The entropy of regulation

Three news stories last week emphasised the confusion and complexity that surrounds regulation in the online gambling sector. Another delay in The Netherlands, an advertising ban in Belgium and a launch in Russia don’t appear to have a great deal in common but there is a common theme underlying them all. And it’s not necessarily a good one for the future of the business.

Belgium’s proposed advertising ban would impose a block on advertising around sports and prior to 8pm, and has seen a predictably strong response from those active in the country. The national online gambling trade group BAGO said consumers would shift to the black market in the absence of a free advertising market. But it’s far from an all-out ban and is a scenario that even Europe’s most open market, the UK, is considering something similar to.

Operators in the country’s near neighbour, the Netherlands, would likely love to have a market to even advertise. An almost endless stream of delays means the market is now predicted to not go live before H2 2018. In the meantime the Netherlands Gaming Authority is continuing to crack down on operators active in the tolerated grey market. Marja Appelman, the NGA CEO, said the stricter rules were a response to the “lack of trustworthiness and reliability” from operators.

Finally we have the news from Russia that it’s fairly opaque and limited “regulated” sports betting market will have a new entrant in the shape of a GVC joint venture.

The Russian Job

As stated in the original news story on EGR Intel, the operator has “teamed up with Rambler&Co., one of the largest online media companies in the country, and local operator Digital Betting, which holds one of the few online betting licences in Russia”. It will permit GVC access to a very large and very restricted market, with just a handful of local operators permitted to legally offer their services.

There is, of course, a large online grey market alongside this semi-regulated one both in terms of sports betting and the casino and poker sector. It’s a market few regulated-focused operators have dared dip their toes in, although Amaya recently told analysts it had relaunched TV advertising in Russia around its live tournament hosted in Sochi and said it was offering online casino in the market.

In many ways Russia is one of the biggest untapped markets in egaming and both moves will have rival operators watching extremely closely. Because the situation facing everyone right now is one of opportunity cost and confusion.

Changing wisdom

For many years there has been a received wisdom that all publicly listed operators should look to long-term markets for the dual benefits of higher multiples and a sustainable business model. To some extent this still holds true, but investors are increasingly comfortable with the grey markets and there is a stack of evidence that those active in them are not suffering from perception or operational issues.

There are many operators, both public and private and some of the biggest names in the sector, who have scaled up through a focus on grey markets in recent years. But it’s hard to point to more than a handful who have achieved this in the regulated sector. And few of those are markedly profitable. So has the great regulated push failed to achieve a great deal for the sector?

An often (mis)used scientific term is entropy, usually presented as the tendency for disorder to increase over time. And there is no doubt this can easily be applied to the rise of regulation in the egaming industry. What started life as the dot.country experiment with tightly ordered handful of Western European nations offering validation of the one-time vice industry has become complex, chaotic and fraught with setbacks and frustrations.

There are as many models of regulation as there are regulated markets and no two nations can seem to agree on the best route forward. What all can seem to agree on however is the need for tighter controls on those operators within their legal remit.

Useful loss

Another more technical definition of entropy involves the loss of “useful” heat from a system as time goes on, and this too can apply well to the egaming sector. The more effort put into achieving regulation and launching and playing a role in a regulated market means less money, time and resource can be put into the remainder of the business. And that’s not to mention the tax burden it brings with it. But there is no going back now.

Eastern Europe’s regulated push has seen most Western European operators squeezed out and nations like Portugal, Belgium and now Russia have acted strictly in their own local interests. The Netherlands is an ocean of setbacks and confusion, and Italy and Spain have proven frustratingly small in contrast to their national spend on land-based gambling. And while the UK and arguably Denmark have shown what is possible there is a distinct absence of regulators keen to learn from their examples.

Instead what we are likely faced with is a future of increasing disorder and wasted energy. Markets where it’s pay to play and not everyone can win. Markets where the main function of the existing top tier operators is to support local firms or to provide a veneer of openness to what remains a tightly protected market. While with high tax rates and glacial regulator progress even those offering a more open and liberal market may perhaps offer more glister than gold.

The value of regulation

Is there still the case then for the valuation mark-up that comes with being a regulated focused operator? Aside from the decreased risk of your business being closed down overnight as has been seen in the past when the industry had a hubris overload in the US, there seems more benefits then negatives from grey markets in 2017. Although it will only take one high-profile closure, arrest or court case to change all that once more.

For the risk-tolerant, grey markets are the best, arguably the only, growth opportunity in egaming in the next two years but they are still a roll of the dice for long-term revenue potential. What operators are faced with right now is the challenge of maintaining enough grey market presence to keep revenue growth ticking over while investing for the future in newer and existing regulated markets in the hope that in time some order will return from the current chaos.

A decade ago the industry wanted to be seen as a legitimate part of the gambling sector. It wanted to be permitted to offer its products to the mainstream consumer and advertise its products legally and freely. The following years have shown that you should be careful what you wish for.