Market Watch: Dreams of Sweden's regulated market have turned into a nightmare for operators and investors

It’s December 2018 and the Swedish market is weeks away from regulating. The industry’s largest and most ambitious operators are dominating the headlines, discussing their ambitious plans for one of Europe’s most exciting markets.

Little did they know that eight months on things wouldn’t turn out quite as expected. Nose-diving share prices, a raft of fines and a swift revocation of gambling licences.

Earnings reports have made for sober reading, with regulated revenues down 15% YoY in comparison with ‘grey’ markets last year which will be closer to 20% once the full reports are in.

To date, the regulator has fined 15 companies, including one that was fined twice and, even more noticeably, seen another stripped of its licence. In alternative territories, such turmoil would typically have speculators relying on the stability of larger players’ share prices but they have not fared any better.

In retrospect, it’s no doubt that the Swedish Gambling Authority’s (SGA) lack of clarity on regulations was an unnecessary spanner in the works, as breaking the rules is far easier when nobody knows what the rules should have been in the first place.

I am a supporter of regulation and compliance, but only when done properly. It’s essential to create a marketplace of trust in a newly regulated territory, and even more so when it comes to levelling the playing field. Ironically, the SGA has arguably done the opposite.

Until the regulator provides more clarity, investors don’t expect things to change. We’ll likely see the law of unintended consequences play out in real-time as money flows back into the black markets – after all, punters still want to place a bet.

If the market shapes up to be a place where only the most financially solid firms who can weather the storm of excessive fines are left, we’re going to witness the textbook economic effects of a market with little to no competition and high barriers to entry. Uncompetitive pricing and lack of incentive to innovate leaves little room for optimism.

The market needs to stabilise, which will hopefully happen in the next nine to 12 months. There were bound to be teething problems but given the way this year has unfolded ongoing issues will continue well into 2020 and beyond.

It is the view of many investors that the SGA would do well to take a leaf from the Danish regulator’s playbook which, notwithstanding its big stick (which is not used unsparingly), takes a pragmatic and transparent stance with operators, providing clear guidelines and sensible tax levels.

Until that happens the smart money will stay on the sidelines and any decent investor worth their fund will be hitting the sell button next to any Swedish operator’s public listing.

Julian Buhagiar is an investor, CEO and board director to multiple ventures in gaming, fintech and media markets. He has led investments, M&As and exits to date in excess of $370m.