The Future of Europe

As we approach the end of 2011, the idea that online poker is in a constant state of flux has never been truer. However you are connected to the industry, be it as an operator, a software provider, a network, a player or any of the myriad interested parties, there is one word which is probably keeping you up at night: regulation. In the US, it’s as ever a question of ‘will they, won’t they’ and depending on who you talk to, Black Friday and the ongoing Full Tilt debacle were either the best or worst things to happen in the quest for a legalised American market.

Even if the truth is somewhere in the middle, it’s clear that going into a Presidential election year, Congress isn’t about to decide anything soon. If the US is the sleeping giant, then Europe is certainly the restless giant. Following the opening of the Italian and French poker markets in 2009 and 2010 respectively, the inevitable has happened, with now almost every European country jostling for some sort of regulatory framework.

To give you some idea of the ever-changing landscape: in the last two months, Denmark’s online gambling law has been given the EU greenlight and the German state Schleswig-Holstein has passed a law which allows any commercial operator to apply for licences for web-based betting from March 2012. Come the end of the year, the Spanish market will be live after a hastily-drafted regulatory process. On top of all this, countries like Holland and Greece are well on their way to establishing their own frameworks. 

The headache, particularly for operators, is that in the absence of a single overarching regulator, they must apply for individual licences and are subject to the idiosyncrasies of that country’s government. No wonder Stefano Mallia, rapporteur for the European Economic and Social Committee’s Green Paper on the future of online gambling referred to the industry as ‘a jungle’. 

But while focus has justifiably been on the convolutedness of the European market, some markets have flourished following their regulation. As reported in the March/April edition of InsidePoker Business, Italy seems to have become the model of choice for other European countries thanks to its balance of player protection and a tax regime which still allows operators to breathe.

And that was even before cash and casino games were introduced on 18 July. A month and a half into the launch, turnover from cash games alone had hit 1.2 billion euros, contributing to Gross Gaming Revenues (GGR) of over €32 million. Pier Francesco Geraci, CEO of 888.it explains the explosion. ‘Before 18 July, the market was fundamentally based on betting, poker tournaments and a little bit of bingo,’ he says. ‘I guess the highest willingness to pay was poker cash and casino. They were expecting that for years.’ 

The introduction of cash games in Italy has led to a forecast of 10bn euros in turnover for 2011, a 110% growth compared to the 28% increase in 2010. With such a lucrative pot on offer, operators have piled into Italy and it says something about the fiercely competition market that 888.it is holding back its poker products, introducing only casino. ‘The poker market is currently very crowded and therefore entering the market is not as easy as entering the casino one,’ says Geraci. ‘Some years ago, 888 decided not to enter the poker market and entering it now might be a little expensive.’

  

One smaller company which was able to capitalise on first mover advantage was Virgin Games. The UK company launched its poker offering in Italy towards the end of 2009 in a revenue-sharing partnership with Italy’s Cogetech SpA which runs on the Playtech network. The idea was that Cogetech would take care of player registration and banking while Virgin did the marketing. ‘We wanted to come into the market but we didn’t necessarily want to invest in a licence,’ says Virgin Games commercial director, Josh Morris. Virgin seems to have chosen its partner well. The Italian brand shares the iPoker network with sites like Eurobet and PokerSnai and the entire network is comfortably in second spot behind only PokerStars in the PokerScout rankings.

‘We’ve seen a really nice hike from the introduction [of cash games],’ says Morris. ‘[Online poker] had its initial spurt then it flattened off a bit then it had another spurt with the addition of cash games.’ 

Peter Cercone, Playtech’s Vice President of Marketing puts Italy’s success down to a number of factors. ‘We think that the pace at which new products have been released to the market has only been beneficial for the regulator and also for the industry itself there as well,’ he says.

‘It’s given players a much broader range of products plus it has the benefit of being regulated. Certainly there is more than anecdotal evidence to show that there’s a shift from people playing on illegal sites to sites that they can completely associate with, sites with very strong local brands. Whereas they might play with some offshore website previously, they now see operators such as SNAI, the larger brands in Italy, are in many ways offering something much better. From our point of view the Italian model has been very successful. It is a very highly regulated market but it is working.’

Italy may be on the up but one market that has been beset by problems is France. PokerScout reveals that while the top two sites of PokerStars.fr and Winamax are averaging over 3,000 players every day, but operators are struggling to turn a profit. And yet online poker has been described as ‘dynamic’ by regulator ARJEL. So what’s the problem? ‘Taxes. That’s the bottom line,’ says Martin Lerby, Ongame’s director of marketing and operations. 

Garth Kimber, head of e-gaming development on the Isle of Man is inclined to agree. ‘France’s legislation was all set out for horseracing and sports betting,’ he says. ‘It’s made it very difficult for any operator to make money.’ Morris says that’s why Virgin Games decided not to launch in France. ‘It just didn’t make sense for us commercially.’ In July 200% Poker closed, citing ‘site maintenance’, despite being operated by the French Society of Online Games which runs brick-and-mortar casinos up and down the country. Even well-established companies like Everest Poker have suffered badly.

When Everest.fr first started operating in 2010, the Mangas-owned site was the 14th largest in the world and the third largest in France ahead of Ongame and PartyPoker. At the time Sandrine Mangia-Park, then director of Everest Gaming and head of Everest Poker France, was optimistic about the future. ‘The market will grow, more player will be introduced to poker and there will be more consolidation,’ she said. Everest has since been overtaken by PartyPoker.fr in the French market and reported grim revenue figures for the second quarter of 2011: a $11m loss compared to a $1.7m loss for the same period in 2010. 

Industry figures are optimistic about changes in the tax laws. ‘According to the information I’ve got, ARJEL are positive to the change in taxation,’ says Lerby. ‘It’s going to be discussed in Parliament in the upcoming months. I think they’re right in the assumption that they won’t lose income even though they will lower the tax pressure because there will be the same turnover and they will make the same amount of tax. The volumes will go up and the margins will be better for the operators. We see a very positive development of that and we see more interest picking up.’

Without a drastic change, even PokerStars says it could be forced to pull out of France. ‘The economic model is unsustainable, and the long-term vision is rather negative if things do not change,’ Alexandre Balkany, managing director of PokerStars France told InsidePoker Business earlier this year.

  

Despite the contrasting results of the Italian and French markets, demand for regulation Europe-wide is at an all-time high with licensing deadlines for operators coming thick and fast. Lerby calls the Spanish market ‘a race against the clock’. ‘Based on the forecast from gaming consultants H2GC, it’s no surprise why operators want to get a headstart in Spain. Preliminary figures suggest that the Spanish interactive gaming market which includes sports betting, casino and poker will grow 11.4% year-on-year from 2012-2015.

You need to be ready this autumn for 16 November when the licensing kicks in,’ he says. ‘You need to at least get your general license for whatever category you choose: sports betting, games (poker and casino), competitions and lotteries. If you don’t get it before that date, you will need to wait for an 18 month moratorium. It will be very tough and expensive to take market share once that period has passed.’

One operator that is definitely in the starting stalls is bwin.party. ‘We’ve been watching developments in Spain for some time and are well positioned to respond to changes in the regulatory landscape’, said a spokesman. Dragonfish, the B2B arm of 888 is also keen to open up business quickly. ‘We want to have a good footprint in the market not unlike what we’ve done in Italy,’ says Yaniv Schwartz, the firm’s Senior Vice President. ‘We want to get good market share in newly regulated markets.’ 

Another undoubtedly popular jurisdiction will be Denmark which has just had its online gambling scheme approved by the European Commission. From 1 January 2012, operators will be able to apply for one of the most liberal licences in Europe. Danish players will have access to international player pools and tax rates for online casinos will be lower than that of land-based casinos. Denmark’s new regulation is a great example of what modern-day gambling legislation should look like across Europe,’ said Martin Cruddace, Betfair’s chief legal and regulatory officer.

To add to what could be a major land-grabbing exercise for operators next year, the recent move by German state Schleswig Holstein has renewed enthusiasm in the German market. ‘There’s 13 different landers (or states) there and they all need to agree something on a national level,’ says Cercone. ‘It’s been helped by Schleswig Holstein being so proactive. The other landers are listening to that. I don’t know exactly how it will happen. I don’t think they’ll sit outside. I think they’ll follow the rest of Europe but I guess it will take some more time. Right now it’s a little bit too unclear how and when it’s going to pan out. Regardless of that, it’s one of the most important markets in Europe.’

  

Regulation is certainly cutting a swathe through Europe but does it necessarily guarantee the growth of poker? In its current ring-fenced form many operators aren’t convinced. Jose Micallef, business development manager for network provider B3W says that he doesn’t see a future in Europe, not for the short to mid-term anyway. ‘Governments are on their knees and need money now. Each and every country within the EU is looking at online gaming as a way to collect more tax. By doing this, they’re creating these crazy regulations and unfortunately they’re closing the market in a way. Once it settles down, I think the European Commission will set regulations which will be equal for all countries but I don’t see this happening in the next five years.’

Aside from Italy, Morris says Virgin Games is approaching the rest of Europe tentatively. ‘Regulation is coming but I think as an operator we have to look at every market as it develops and understand commercially whether it’s a viable option to do it,’ he says. ‘A lot of people are investing in the future. That’s not for Virgin, we want a decent business model from day one. We do have a long-term view of it but we can’t go into a market in the hope that we’re going to make money in five years when the taxation rates change.’

However some think that regulation is the key to shutting down the unregulated operators. ‘It’s the best way to protect consumers and prevent a black market,’ according to a bwin.party.

‘We’re encouraged by a number of developments where governments are recognising the need to create a commercially sustainable regulated market without which consumers will simply seek out more attractive offers on the black market,’ the firm said in a statement. Those offers will still be attractive for quite some time though, says André Wilsenach, CEO of the Alderney Gambling Control Commission. ‘The benefit of dot com sites for quite some time is that they can offer a better, cheaper proposition. Players know that. If the cost of regulation is lower, tax is lower and you can do it somewhere from the Caribbean. You don’t have to go find the players, they will find you.’

Micallef concurs. ‘At the moment people are playing on dot com sites because there is a wider selection of players,’ he says. ‘Poker needs liquidity. When it comes to online poker, the idea of cross-border trading between European member states does not exist.’ So while regulation in Europe will continue to be ‘on trend’ going into 2012, it seems the true potential of online poker will continue to evade governments, operators, networks, software providers, players and all parties involved unless the invisible borders can come down.

‘Why should an Italian or an Englishman or a Frenchman have the ability to log onto a network, a find a style of poker that he wants, at the price he wants, with enough ability to form a table within a couple of minutes and a guy in Luxembourg can’t because there’s only a few players there,’ contends Kimber. ‘Ultimately you’ve got to get into a position in the EU where one European has the same rights as another.’