Gearing up for a new era: navigating the challenges of the regulating German market

Modern Germany is synonymous with several things, including workmanlike efficiency and churning out some of the world’s top-performing motorcars. The latter requires two crucial ingredients: performance and an engine designed to cope with even the most challenging of roads. Yet, while the German car industry arguably leads the world in motor manufacturing prowess, Europe’s largest economy has been woefully slow to implement online gambling legislation. Stuck in neutral for years, the country became one of the largest grey markets. However, after years in the pits and well-documented disagreements between Germany’s 16 states, nationwide online gambling betting received a jumpstart with the fourth Interstate Treaty (IST), the largest and most comprehensive reform of the German market ever. That reform, while welcome, has since seen the country impose a variety of so-called transitional standards affecting online operators. These include rules like €1,000-a-month deposit limits, a €1 cap on slot spins and limited in-play betting markets. Table games also must be switched off for now, although it will be up to individual states if they wish to eventually allow online casino games like blackjack and roulette. Two schools of thought have emerged among operators looking to Germany: on the one side you find those prepared to conform and not looking to jeopardise any potential market share; on the other are those operators looking to retain revenue and count on effectively not being found out by German regulators. This schism before the market has even got going has already had an impact on many operators’ bottom line, including Entain, LeoVegas and Betsson among others. In the case of Entain, the impact was a €70m (£60.4m) hit to its EBITDA, as confirmed by the firm in January. Entain CFO Rob Wood later suggested it might take as much as three years for Entain to reach pre-tolerance policy revenue levels, an assertion that was backed up by his colleague Martin Lycka.

“Despite the hit, we are nonetheless confident that compliance with the Toleration Policy will put us in a prime position to apply for licences under the new German regulation as soon as they are available,” Entain’s head of regulatory affairs tells EGR.

Loss mitigation

William Hill has also revealed losses from the application of German transitional standards, with Hills’ German revenue down 30%, leading to a reduction in EBITDA contribution of £10m. Confidence that the eventual juice would be worth the squeeze seemed to be the prevailing sentiment from other heavy hitters including LeoVegas CEO Gustaf Hagman, who confirmed the Malta-based mobile casino operator would mitigate its losses in Germany with growth from other markets. “The regulations will continue to affect us, as they will affect other operators, but then in June/July when the market regulates it will be a level playing field for us and those other firms that choose to stay in the market,” Hagman explains. For its part, Betsson Group reported a 70% decrease in revenue from implementation of the transitional standards, a decline which caused a 9% drop in the operator’s share price. However, Betsson Group’s MD DACH (Germany, Austria and Switzerland) Stefan Esch Schulte highlighted a longer-term consequence from the imposition of these strict rules, with the market still to go live in July. “Besides affecting us both operationally and financially, I think we are diverging from what online gambling is all about. I feel these measures are simply forcing a scenario where fun is shadowed by a raft of limitations,” Schulte says. “Let’s just look at the removal of live casino. I am a big fan of blackjack and enjoy the engagement that a live casino offers. I know that there are many like me in Germany. However, since this is not allowed anymore, customers in Germany are not able to play any table games, unless they extend their search to non-regulated operators. “The same applies for sports betting – there are a lot of limitations on what markets we can offer, and this is negatively affecting the gameplay of our customers and, sadly to say, making their experiences less than ideal,” he added. In its full-year 2020 results, Flutter pointed to an even more potentially damaging change on the horizon, that of a 5.3% turnover tax on online poker and slots, a change which could come into force as early as 1 July. “While the tax is yet to be ratified, if it does come into force we believe it would effectively make the German online gaming market commercially unviable for regulated operators, with the taxes being equivalent to significantly greater than 100% of gross revenue,” the FTSE 100 operator explained. “The financial impact of such a change would depend on how it is implemented and what, if anything, we could do to to mitigate the charge, but our initial estimate is that the contribution impact could be between £15m and £25m in 2021 if it comes into effect on 1 July,” Flutter added.

Weighing it up

The question for anyone looking at this objectively is: why bother? Catastrophic impacts to revenue from adopting standards which may not be enforced, and with potentially more coming down the pipe. But at the same time, the potential of the German market is undeniable, with its population of 83 million – Europe’s second largest – it is a huge untapped resource, with a report last August by telecoms advisory group Goldmedia claiming the online casino market alone could be worth as much as €5bn by 2024. This is the debate going on at the very heart of the German market at present, and while many of the big operators are playing ball and conforming, there are just as many choosing not to. Much of this depends on one crucial thing: when do you, as an operator, want to enter the German market? Operators not playing ball are unlikely to stick their heads over the parapet for fear of being identified by the German authorities and potentially placed at the back of the queue, while those that do have to ensure that they remain whiter than white. A similar scenario exists in the Dutch market, which is due to commence licensing of operators next month ahead of the scheduled launch in October. In this case, however, the regulator, the KSA, has been around for a long time and is well versed in identifying operators breaching Dutch law. It has an established cooling-off policy set up to single out those rule-breaking businesses. Discussing the dilemma from the perspective of a firm which is playing ball, Esch Schulte explains: “I think the whole industry is concerned about this. Enforcement needs to be in place for those flouting the transition measures during this pre-regulation phase. We can only achieve an even playing field if the rules apply for every operator equally. “If we are going to have operators that operate beyond the pre-regulation rules, then there is going to be a shift in players who might now know all the details and prefer a casino with no limits whatsoever as opposed to one where they need to go through hoops in order to play. If these operators continue to exist even after regulation, then the channelisation will be impacted,” he adds. In the middle of this fork in the road are the German authorities, still grappling with the little nuances of online gambling as the deadline of July 2021 edges closer. Historically, German authorities have been pretty ‘trigger happy’ when it comes to targeting operators, but have often lacked the muscle and regulatory knowledge to really enforce practical claims against these firms. What could change this track record is the implementation of consistent igaming and sports betting standards across Germany, which is a principal objective of the IST. “Consistent action against all operators who do not comply with the rules is essential for a successful regulation in Germany. The authorities know that,” Bernstein Group senior associate Kevin Rieger tells EGR. “In my observation, quite a few operators are playing with fire right now.

Besides affecting us both operationally and financially, I think we are diverging from what online gambling is all about. I feel these measures are simply forcing a scenario where fun is shadowed by a raft of limitations – Stefan Esch Schulte, Betsson Group

“The authorities have clearly stated that anyone who does not comply with the strict regulations of the transitional regime has no chance of getting a licence at all. Not for virtual slot machines, and he puts his sports betting licence at risk, if he already has one,” Rieger adds. While the German authorities have yet to set up a centralised gambling regulator to govern the new market, their prior record speaks for itself. Indeed, the transitional standards themselves are the biggest indicator of how authorities might look to punish non-compliant operators, through the medium of legislation and regulation. There is nothing to stop German regulators from turning these transitional standards into permanent standards, a move which would spell certain disaster for the licensed online casino market by removing several of its key main verticals, to say nothing of the potential impact on the growth of the sports betting market.

Black-market concerns

As with all regulations, there is a balance to be struck between legislating effectively and keeping the licensed market as number one in the country. Recent experiences in Sweden have shown the perils of overregulating the licensed market, with channelisation rates falling at an alarming rate following the implementation of deposit and bonusing limits on players last July. Discussing the Swedish precedent, Lycka highlights it as a “major concern” for Entain ahead of the new market launch in July. “Studies conducted in Sweden have shown that the level of channelisation into the Swedish regulated market is below 80% and falling. The channelisation rate in Germany could arguably be even lower in the long run,” he explains. “This would inevitably lead to public health issues as customers would be increasingly exposed to black-market operators that do not offer adequate standards of consumer protection, if any at all. It is therefore critical that German authorities take some efficient steps against black-market operators, for example by means of payment blocking,” he adds. These sentiments are echoed by Rieger who, when asked if the concerns about channelisation are valid, suggests that the black market may be already moving in on Germany. “Websites with overviews of ‘sports betting without a German licence’ or ‘casinos without a German licence’ are popping up everywhere. This is not a good development,” Rieger reveals. “The states must consistently fight this black market and also cut off the payment flows of these rogue providers,” he adds. Going back to the driving analogy used at the start of this analysis, the German market is a lot like a learner driver, in that it can learn the standards required to drive and effectively govern the market without crashing the car but learning to drive doesn’t automatically make you a good driver or, in this case, a good regulator. As Rieger explains: “That is what the regulator wants, to channel the gambling impulse into a legal market to offer better player protection than with rampant providers without a licence and outside the European Union. “Regulation is the right step. What is now needed is a permanent evaluation of the measures and their effect on both the regulated and the black market. “Depending on these developments, the regulator needs the courage to also make the market attractive so that players will accept it and at the same time at-risk players will be protected in the best possible way,” he adds. A lot could change between now and July, but one thing is clear: the German market is here for the long haul and could potentially be as big of a market as the UK, yet the challenge now is the journey to get to that point.