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.
UK: Politics – Budget Day to bring tricks not treats
The pumpkins are out, fake cobweb and plastic skeletons adorn the pubs – but Halloween may come early for gambling operators with duty likely to increase in Monday’s Budget statement.
When the Chancellor of the Exchequer, Philip Hammond addresses Parliament in three days’ time, he is expected to put to an end five months of speculation on the future rate of remote gaming duty and the date for reduced stake maximums on machines in betting shops. It seems likely that the rate of RGD will move from 15% to 20% (and may go even higher), despite claims from within the industry that the revenue neutral rate (ie, where duty would need to be set in order to compensate for the anticipated lost revenue from FOBTs) should be around 18%. There is also a possibility that the announcement will coincide with final clarity on DCMS review implementation (more below).
It says much for the quality of regulatory-political risk management that a positive outcome for the industry on Monday would be stake reduction and 20% RGD to come into force in a year’s time (rather than sooner). The handling of this particular duty change may also reinforce a few obvious truths: governments in the spotlight are unlikely to go for fiddly figures when a nice round number has a better ring; gambling companies may struggle to be taken seriously in relation to valid concerns when they complain about all taxes and all regulation; and even those ministers minded to take a pragmatic view towards the industry are sensitive to the moods of Parliament and press.
While we should always be grateful for small mercies, it would be dangerous to allow the achievement of a better than expected outcome to occlude the disastrous impact of what has gone wrong for UK licensees in recent years. A 5ppt increase in RGD would cost the industry c £180m in 2019 – or likely c. 10% of UK-related profits for exposed companies (albeit with considerable variation). Perhaps more significantly, the cost of offering bonuses will increase further, providing greater levels of competitive advantage to unlicensed gaming operators seeking to appeal to a small but dedicated (and high spending) cohort of gaming-led bonus hunters. While c. 10% of profits and perhaps a couple of ppts increase in the (currently very small) GB black market leakage rate cannot be considered disasters, the negative impact is becoming cumulative and potentially compounding from a FCF perspective for the most exposed and financially brittle operators. In a general market sell-off, it is perhaps little wonder that gambling stocks are suffering more than most….
It would also be a mistake to assume that the British industry has now found the bottom of this particular regulatory-political cycle. Some operators will not be directly affected by Monday’s announcement, but they are not immune from legislative changes that either restrict their ability to generate revenue or squeeze margins.
Gambling has been a perennial soft Budget Day target in the period since the introduction of the Gambling Act. Despite George Osborne’s observation more than a decade ago (when Shadow Chancellor) that there had been too much “tinkering” with gambling taxes, HM Treasury continues to play around in this area (while the libertarian wing of the Conservative party is currently somewhat preoccupied with bigger issues than gambling). Often the pragmatic need to balance books (and score political points) has trumped the department’s philosophical desire for greater simplicity. Indeed, over the course of the last decade-and-a-half, there have been more years when the Government has made structural changes to gambling taxes than years when they have left things alone (quite a scary statistic for the GB industry).
HM Treasury has never been too concerned about problem gambling (although that could change with greater NHS involvement and a keener understanding of costs to the state) but it has always had a good nose for when certain sectors are out of favour with the media and General Public. When there’s blood in the water in terms of public sentiment, Treasury thoughts of tax-raising are seldom far away. It used to be the case that 15% was the default rate of duty for betting and gaming. If RGD does move to 20% (joining machine games duty) then around 66% of non-lottery GGY in this country will be taxed at that level or higher (excluding the effect of the Horserace Levy). This may in time create a logic for raising up duty for over-the-counter betting, online betting and casino games (where the starting rate is still 15%). Moreover, if 20% becomes the new standard, so the possibility grows that those products in gambling’s ‘naughty corner’ will see tax move to an even higher level (as happened to the FOBT in the 2014 Budget).
More broadly, the shift of public policy focus towards gambling-related harm, the greater involvement of public health bodies, the empowerment of the gambling concern lobby (thanks largely to their effective use of social media) and some spectacular own goals from the industry have raised some mountainous challenges. Some operators have responded (first in terms of raising standards on harm prevention and more recently in improving industry cohesion) but there is almost always a lag effect in these matters. For now at least, the game continues to move dangerously away from licensees, in our view.
It is likely that whatever happens on Monday, operators will need to take their medicine and move on. If the GB gambling industry wants its nightmare to end, it will require a degree of self-analysis (and awareness), a willingness to learn and change, and the perseverance to play the long game more collectively and more convincingly than anything seen hitherto.
Belgium: gambling duty – misreading Cnut?
The Belgian government is considering the legal imposition of online gambling taxes on unlicensed operators, with an added 5% tax on PSPs facilitating unlicensed payments. The problem that the Belgian government is trying to address is an obvious one: its landbased-linked licensing regime has not provided the level of domestically licensed competition necessary to completely stamp out the black market. The solution, however, is rather like the misreported story of Cnut trying to stop the tide (he was apocryphally demonstrating humility, not divine powers): black market operators are very good at avoiding state scrutiny (except where benefit is perceived, eg Germany) and perforce avoid mainstream PSPs. The plan might be to send a message rather than increase tax collection, but the message is likely to register as much with most black market operators as the duty…
UK: Politics – In Parliament – Wright in Fight over FOBT Timing
Since his appointment as Culture Secretary in the July ministerial reshuffle, Jeremy Wright has largely managed to skirt issues of gambling regulation. That changed this week as the Member of Parliament for Rugby and Kenilworth was subjected to scrutiny by the Commons Select Committee for Culture, Media and Sport. The agenda focused on his plans to tackle ‘fake news’ and disinformation – so perhaps it was not surprising that questioning strayed onto matters of gambling policy (an area of debate which has had only the most fleeting acquaintance with unimpeachable facts and verifiable truths in recent years).
In addressing questions on the timing of changes to stakes on FOBTs, Wright appeared to indicate that operators would be given a full year to prepare from the point at which the Statutory Instrument has been approved by Parliament. His answer precipitated “uproar” – at least as far as the Guardian was concerned. The Conservative Party’s former leader, Iain Duncan Smith (Cons, Chingford and Wood Green) expressed his dismay, branding as “rubbish” the idea that betting shops required an additional year of grace. Other MPs – including Carolyn Harris (Lab, Swansea East) and Ronnie Cowan (SNP, Inverclyde) – were also quick to vent their displeasure.
The Government’s handling of the FOBT issue has been a masterclass in dithering – an epitome of “windsock politics”. The long and drawn-out process has been characterized by vague official pronouncements, punctuated by departmental leaks and press speculation; indications of ministerial intent have appeared to change from week to week. If gambling is in a mess, then it is in no small part due to the vacillatory nature of its political oversight during the last decade.
We must suppose that Alison Thewliss is likely also to be unimpressed at the prospect of further delays on FOBT cuts – this week, the SNP Member for Glasgow Central became the latest in a long line of MPs to submit a Parliamentary Question on the timing of stake reduction.
In other PQs, Lord Chadlington (Cons) kept up the pressure on the Government on gambling related harm (asking why the Home Office hadn’t the foggiest about Police call-outs and problem gambling). He was joined in this enterprise by Chi Onwurah (Lab, Newcastle-upon-Tyne Central) who asked the Department for Work and Pensions how many recipients of universal credit it estimated are problem gamblers. Onwurah also received an answer to an earlier question on how well the Gambling Commission scrutinized the casino licensing application from the businessman Vasilijs Melniks (currently under criminal investigation in the Ukraine). Based upon the DCMS response, it seems that the Gambling Commission is entirely satisfied that the Gambling Commission performed its duties appropriately…which is reassuring. Melniks, meanwhile has resigned as a director of London’s Park Lane Club casino (which he owns).
Next week’s Budget Statement may result in greater certainty over two of the big issues dominating the politics of gambling (remote duty and FOBTs); but the current confusion and controversy that dominates the industry is likely to persist for some time yet.
UK: football grass-roots funding – FA eyes
Following the withdrawal of Shahid Khan’s £600m for Wembley Stadium, the FA has moved swiftly to identify alternative sources of revenue to fill its grass-roots funding gap, including trying to secure a proposed financial “fair return” from the betting industry. Such an idea has been periodically mooted over the past few years and was flagged by the FA in 2017 in connection with its termination of its Ladbrokes partnership. That it is raised again now is another reminder to the industry (following the US sports leagues’ integrity fees / royalty lobbying) that it is seen as a soft target when it comes to potential funding sources.
Operators may question why the sizeable revenues generated within football itself aren’t better distributed before other organisations within the wider ecosystem are targeted. However, if all stakeholders were to approach the problem in a collaborative way they would be more likely to identify some novel commercial or quasi-regulatory solutions which avoid the pain (and cost) of imposed legislation and inevitable disputes, in our view.
UK: horseracing – not in my back yard
Jockey Club Racecourses (‘JCR’) has been granted an interim injunction in an attempt to prohibit the buying and selling or ‘touting’ of tickets on its property. The action was commenced as a result of racegoers complaints of harassment by touts and potential loss to the company of £1m per year (according JCR SW Regional Director Ian Renton). The news has been reported as a big victory against the ‘scourge’ of ticket touts and, with the precedent now set, other sports and entertainment venues could follow suit and bring their own similar action.
However, this order alone is unlikely to address the issues identified by JCR: unless additional injunctions are taken out by neighbouring landowners (council and private) racegoers are still likely to come in to contact with touts on their way to the course and as the order cannot prevent the trade of tickets outside of the racecourse (online or at other physical locations) any losses will still be incurred to a certain extent as a result.
While the resale of tickets has come up a number of times in Parliament (including early this year), there is no current legislative provision to prohibit touting (other than at designated football matches), leaving only the possibility of civil law action by organisers (the enforcement of which requires time consuming and expensive litigation). Until organisers can provide an easier way for customers to buy, exchange and cancel tickets there will always be a role for touts to plug the gap and make a small profit on the trade of unwanted tickets, it is for venues to weigh up the risk/reward of attempting to police it in this way.
Albania: gambling regulation – dismantling an industry
The Albanian domestic gambling industry has been aggressive and expansionist for some time (both licensed and black), with a ‘mixed’ (at best) track record on harm prevention and perception management. Indeed, Albanian estimated gambling spend (c. €500m) is now approaching c. 6% of official GDP (though not all regional economic activity is effectively measured). The level of political pressure has mirrored and often surpassed similar issues in more developed markets; Albania also has the added complexity of a burgeoning organised crime sector, which inevitably has been attracted to the ‘easy cash’ of gambling (opening interesting KYC issues for the exposed supply chain as well as for operators). The Albanian government’s response has been brutal: to effectively ban arcades and betting shops, effective from the beginning of 2019. The panicked rear-guard compromise offer of the domestic industry is to close half of outlets and enforce an advertising ban. Whether this cuts much ice remains to be seen, but evidence of a rapidly and dramatically swinging pendulum of commercial exploitation and political backlash in an emerging market cannot be more stark.
Global: crypotcurrencies – same day transfer?
A new protocol is allowing users to complete cross-chain transactions – meaning value can be transferred between different blockchains such as Bitcoin and Ethereal. The open-source technology is known as the Open Federated Gateway Protocol, or OFGP for short. It has been developed by iBitcome and DEx.top and is the first federated blockchain to be built using this protocol. Known as Mallow, it is accompanied by a block explorer which enables users to examine the flow of assets and check up on transactions whenever they please. Trading between Bitcoin and Etherium will be supported through the creation of a new token known as WBCH. The value of this cryptocurrency is pegged to the price of 1 Bitcoin Cash.
iBitcome has already launched a crypto wallet. The startup says its multi-crypto wallet supports the likes of Tether along with Bitcoin, Bitcoin Cash, and Ethereal. The company hopes that Mallow’s launch is going to enable existing iBitcome users to complete transfers of assets more efficiently between main chains and side chains. Users can also access DApps through the iBitcome crypto wallet – and benefit from a digital ID system which enables them to prevent fraud and maintain “full control over their identity.” As its gateway protocol is introduced to the public, iBitcome hopes to establish connections between public blockchains which may have suffered from isolation otherwise.
Global: M&A Watch – Golden Nugget / Caesars Entertainment; Full House Resorts / Z Capital Partners; The FA / IPSX Group; William Hill / Sid Hooper
It has been reported that Caesars Entertainment will reject any approach from the owner of the Golden Nugget casinos regarding a possible merger.
The Board of Full House Resorts has rejected a proposed $132.5m takeover by Z Capital Partners and Affinity Gaming.
It has been reported that International Property Securities Exchange (IPSX) Group has presented an investment proposal to the FA involving a £600m listing of Wembley Stadium.
William Hill has sold its 82 on-course pitches to the operator of the Sid Hooper brand, for a price reported to be around £2m.