Black markets in remote gambling

1. Black markets in remote gambling Causes and Prevention Paul Leyland 13 August 2015

2. Introduction I: who we are Regulus Partners • Strategic consultancy to the regulated gambling industry • Multi-disciplinary expertise and data-driven approach • Eight Partners with senior management and advisory experience across products and jurisdictions Paul Leyland • City analyst specializing in gambling companies for twelve years • Corporate Development Director of William Hill • Founded Regulus Partners in 2013 Regulus Partners

3. Introduction II: black markets Topics • Key features of the European remote gambling landscape and their impact on regulation • Selected areas of remote gambling regulation and how they affect black markets • Europe is used as the case-study since it contains the most developed set of regulated jurisdictions Key points to draw out • The hard gambler will always find a way to access the products and services they want • Regulations which affect product choice or distort price will create a black market • Failure to police facilitators and the supply chain will allow that black market to flourish Regulus Partners

4. European Remote Gambling I: product The data • Product has been the primary lens for the market • In a .com environment operators tend to have a lead • …but benefit hugely from cross-sell (especially slots) The point • There will be players that seek all products in all jurisdictions • The ‘one-size-fits-all’ .com product model was highly effective • Around 35% sports cross-sells slots; around 70% bingo is slots Regulus Partners

5. European Remote Gambling II: regulated markets The data • The regulation of remote gambling is still relatively new • C. 70% of the European market is now domestically regulated • But .com is still worth nearly €3bn in revenue The point • Most companies are being compelled to regulate • But, competition and cost of doing business increases • Meaning many are still reliant on .com cash flow Regulus Partners

6. European Remote Gambling III: regulatory risk The data • Domestic regulation has created ‘black and white’ • We believe the European black market is worth > €800m • This represents c. 10% of the total market The point • The black market is much less visible… • …can be reasonably easy to hide (more below)… • …and is big enough to be attractive to large organisations Regulus Partners

7. European Remote Gambling IV: market share The data • The top 12 operators have over 60% market share • The market is nevertheless relatively fragmented • ‘Other’ is sill material and growing revenue (c.€3bn) The point • The ‘big names’ are highly visible • They have little choice but to participate in regulated markets • Most have some .com exposure; many are far less visible Regulus Partners

8. European Remote Gambling V: customer concentration The data • The top 1% of actives generate c. 15-20% revenue • The top 10% generate c. 70 – 90% revenue • The vast majority of people barely contribute The point • In gambling averages are highly misleading • The habits and needs of the top 1% are critical to revenue • The top 1% will always find a way Regulus Partners

9. Remote gambling regulation: key drivers Key areas of regulatory impact on black markets • Product restrictions • Rates and nature of tax • Infrastructure requirements • Marketing, advertising and offers • Behavioral restrictions • Stopping illegal operators* Criminalisation* Payments* ISP blocking* Policing the supply-chain Regulus Partners

10. Regulatory drivers: product restrictions Purpose • Reduce availability of more ‘harmful’ products • Ensure a more smooth transition for incumbents • Create an orderly, phased market opening Examples • France: betting and poker only • Italy and Spain: phased product introduction, limited in-play • Denmark: Lottery monopoly on bingo and racing • New Jersey: no sports betting • Nevada: no sports betting, no casino • UK: no material restrictions (ex Lottery) What reduces black markets • Legalising as broad a range of products as possible • Ensuring illegal sites cannot have an easy product edge • Understanding those products which can be effectively run by a monopoly and those which can’t • Understanding cross-sell matrix • Understanding which products popular in .com market What increases black markets • Banning popular products (!) Regulus Partners

11. Regulatory drivers: tax Purpose • Ensure sector pays its fair share • Generate support for allowing in the first place • Create a system which does not overly-favour online Examples • France: high turnover-based taxes and commission fees • Italy: moderate turnover for betting; GW for some products • Spain: moderate GW taxes • Denmark: moderate GW taxes • UK: lower-end GW taxes What reduces black markets • Taxes on GW rather than turnover • Moderate rates which allow profitable competition What increases black markets • Turnover taxes: * they affect the price of the product…*…which gives a value advantage to black market • High rates of tax:* reduce marketing and development spend* give black market operators a cost advantage Regulus Partners

12. Regulatory drivers: infrastructure requirements Purpose • Visibility • Control • Mirrors land-based requirements Examples • Servers and/or headquarters in the country • Real-time transaction reporting • Land-based presence What reduces black markets • Minimal additional costs and infrastructure • Leveraging existing regulatory knowledge and processes What increases black markets • Creating discrete, intensive and bespoke infrastructure:* dark-grey / black operators will by-pass anyway* smaller operators will struggle to justify (limits supply)* likelihood it impacts user experience • All of which gives advantage to black market operators Regulus Partners

13. Regulatory drivers: marketing, advertising, offers etc Purpose • Ensure vulnerable not exploited • Reflect wider social tastes and concerns Examples • Strict Ts & Cs on offers and bonuses • Restricting TV and other top-line advertising • Licensing affiliates What reduces black markets • Controlled above the line advertising • Fair but open offer and bonus environment What increases black markets • Restricting above-the-line advertising* levels playing field with black-market operators • Materially restricting offers and bonuses* high value players will seek them out Regulus Partners

14. Regulatory drivers: customer-focussed restrictions Purpose • Protect the vulnerable • Mirror land-based practices • Limit harder gambling behaviors Examples • Coordinated account-based play • Time and spend limits What reduces black markets • Onus on monitoring rather than restriction • Understand and allow ‘high roller’ behavior* high rollers and problem gamblers are not the same What increases black markets • Customers who do not want to be monitored (balance?) • High-rollers / harder gamblerswillgo elsewhere • Current model reliant on harder gamblers:* what is the economics of the new model? Can they work? Regulus Partners

15. Regulatory drivers: criminalisation Purpose • Deterrence • Active defence Examples • Individuals / corporate officers providing illegal gambling • Companies providing illegal gambling • Customers accessing illegal gambling • Businesses facilitated illegal gambling What reduces black markets • Ensuring laws are clear • Ensuring that laws are actually enforced • Reducing the time between investigation and prosecution • Civil as well as criminal* speed* burden of proof* corporate as well as personal risk What increases black markets • Unenforceable deterrents • Distant threats • Limited likelihood of successful prosecution Regulus Partners

16. Regulatory drivers: payments Purpose • Disrupt black market supply-chain • Focus on weak-point • Focus on large regulated businesses with much to lose* NB, banks fear of gambling is now a real business issue Examples • UIGEA • UK • Russia • China What reduces black markets • Payments blocking will disrupt, not stop • Understand flags and act on them:* myriad small specialists (which change often)* absence of credible PSPs / banks* high cost of payment processing What increases black markets • Not understanding / monitoring tackling ‘specialist’ payments supply:* vanilla banks / PSPs* legitimate specialist PSPs* grey-market specialists* black-market specialists • Making banks ‘scared’ of gambling* forces otherwise respectable business into ‘specialist supply’ Regulus Partners

17. Regulatory drivers: ISP blocking Purpose • Disrupts supply chain • Enlists large businesses with something to lose • Makes brand-building more difficult Examples • Most domestic-regulated jurisdictions • China What reduces black markets • Consistent approach with ISPs • Understand and monitor work-arounds • Allow licensed businesses to effectively advertise and market What increases black markets • Irregular enforcement • Failure to police work-arounds • Regulatory regime which does not allow brand strength Regulus Partners

18. Regulatory drivers: supply chain Purpose • Increases regulatory visibility • Reduces places to hide • Recognizes the importance of suppliers • Mirrors (some) land-based practice (especially US) Examples • Capturing more of the supply-chain in licensing • Fully licensing suppliers • xxx • Xxxx • xxx What reduces black markets • Visibility over content, platform etc* many black-market operators need to outsource* supply chain typically less fragmented than operators • Competitive advantage to licensed operators* best content and services from majors* ensures not available to black-market operators What increases black markets • Giving suppliers a get-out to supply black-market operators* effectively means same product available at lower price* ‘just a supplier’ can control over 90% of revenue chain Regulus Partners

19. Conclusions What causes black markets? • Product restrictions • Taxes which affect the price of the product • Allowing black market operators full access to (or get arounds for) marketing, payments and suppliers How can they be prevented • Allow as many products as possible; seek other ways to achieve policy aims than forbidding (or accept black-market) • Tax at the gross win level; 20% is typically the economic tipping-point • Regulate supply-chain and enlist bigger businesses to prevent and police; be fully aware of all the (many) work-arounds Regulus Partners

20. Thank you - Q & A Regulus Partners