GPWA Times Magazine - Issue 18 - October 2011

gambling environment because it is business as usual for them. Restriction on gambling activities Governments in different mar- kets have proposed regulation that places restrictions on cer- tain Internet gambling activi- ties. These restrictions can be either direct regulations pro- hibiting certain activities or indirect by imposing tax mech- anisms that make running cer- tain products unviable. There are different motives for wanting to restrict certain gambling services in a market. The French government cited a desire to protect their citizens from addictive gambling as a reason for excluding casino games from their new online gambling laws. Governments are also wary of licensing betting exchanges because they perceive exchanges as a threat to the domestic horse-racing betting industry, either in terms of lost revenues or lower margins. Domestic horse-racing betting providers are often owned by the state or contribute large amounts of tax to the government, so there is also an element of vested interests in the restrictions. This is clearly the case in the United States, where the influential sports as- sociations, Nevada casinos and Indian tribes understandably want to protect their existing businesses and are nervous about Internet gambling. It is partly for this reason that the draft bills with the best chance of success deal solely with Internet poker and games of skill. Such restrictions are obviously not good for consumer choice or for affili- ates wishing to promote certain types of gaming in different markets. But as the example of the United States amply demonstrates there will always be op- erators (usually privately held compa- nies) prepared to step into the breach and offer customers what they want. Depending on the ambiguity, or lack thereof, in the law, service providers who work with those operators – be it providing payment services or affiliate promotion – need to assess the risk of being associated with them. A new era of regulation Internet gambling was founded on the following pillars: Low (or no) gaming taxes based on gross gaming yield High payout to customers – made pos- sible by the low taxes and giving online gambling an advantage over the land- based market Offshore jurisdictions One license, targeting many markets This was the “golden age” of Internet gambling, and from the point of view of players, operators and affiliates was the ideal regulatory setup. But for ma- jor governments it was not acceptable because tax revenues were being lost offshore and they had no control over the operators. Governments may have been caught napping in the first phase of Internet gambling but they have now caught up. As a result, these founding pillars are now crumbling in most re- gions of the world, with the exception of Asia. In Europe taxes for online gaming are rising; Greece collects 30 percent of gross gaming yield, while Germany’s plan would collect one of every six eu- ros in turnover. This ruins the payout to customers and hits the profitability of operators. In turn it restricts the rev- enue shares offered to affiliates as com- panies have to cut costs to turn a profit. The trend started by Italy of requiring a license in each market also increases • • • • regulatory and operational costs. The tax rates and licensing costs being proposed in the United States – either federal or state – are no better. So, five years ago the industry had the perfect regulation but has lost it all in that short space of time. But how have govern- ments fared? Take France: They have gained far great- er control of the Internet gambling beast (something they are very keen to do: http://gpwa.org/222 ). They have satisfied the European Union trade requirements and got the European Commission off their backs. They have protected their existing domestic monopolies. They have enlisted private license holders toeffectively act as tax collectors for the state. For government it has been an over- whelming success. Implications for affiliates There is very little that is passed in regu- lation that is not to the benefit of the gov- ernment’s own aims. The various models adopted will shape the future of the on- line gambling sector and the opportuni- ties open to operators and affiliates alike. Higher overall costs for operators mean less generous revenue shares available to affiliates and more competition in the affiliate sector. The weaker affiliates will not survive if they do not adapt to the new regulatory landscape. In theory, “successful” legislation is about creating a well-regulated, competitive market that offers choice and value to the consumer. In practice, it is more of- ten about appeasing politically influential vested interests and protecting existing government tax providers. Lorien is Head of Research for Global Betting and Gaming Consultants, a spe- cialist, international consultancy based in the Isle of Man. • • • • “There is very little that is passed in regulation that is not to the benefit of the government’s own aims. The various models adopted will shape the future of the on- line gambling sector and the opportunities open to opera- tors and affiliates alike.” 28 Playing by Taxing Rules