviewed the casino’s operating licence in relation to “serious suspicions” regarding the adequacy of anti-money laundering controls. A year later, two members of the club’s senior management team were issued with warnings following reviews of their personal management licences.

This week’s developments will encourage speculation regarding the future of the casino (at a time when two high-end clubs are up for sale and a third has been closed). Proceedings in the Ukraine may also raise questions regarding determining ‘fit and proper’ ownership (with regard to a politically exposed person) – particularly as in this case (and unusually) the Commission’s response seemed to lag behind the news. A key risk of any regulatory regime is that it is much easier to be tough on visible breaches occurring more through incompetence than malfeasance, rather than from systematic and planned (therefore disguised) bad behaviour. However, systematic risk is almost certainly more acute from the latter than the former. Balancing this involves prioritising resource and acumen over potentially politically pleasing (in the short term) ‘visible results’ – never easy, especially in a charged environment more aggressively scrutinised by wider stakeholders than understood.

Also this week, Camelot agreed a £1.15m voluntary settlement with the Gambling Commission in relation to governance breaches. This is the second time inside the last two years that Camelot has been required to pay out over licensing concerns (the hit in 2016 was £3m) and the timing may be unhelpful given current tender proceedings for the third National Lottery licence. The sanction may also serve as a reminder that, whoever succeeds in the competition to run the lottery from 2023, they are likely to experience materially more stringent regulatory oversight than they might have expected in the past.

EU: tax law – offshore no more?
Pressure has been placed on offshore centres by the EU, including gambling-related centres such as Jersey, Guernsey-Alderney and the Isle of Man. The aim is to make sure companies that are registered in these jurisdictions for tax purposes have genuine local substance. The EU’s Code of Conduct for Business Taxation with respect to companies in zero tax authorities has been recently extended to include these jurisdictions and so far they have voluntarily committed to comply with the code.

There will be new reporting requirements (in company tax returns) and tax audits will be carried out to review substance. Where a company has insufficient substance, there will be penalties, ranging from fines to striking off the company. Jersey and Guernsey have published detailed consultations setting out the proposed requirements and similar proposals are under review in the IoM.

The consultations suggest that companies will be required to show how they carry on the “core income generating activities” in the territory. They will have to demonstrate that there is:

An adequate level of (qualified) employees in the jurisdiction proportionate to the activities of the company

An adequate level of annual expenditure incurred in the jurisdiction proportionate to the activities of the company

Adequate physical offices and/or premises in the jurisdiction for the activities of the company

The current timetable is for the measures to be finalised by 31 December 2018, toapply for 2019 onwards, so there is only a short time to prove substance. While some POS licensees will have no issue with this law as many have a material ‘hub’ presence, this does not apply to all and could drive some material disruption, especially for those non-EU operators seeking to use European offshore jurisdictions as a licensing ‘brass plate’.

GB horseracing: bookmaker MLBs – a return to the good old days?
BetVictor’s announcement this week of a new MBL (Minimum Bet Liability) market for horseracing is brave and welcome. Bookmakers have needed to readdress their appeal after taking hits (taxation. FOBTs, etc.) and punters have been quick to recommend that in order to win them over then the operators should look at their historically important horseracing offering.

The first to move was LCL (GVC) earlier this year with a retail MBL of £2k on class 4 and better races (win only), £5k on ITV races and £500 on all other UK and Irish races. William Hill also went with an MBL for ITV races (win only) of £5k in shop and £1k online (plus a very welcome £10k MBL on all football World Cup singles).

BV has gone a large step further. Its £500 MBL is for all UK and Irish races, no Best Odds Guaranteed (BOG) and singles only – but for each-way as well as win only. PPB quickly followed with a £500 MBL for UK/Ireland Class 1 & 2 races but also significantly for all races at 2+ further meetings each day.

At the root of this move to MBL is punters’ anger and frustration at the modern trend of restricting bets. Small winners (and some losers caught in bookmakers’ algos) have been restricted alongside the rare, consistently successful horseracing bettor. Many have contacted the BHA authorised Horseracing Bettors Forum (HBF), who have met in Parliament to discuss restrictions with MPs and one significant bookmaker. HBF has been negotiating with the operators to sign up to a betting charter, one proposed condition of which is MBL.

In the bookmakers’ defence, MBL may set them up to ‘filled in’ by sharp money, one-sided betting on tipsters’ and tipping-line selections, the constant threat of clients using multiple accounts and the danger of ‘bad each-way’ races (though understandably, traders may tinker with these). Due to this operators embracing MBL will need to enhance their bookmaking capability (as opposed to liability / customer management) to cope. This makes BV’s move all the more meritorious in that they have gone alone (and also included each-way bets) – a fitting move for an operator still very much associated with the braver end of bookmaking.

It is understood that MLB offers might come at the cost of some other customer benefits, which in turn will lead to a greater level of customer segmentation. However, we believe that many (currently disenfranchised) customers will be happy with – and have called for – a so-called ‘no-frills account’. These customers want to know they can get a decent bet on, without restrictions but also, if necessary, without BOG, enhanced price offers and for singles only – like the good old days.

Paul Johnson is a member of the Horseracing Bettors Forum

Kenya: gambling duty – confusion reigns as Finance Bill comes in and is swiftly suspended, or is it…
Only a matter of weeks after Kenyan operators were breathing a sigh of relief that significant tax hikes had apparently been averted, the President has had different ideas and passed the Finance Bill into law, including gambling duties of 35% of GGR and a 20% withholding tax on customer winnings (making passing duty onto customers impossible and therefore creating a significant catalyst for a competitive black market). While petitions against the Bill have been lodged, and in theory its provisions are suspended pending hearings into those matters, it is understood that the Revenue Authority is telling operators that tax is payable at the new rates dating back to 1 July 2018. If enforced, this could prove difficult / impossible / terminal to exposed operators, which are unlikely to have been withholding tax during that period and will have little chance of recovering the tax from paid-out customers.

This latest move highlights, in our view, a key risk, in particular in emerging markets. Incumbents and new entrants are hostages to the political whim of the prevailing administration in any territory. Lobbying power is important but, given what is happening in Kenya, apparently only gets you so far. Given the ever-evolving fiscal-regulatory tides across the globe, it has never been more important for operators to do their homework prior to expansion into new jurisdictions, and to work as closely as possible with legislators and regulators to try to ensure favourable (or at least workable) trading conditions.

US: eSports and Cryptocurrencies – cryptic UniKrn
High profile eSports betting operator, Unikrn, is the subject of a class action brought by investors in its cryptocurrency following its ICO of UnikoinGold (UKG) last year. The currency was created for use on the Unikrn betting platform, with the ICO intended as a fund raising ($29m was realised, despite hopes of raising $86.4m).

The complaint alleges that Unikrn has attempted to avoid federal securities laws by claiming that its cryptocurrency is a ‘utility token’ rather than an investment intended to bring profit for buyers (under SEC rules, digital tokens may be considered securities and would therefore require registration, and, as a result, offer more protection to investors). The plaintiff complains that the continuous sale of the currency by other means led to its devaluation meaning the ICO provided no advantage to investors.

While this claim is yet to be heard and concluded, it is another instance where the immaturity of the cryptocurrencies market is highlighted and yet to be fully tested from a legal and policy perspective. Also, the need for further investment in eSports related businesses shows the sector is yet to prove material profitability. Investors and interested parties are advised to proceed with caution within both areas.

*see also WP article 20 July – cryptocurrencies may be considered an ‘asset’ from  a tax perspective.
 
Global: M&A Watch – Breaking Data Corp / Oryx Gaming
It has been reported that Breaking Data Corp, owners of sports news platform GIVEMESPORT (26m Facebook followers), is set to acquire Oryx Gaming for €7.5m.

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