Did affiliates drop the ball on free-to-play games?

The latest free-to-play age verification requirement from the UKGC, which was implemented earlier this year, has left many affiliates floundering. However, I would claim that the writing was on the wall.

Free-to-play was a very useful tool for most affiliates in attracting players at a relatively low cost (about £3) and referring them to online gambling operators. From a regulatory standpoint, very little was required, making this a highly profitable mechanism with hefty margins.

Two years ago, when I attended an industry conference in Amsterdam, I vividly recall trying to warn various affiliates of the upcoming risks of continuing their aggressive marketing.  At the time all parties involved with player acquisition channels were optimising revenues with little regard to regulatory requirements, bouncing responsibilities between themselves and operators, assuming that by doing so they would avoid regulatory actions and fines. During the event, I warned against such an assumption, pointing out the fact that the UKGC had called for better compliance, marketing restrictions and has initiated investigations, and shall eventually read between the lines and would hit both regulators and affiliates.

However, as always, when a substantial amount of money is at stake, affiliates and operators as one continued pushing the limits. Soon after, 888 Holdings received a record £7.8m penalty  in August 2018 from the UK Gambling Commission. In November 2018 Casumo was hit with a £5.85m fine as a result of serious deficiencies identified by a separate UKGC investigation, while Videoslots agreed a £1m settlement for its own failings. Following this many more fines were imposed, hitting almost every online gambling licence holder in the UK.

As result of the regulatory actions, some operators like LeoVegas spun out its entire compliance division while others like 888 Holdings and Sky Betting & Gaming decided instead to completely let go of their entire affiliate programme. But still, no real change has occurred, and the gambling industry has continued to do its best to avoid implementing required regulatory checks and limitations.

Further investigations by the UKGC were initiated, more operators and affiliates were interrogated with regard to underage players among others. Additional fines were issued and many more millions of pounds were paid. And that was just the beginning.

A bad name

In a vicious cycle, aggressive marketing targeting younger audiences created a toxic environment for gambling in the UK, causing very bad publicity and leading to calls for a complete marketing ban and severe gambling restrictions. Tighter AML and anti-money laundering requirements were issued along with regulatory inquiries on social gaming, loot boxes and free-to-play games. These have resulted in additional regulations and fines further causing much higher CPA and falling margins.

In a reminder published in May 2019, the UKGC has commented that it “has been made aware that licensees may be benefiting from affiliate advertising models, which offer free-to-play versions of real-money games on their websites without the necessary accompanying age verification of users”.

But that wasn’t enough. Several recent reports by the charity GambleAware have continued to illustrate younger audience participation in social and free-to-play games which lead to underage participation in illegal gambling. Therefore, the UKGC has raised the bar again and in a punitive move, which aims to protect children and the vulnerable from gambling, has materially expanded the rules applying yet additional very strict regulations. It has implemented age verification requirements and specifically demanding that operators verify players’ ages prior to making any deposits of funds into an account and before they gamble with the licensee with either their own money or a free bet or bonus.

Furthermore, the Advertising Standards Authority (ASA) decided to censure gambling and gaming companies alike over marketing campaigns targeting underage and, for example, has censured tombola over an app advertisement that had “some appeal” to under-18s.

The painful implementation of those new regulations shall no doubt further drive the UK gambling industry down to lower revenues and margins until a new loophole shall be found and exploited.

Dina Niron is the founder and CEO of Sparks Advisory, a consulting firm where she consults companies on gaming and gambling compliance and legal requirements in various jurisdictions as well as advises on business strategies. Niron has previously served as CEO of Playtech’s Juego Online subsidiary, managing Playtech’s B2C operations in Spain. During that time, Niron led some of Playtech’s most substantial M&A deals such as PokerStrategy and the joint venture with Gauselmann.