Research undertaken by Global Betting and Gaming Consultants (GBGC) for its Interactive Gambling Report reveals that in 2011 51.3% of revenues were from domestically regulated markets. This figure will jump to 60.1% in 2012 as several key markets launch new e-gaming licensing regimes.

GBGC Europe E-Gaming Local Licence

“The founding pillars of the “golden age” of Internet gambling in Europe are crumbling and 2012 will be a defining year in that process. Low gaming taxes are being replaced by high taxes; single licences are being replaced by the need for multiple licences. As a result, the high customer payouts that made e-gaming so attractive are being reduced too,” explained Lorien Pilling, Director at Global Betting and Gaming Consultants.

Spain is due to launch its new licences in the middle of 2012, whilst Denmark has already begun issuing e-gaming licences with a 20% tax on gross gaming revenues. Germany’s states are also planning some restrictive licensing of e-gaming under the new Interstate Gambling Treaty and Greece has plans for a 30% gross profits tax for its domestic e-gaming licences, plus a withholding tax on players’ winnings.

Major operators like PokerStars, Bwin.Party Digital Entertainment, Unibet, and 888 Holdings have accepted the new regulatory landscape in Europe even though the higher taxes and increased costs make once profitable markets a lot less so. Domestic, local, licences do have benefits for operators because they make advertising and payments easier to undertake. But the success of the new licensing model is dependent upon governments being able to prevent non-domestically licensed operators from continuing to attract players.

A number of the newly regulated markets, for example, restrict Internet casino games. GBGC’s research predicts that only 39.8% of online casino revenues in Europe will be derived from domestic licences in 2012.

“Casino games and slots are popular with players. If governments continue to restrict the availability of these games, players will find means of using websites that will accommodate them,” Pilling stated.

Definition

Domestically Regulated = operating under a local licence issued or specifically recognised by the government of the country from which revenues are derived. This usually means a licence issued by that government but in the case of UK it currently also encompasses licences held in White List jurisdictions. The figure does not include revenues from state lottery games.

100 country reports updated in the Global Gambling Report this month.

The legal opinion published by the DOJ regarding the Wire Act in the US before Christmas is extensively covered in the US country report.

Recent details on possible gaming expansion are covered in various US state country reports: Massachusetts, Florida, New York, and Kentucky.

In the Taiwan country report we have included the details of the fine handed to the sports lottery as a result of the scandal uncovered in 2011.

Developments in casino advertising and lottery taxes have been added to the Indian report.

The latest casino and gambling revenues from Macau in 2011 have been added to that country report.

For the UK there have been updates to a number of ongoing issues: machine games duty, the Tote, sports rights, the Health Lottery and revenues from operators like Betfred, Gala Coral, and Bet365.

GBGC has also updated key European markets – including Denmark, Spain, France, Italy, Germany, and Greece – with the latest regulatory developments in both the land-based and Internet gambling sectors.

The Key Markets Database has also been greatly expanded with new countries and some 3,000 additional data points. The database now encompasses some 86% of global gambling revenues and is a useful resource for seeing the extent of gambling in markets around the world.

GBGC’s specialist gambling indices – the GBGC 50 and iGBGC – have been updated in January too and their performance can be viewed in the subscription files.

As Jonathan Cohn writes for The New Republic in Why I’ll Miss Barney Frank, there are two types of legislators:  those who make headlines and those who make laws.  Cong. Frank “managed to do both things and do them well.”  Frank has announced his retirement from Congress in January 2013.

From his perch as former Chair (and now ranking member) of the House Financial Services Committee, democrat Frank was the earliest and most influential US politician to advance internet gambling legislation in Washington.  Frank’s pitch for internet gambling was not about filling depleted coffers of government with tax revenue or a complaint that America’s prohibitionism was out of step with the rest of the world.  His position was never a populist appeal to the millions of US internet gamblers.

Instead, Frank brought to the debate three plain but powerful arguments.  First, unless an activity is harmful to others, it’s not the business of the federal government to regulate what adult Americans do.  For Frank, the Unlawful Internet Gambling Enforcement Act (UIGEA) is an example of illegitimate government paternalism; it’s also a waste of time and effort.  Second, in a quasi-First amendment argument, Frank advanced that UIGEA impermissibly intrudes on the freedom of the internet.  Finally, for Frank UIGEA inappropriately burdens financial institutions by imposing criminal penalties for failure to correctly divine the source of funds deposited by banking customers.  Frank’s arguments were a focused appeal to the political tenents of his Republican legislative colleagues.  It worked.

Various bills sponsored by Republicans have been introduced and are under consideration, primarily including Frank’s HR 1174 (sponsored by John Campbell, R-Ca) and Joe Barton’s (R-Tx) HR 2366.  The Frank/Campbell bill, which is not limited to internet poker, and Barton’s bill, which proposes to legalize internet poker though state licensed agencies, each have a brace of Republican cosponsors.  In a related development, on 23 December 2011 the Department of Justice acknowledged that the Wire Act (18 U.S.C. 1084) does not prohibit states from using the internet to sell lottery tickets (non-sports betting) within their own borders.  New Jersey and its influential Republican governor are now reportedly rushing to complete an intra-state internet gambling law sometime early this month.

In short, Frank’s departure from Congress 12 months hence will only mean the loss of a potent advocate for internet gambling.  The initiative is now so mature that the most important remaining question is whether US regulation will be federally coordinated (favored by the bricks-and-mortar American Gaming Association) or basically left to the states, as now seems a bit more likely.  Whatever the outcome, it should be counted as part of Frank’s legacy.

Florida is one state that has started talks about launching commercial casinos. There were several versions of the casino bill proposed in recent months, with most recent change to Fresen-Bogdanoff bill made in January 2012. Many operators have expressed interest in the state. Genting has already purchased land in Florida, LVS is in the process of acquiring land. Caesars and Wynn have also expressed interest, as have local investors. Of course, they will all have to overcome the opposition of the powerful Seminole tribe to make casinos a reality.

In late 2011 Massachusetts finally passed a casino bill, after a few years of negotiations. The law now allows three casinos and one racino.  All major casino companies have shown interest in running gaming in the state.

New York has opened its first, highly successful, racino in the New York City. Probably prompted by Genting’s racino success, the new Governor Cuomo and the legislature have reached a preliminary agreement to pursue expanded gaming in the form of traditional casinos. The measure could take two years to pass.

The first casino in Ohio, the Horseshoe Casino Cleveland, is on track for its 2012 opening. In mid-2011 the state also allowed VLTs at the racetrack, which could be also become operational during 2012.

Maryland is finally expected to award the licence for the downtown Baltimore racino during 2012. The first phase of the largest Maryland slot venue, the controversial Maryland Live! Casino development adjacent to a shopping mall in Anne Arundel County is planned to open in mid-2012.

In 2011 Kentucky added instant racing to the tracks and is now looking into adding casinos. The bill is expected soon.

A Texas businessman is interested in bringing casinos to Arkansas. He needs to collect 77,133 signatures to put the issue on the November 2012 ballot. After many delays, Illinois VLTs are expected to be operational in H2 2012.

Kansas got its second casino in late 2011 and should get one more casino during Q1 2012. The fourth licence is still not issued. Lawmakers are now preparing a set of measures to attract bidders for the fourth licence as well as to add slot machines to the now-closed racetracks, as originally envisaged by the 2007 expanded gambling law.

New Jersey has allowed smaller, so called “boutique casinos”, with Hard Rock filing an application for one of the two possible licences. New Jersey voters have also allowed sports betting if the federal ban is overturned (it still has to be approved by the Governor), which gives the state legal standing to challenge Professional and Amateur Sports Protection Act of 1992.

But it is not just the land based industry that is expanding, but also the Internet gambling industry.

After 23 December 2011, when the federal Department of Justice (DOJ) published a September memorandum opinion which basically states that the Wire Act applies only to sports betting, it seems state-by-state legislation is closer than ever. GBGC still maintain that the federal government is highly unlikely to allow Internet gambling in the election year.

Nevada seems to be closer to implementation than other states as it has already passed the law that legalises Internet poker for the licensed companies (once it becomes legal – which is closer than ever due to a different reading of the Wire Act and UIGEA’s inapplicability to in-state Internet gambling). The state has also already drafted sub-legal acts governing Internet poker and is receiving applications – so far around 10 companies have applied for either operating or software licences – including heavyweights such as Caesars and smaller casinos like South Point.

DC has legalised Internet poker operated by the DC Lottery in early 2011, but they seem to have got ahead of themselves as there has been very little progress in the field since the law was passed.

Other states are also considering legalising intrastate Internet gaming: New Jersey’s Internet bill passed both chambers of the legislature in 2011, only to be vetoed by the Governor. However, it will be reintroduced in the 2012 legislative session.

Following the DOJ opinion, Illinois lottery has stated it could start offering lottery tickets over the Internet already in spring 2012.

In late 2011 Iowa allowed remote wagering on horse races, which is expected to kick off in April 2012. More states are expected to unveil Internet gambling bills during 2012 legislative session.

Of course, not all of the proposals will come to fruition. But with the squeeze continuing to press upon state budgets and finances it will be an eventful 18 months for the US gaming industry as Governors look to gaming expansion as new source of voluntary taxation from their citizens.

Whose victory would better suit the gambling industry? Those who like to play it safe would undoubtedly argue a Sarkozy victory is a more welcome outcome. After all, it was Sarkozy and his party the Union of Popular Movement (UMP) that oversaw the opening of the online gambling market. It was the not the most liberal opening as the two state-backed operators, PMU and FDJ, kept their land-based monopoly on sports betting and lotteries, and the chosen tax regime based on turnover makes the French market the most unprofitable online gambling market in Europe.  The UMP-led government has hinted that it is willing to look again at the tax regime after the elections.

While Francoise Hollande has not expressed any views on gambling legislation, his party has not exactly distinguished itself for a liberalising fervour.  In 2009, Jean-Marc Ayrault, president of the Socialist grouping in the National Assembly delivered a strong speech against the opening of internet gambling market. During the process to produce legislation, the Socialists cited the “Santa Casa” case repeatedly (the 2009 Santa Casa ruling by the European Court of Justice effectively upheld the legality of the monopoly on sports betting of the Portuguese lottery operator Santa Casa against a challenge by Bwin).

The Socialists have now officially accepted that there is a necessity to legislate online gambling, but at the same time argue that the legislation enacted does not guarantee sufficient customer protection. In a December 2011 interview with the magazine Kuzeo, the influential Socialist Senator Gorce said that after 18 months the opening of the market the law has proved to be a failure. If the Socialists win the presidential and the general elections in June, they should conduct a thorough review of the gambling legislation.

The Socialists also feel that the legislation favoured online operators to the detriment of consumers and public health issues. Many Socialists have previously complained that the opening of the market was to the benefit of Sarkozy’s friends, citing the example of Alexandre Balkany, hired as General Manager of PokerStars and son of Patrick Balkany, National Assembly UMP member and close friend of the president. The younger Balkany is also head of Kawa Production, a media company that produces “Duel Poker” and “Mission Poker” on channel NRJ 12, “Direct Poker” on Direct 8 and “Stars of Poker” on Canal +. Other presidential friends that were awarded online licenses include Martin Bouygues (eurosportbet.fr) and Stéphane Courbit (BetClic and Everest). Many Socialists are angered at the mix between well-connected people and policy decisions. It is this toxic mix that has the potential to undermine the legislation in the future, and Sarkozy deserves the blame for this legacy.

Not all Socialists are against the gambling legislation as not all UMP Assembly members were convinced in the merits of liberalising online gambling. 29 UMP assembly members either abstained or did not vote when the gambling legislation was presented for a vote.

But Sarkozy has the capability to control his party. Does Hollande? Even if Hollande does not wish to re-examine the legislation, it is not clear that he can keep his MPs or senators at bay. Sarkozy is a politician that has used his party machine to get into office, while it seems that the Socialist party is using Hollande to propel itself into power. Hollande was not even first choice, Dominque Strass Khan (DSK), the former president of the IMF  was the left’s favourite candidate until he committed political suicide in a hotel suite in New York by having sex with a chamber maid (his version)and being charged with rape(her version). DSK’s stature in the party was immense and his political instincts are to liberalise and deregulate markets. It is hard to think of a DSK government reverting gambling legislation back to a statist model, while that outcome is a possibility under Hollande.

Until the gambling legislation is firmly anchored and the liberalisation of the market irrevocable, for now it is perhaps prudent for the gaming industry to stick with the devil you know.

In 2010-11 sin taxes produced 10% of all revenue.

It is little wonder that every New Year the most popular resolutions revolve around quitting drinking and smoking:

53p on a pint of beer,
£2.18p on a bottle of wine,
£8.54 on a bottle of whisky,

For cigarettes 75% of what you pay goes in tax.

Vices have been taxed to death and are consequently in decline.  The prevalence of smoking is down to about 22% of the population in 2010. Even drinking is in decline.

The betting duty returns are also in decline down from GB£ 536 million in 1999 to an estimated GB£339 million in 2011.

Unlike smokers and drinkers, the gambler has never had it so good. The payout to punters has never been higher. A compliment to the efficiency of the industry.

ICE Logo

There will be no excuse not to meet one of GBGC’s consultants at some point during ICE week in London (23 – 26 January) because they will be everywhere during the 4 days.

MONDAY 23 JANUARY
Legal Gaming In Europe conference, Millennium Mayfair
Morgan Stanley Online Gambling Conference, 25 Cabot Square

PM:  Legal Gaming In Europe networking reception, Millennium Mayfair

TUESDAY 24 JANUARY
Legal Gaming In Europe conference, Millennium Mayfair
ICE Totally Gaming exhibition, Earls Court
Society for the Study of Gambling meeting, Earls Court

PM:

Gaming Intelligence Hot 50 Reception

GTECH G2 Party

WEDNESDAY 25 JANUARY
ICE Totally Gaming exhibition, Earls Court

GBGC have a meeting room at ICE on Wednesday if you wish to discuss your project away from the bustle of the exhibition floor. Our Sales Manager will also be attending the exhibition today if you wish to discuss our gambling reports and publications.

THURSDAY 26 JANUARY
AM: ICE Totally Gaming exhibition, Earls Court

If you would like to arrange a meeting to discuss our services, reports, or how we can assist with your gambling venture, please get in touch.

Mr Warwick Bartlett
Warwick@gbgc.com

Mr Lorien Pilling
Lorien@gbgc.com

01624 827 138

Indeed, the performance of the iGBGC Index would have been substantially worse were it not for the US Department of Justice’s (DOJ) legal opinion on the Wire Act and its applicability to non-sports wagering over the Internet in the last week of December 2011.

The reaction to the DOJ’s legal opinion gave a boost to certain e-gaming companies’ shares. Without this boost late in December the decline over the year would have been 15.7% instead.

The effect of the DOJ’s Wire Act opinion on the iGBGC Index was substantial. The iGBGC index grew by 16.8 points in a single day, its largest daily increase in 18 months.

iGBGC Index Jan 2012

Six of the iGBGC companies have seen their share price fall during 2011. Sportingbet showed the largest fall of 47.3%. During 2011 Sportingbet sold off its business in one of its key markets – Turkey – and was subject to takeover talks with Ladbrokes, which came to nothing.

Betting exchange operator Betfair saw its shares fall by 21.9% and a number of issues have afflicted the firm during the last 12 months:
•    Uncertainty as to how it will operate in Europe, with several newly regulated markets not permitting betting exchanges in the first phases of regulation;
•    The loss of a number of executives and managers;
•    A few high-profile technical issues resulting in bets being voided or Tote bets not reaching the pool.
Of the four companies whose share prices rose over the year, Swedish firm Betsson grew the most, 30.3% YoY.

Historically, the iGBGC has outperformed the GBGC 50 Index (largely composed of land-based gambling companies).

Both indices were based at 100 in January 2005. By January 2010 the iGBGC Index had reached 307.4, whilst the GBGC 50 was below its starting level at 85.7.

But in recent years the GBGC 50 has been outperforming its online counterpart, growing by 41.1% in 2010, and declining by 2.2% in 2011. Over the same two years the iGBGC fell by 12.4% and 7.7%.

GBGC 50 Index vs iGBGC 2012

Lorien Pilling, GBGC’s Research Director, explained, “The move to domestic Internet gambling regulation in Europe is certainly putting the e-gaming business model under pressure. The original model was founded on the pillars of low tax, high payout to customers, and a single operating licence.”

“In 2012 European operators are facing higher tax, resulting in lower customer payouts, and the increased costs of multiple licences. Several firms in the iGBGC Index will be hoping for substantial developments in the US this year to help them out.”

Sun International entered the GBGC 50 Index at number 36, just above Churchill Downs.

Sun International earned 78% of its revenues from South Africa in 2011, with the group’s total revenue from all operations rising by 12% to R8,892 million. Operating profit fell by 2% to R1,705 million.

Sun International’s casino revenues grew by 12% to R6,981 million, accounting for 78.5% of all revenues.

The company runs a number of casinos and resorts across southern Africa, including the Sun City resort in South Africa’s North West province.

“Sun International’s inclusion in the GBGC 50 as the first African-based gambling company reflects the wider development of the African gambling market. In our Global Gambling Report – Betting on Regulation we calculate that the total African gambling market was worth US$ 5.14 billion in gross gaming yield 2011, with casino gaming accounting for 62% of that figure,” explained GBGC’s Research Director Lorien Pilling.

Specialist international gambling consultancy Global Betting and Gaming Consultants (GBGC) compiles two gambling specific stock market indices:

•    The GBGC 50: consists of the 50 largest gambling companies by their gambling market capitalisation.
•    The iGBGC: consists of the 10 largest Internet/interactive gambling companies by their gambling market capitalisation.

GBGC tracks the rise and fall of the indices as the fortunes of the constituent gambling companies wax and wane.

The total gambling market cap (i.e. market cap adjusted for share of revenues derived from gambling) of the 50 largest gaming companies in January 2012 decreased by 5% compared to April 2011, to US$185.3 billion.

Between January 2011 and January 2012 the GBGC 50 Index fell from 121.0 to 118.4, a decline of 2.1% over the course of 12 months. This, however, was a better performance than the iGBGC Index of I-gaming companies which fell by 7.7% over the year from 269.1 to 248.5.

GBGC 50 Index vs iGBGC 2012

The top 10 companies in the GBGC 50 continue to be dominated by operators focused on Asian gambling jurisdictions. Seven of the 10 largest gambling companies are Asian facing, including: Sands China, Wynn Macau, and SJM Holdings. Las Vegas Sands and Wynn Resorts also have significant revenues from Asian operations.

Best & Worst Performers in the GBGC 50
The best performer in the GBGC 50 Index was Galaxy Entertainment, which saw its share price rise 53% over the year. The company opened its new Galaxy Macau casino in May 2011. Close behind Galaxy Entertainment was Kingston Financial (formerly Golden Resorts), which owns two casino hotels and offers entertainment services in Macau (up 51%), Irish-based bookmaker Paddy Power (up 46%) and Macau casino operator Melco Crown (up 45%).

GBGC 50 Index Jan 2012

The worst performing shares were gaming machine manufacturer WMS (down 55%), Sportingbet (down 47.3%), which actually fell out of the index starting from January 2012 (it is now ranked 56th), and Greek lottery and sports betting giant OPAP (down 47.2%).

•    The GBGC 50: consists of the 50 largest gambling companies by their gambling market capitalisation.
•    The iGBGC: consists of the 10 largest Internet/interactive gambling companies by their gambling market capitalisation.

GBGC 50 Index Jan 2012

GBGC tracks the rise and fall of the indices as the fortunes of the constituent gambling companies wax and wane.

GBGC 50 Index vs iGBGC 2012

The total gambling market cap (i.e. market cap adjusted for share of revenues derived from gambling) of the 50 largest gaming companies in January 2012 decreased by 5% compared to April 2011, reaching US$185.3 billion.

iGBGC Index Jan 2012

Between January 2011 and January 2012 the GBGC 50 Index fell from 121.0 to 118.4, a decline of 2.1% over the course of 12 months.  This, however, was a better performance than the iGBGC Index of I-gaming companies which fell by 7.7% over the year from 269.1 to 248.5.

GBGC Indices January Values