black markets in remote gambling causes and prevention paul leyland 13 august 2015

Black markets in remote gambling

Causes and Prevention

Paul Leyland

13 August 2015

Introduction I: who we are

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Regulus Partners

• Strategic consultancy to the regulated gambling industry

• Multi-disciplinary expertise and data-driven approach

• Eight Partners with senior management and advisory experience across products and jurisdictions

Paul Leyland

• City analyst specializing in gambling companies for twelve years

• Corporate Development Director of William Hill

• Founded Regulus Partners in 2013

Introduction II: black markets

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Topics

• Key features of the European remote gambling landscape and their impact on regulation

• Selected areas of remote gambling regulation and how they affect black markets

• Europe is used as the case-study since it contains the most developed set of regulated jurisdictions

Key points to draw out

• The hard gambler will always find a way to access the products and services they want

• Regulations which affect product choice or distort price will create a black market

• Failure to police facilitators and the supply chain will allow that black market to flourish

European Remote Gambling I: product

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The data

• Product has been the primary lens for the market

• In a .com environment operators tend to have a lead

• …but benefit hugely from cross-sell (especially slots)

The point

• There will be players that seek all products in all jurisdictions

• The ‘one-size-fits-all’ .com product model was highly effective

• Around 35% sports cross-sells slots; around 70% bingo is slots

2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

1000

2000

3000

4000

5000

6000

7000

8000

European gambling market by product

Sportsbook Casino Poker Bingo

Reve

nue

(€m

)

European Remote Gambling II: regulated markets

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The data

• The regulation of remote gambling is still relatively new

• C. 70% of the European market is now domestically regulated

• But .com is still worth nearly €3bn in revenue

The point

• Most companies are being compelled to regulate

• But, competition and cost of doing business increases

• Meaning many are still reliant on .com cash flow

2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

1000

2000

3000

4000

5000

6000

7000

8000

European gambling market by licensed jurisdiction

UK Italy France Denmark Spain Belgium .com

Reve

nue

(€m

)

European Remote Gambling III: regulatory risk

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The data

• Domestic regulation has created ‘black and white’

• We believe the European black market is worth > €800m

• This represents c. 10% of the total market

The point

• The black market is much less visible…

• …can be reasonably easy to hide (more below)…

• …and is big enough to be attractive to large organisations

2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

100020003000400050006000700080009000

European gambling market by regulatory profile

Demand Regulated Supply Regulated Black

Reve

nue

(€m

)

European Remote Gambling IV: market share

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The data

• The top 12 operators have over 60% market share

• The market is nevertheless relatively fragmented

• ‘Other’ is sill material and growing revenue (c.€3bn)

The point

• The ‘big names’ are highly visible

• They have little choice but to participate in regulated markets

• Most have some .com exposure; many are far less visible

Amaya (Pok-erStars)

Bet365

Bwin.Party

William Hill

Betfair

Paddy Power

Betclic

Unibet

Gamesys

Sky Bet

Ladbrokes

888 Holdings

GVC

Other

European Remote Gambling V: customer concentration

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The data

• The top 1% of actives generate c. 15-20% revenue

• The top 10% generate c. 70 – 90% revenue

• The vast majority of people barely contribute

The point

• In gambling averages are highly misleading

• The habits and needs of the top 1% are critical to revenue

• The top 1% will always find a way

2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

100020003000400050006000700080009000

European gambling market by customer concentration

Top 1% Following 9% Remaining 90%

Reve

nue

(€m

)

Remote gambling regulation: key drivers

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Key areas of regulatory impact on black markets

• Product restrictions

• Rates and nature of tax

• Infrastructure requirements

• Marketing, advertising and offers

• Behavioral restrictions

• Stopping illegal operators

* Criminalisation

* Payments

* ISP blocking

* Policing the supply-chain

Regulatory drivers: product restrictions

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Purpose

• Reduce availability of more ‘harmful’ products

• Ensure a more smooth transition for incumbents

• Create an orderly, phased market opening

Examples

• France: betting and poker only

• Italy and Spain: phased product introduction, limited in-play

• Denmark: Lottery monopoly on bingo and racing

• New Jersey: no sports betting

• Nevada: no sports betting, no casino

• UK: no material restrictions (ex Lottery)

What reduces black markets

• Legalising as broad a range of products as possible

• Ensuring illegal sites cannot have an easy product edge

• Understanding those products which can be effectively run by a monopoly and those which can’t

• Understanding cross-sell matrix

• Understanding which products popular in .com market

What increases black markets

• Banning popular products (!)

Regulatory drivers: tax

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Purpose

• Ensure sector pays its fair share

• Generate support for allowing in the first place

• Create a system which does not overly-favour online

Examples

• France: high turnover-based taxes and commission fees

• Italy: moderate turnover for betting; GW for some products

• Spain: moderate GW taxes

• Denmark: moderate GW taxes

• UK: lower-end GW taxes


• Taxes on GW rather than turnover

• Moderate rates which allow profitable competition


• Turnover taxes: * they affect the price of the product…*…which gives a value advantage to black market

• High rates of tax:* reduce marketing and development spend* give black market operators a cost advantage

Regulatory drivers: infrastructure requirements

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Purpose

• Visibility

• Control

• Mirrors land-based requirements

Examples

• Servers and/or headquarters in the country

• Real-time transaction reporting

• Land-based presence


• Minimal additional costs and infrastructure

• Leveraging existing regulatory knowledge and processes


• Creating discrete, intensive and bespoke infrastructure:* dark-grey / black operators will by-pass anyway* smaller operators will struggle to justify (limits supply)* likelihood it impacts user experience

• All of which gives advantage to black market operators

Regulatory drivers: marketing, advertising, offers etc

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Purpose

• Ensure vulnerable not exploited

• Reflect wider social tastes and concerns

Examples

• Strict Ts & Cs on offers and bonuses

• Restricting TV and other top-line advertising

• Licensing affiliates


• Controlled above the line advertising

• Fair but open offer and bonus environment


• Restricting above-the-line advertising* levels playing field with black-market operators

• Materially restricting offers and bonuses* high value players will seek them out

Regulatory drivers: customer-focussed restrictions

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Purpose

• Protect the vulnerable

• Mirror land-based practices

• Limit harder gambling behaviors

Examples

• Coordinated account-based play

• Time and spend limits


• Onus on monitoring rather than restriction

• Understand and allow ‘high roller’ behavior* high rollers and problem gamblers are not the same


• Customers who do not want to be monitored (balance?)

• High-rollers / harder gamblers will go elsewhere

• Current model reliant on harder gamblers:* what is the economics of the new model? Can they work?

Regulatory drivers: criminalisation

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Purpose

• Deterrence

• Active defence

Examples

• Individuals / corporate officers providing illegal gambling

• Companies providing illegal gambling

• Customers accessing illegal gambling

• Businesses facilitated illegal gambling


• Ensuring laws are clear

• Ensuring that laws are actually enforced

• Reducing the time between investigation and prosecution

• Civil as well as criminal* speed* burden of proof* corporate as well as personal risk


• Unenforceable deterrents

• Distant threats

• Limited likelihood of successful prosecution

Regulatory drivers: payments

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Purpose

• Disrupt black market supply-chain

• Focus on weak-point

• Focus on large regulated businesses with much to lose* NB, banks fear of gambling is now a real business issue

Examples

• UIGEA

• UK

• Russia

• China


• Payments blocking will disrupt, not stop

• Understand flags and act on them:* myriad small specialists (which change often)* absence of credible PSPs / banks* high cost of payment processing


• Not understanding / monitoring tackling ‘specialist’ payments supply:* vanilla banks / PSPs* legitimate specialist PSPs* grey-market specialists* black-market specialists

• Making banks ‘scared’ of gambling* forces otherwise respectable business into ‘specialist supply’

Regulatory drivers: ISP blocking

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Purpose

• Disrupts supply chain

• Enlists large businesses with something to lose

• Makes brand-building more difficult

Examples

• Most domestic-regulated jurisdictions

• China


• Consistent approach with ISPs

• Understand and monitor work-arounds

• Allow licensed businesses to effectively advertise and market


• Irregular enforcement

• Failure to police work-arounds

• Regulatory regime which does not allow brand strength

Regulatory drivers: supply chain

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Purpose

• Increases regulatory visibility

• Reduces places to hide

• Recognizes the importance of suppliers

• Mirrors (some) land-based practice (especially US)

Examples

• Capturing more of the supply-chain in licensing

• Fully licensing suppliers


• Visibility over content, platform etc* many black-market operators need to outsource* supply chain typically less fragmented than operators

• Competitive advantage to licensed operators* best content and services from majors* ensures not available to black-market operators


• Giving suppliers a get-out to supply black-market operators* effectively means same product available at lower price* ‘just a supplier’ can control over 90% of revenue chain

Conclusions

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What causes black markets?

• Product restrictions

• Taxes which affect the price of the product

• Allowing black market operators full access to (or get arounds for) marketing, payments and suppliers

How can they be prevented

• Allow as many products as possible; seek other ways to achieve policy aims than forbidding (or accept black-market)

• Tax at the gross win level; 20% is typically the economic tipping-point

• Regulate supply-chain and enlist bigger businesses to prevent and police; be fully aware of all the (many) work-arounds

Thank you - Q & A

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black markets in remote gambling causes and prevention paul leyland 13 august 2015

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