The Battle for the Soul of Europe
by Andrew Drinkwater
March 1, 2010
Markets vs. Monopolies
Like two boxers slugging it out to the finish, private companies and European Union states have been trading blows for more than 10 years over the right to offer betting and gaming over the Internet. There have been arrests, court cases, fines, high-level legal proclamations, political rows and some harsh exchanges of words since the late 1990s when sports books, poker rooms and casinos first appeared on the Web.
Ambitious gaming operators saw the Common Market as a way to open new revenue streams. Not only did the Internet open up the possibility of new geographical markets, it offered a way to reach a younger, more sophisticated demographic. The combination of the two offered a powerful incentive to the leading European players to invest heavily in new languages, products and platforms.
The Web-based gaming products were sent down the digital highway full of hope and enthusiasm, only to be brought to a shuddering halt by EU member states. Since then it’s been a relentless battle, punctuated by skirmishes and the occasional peace offering.
Making sense of all this is no easy task, but at stake is the very principle of the union itself. In theory it’s a free market of 27 member countries that have signed up to some fundamental rules such as freedom of movement, freedom of establishment and freedom of trade. But, when it comes to allowing betting companies to do business freely across the union, it would seem that not all the members of the club want to play by the rules.
So, behind the rhetoric and high-minded principles of the European Union what is the reality for gaming operators? What are the prospects of a sensible solution? And what are the key battlegrounds in the months ahead?
The heart of the issue is simple. Betting and gaming companies want to be able to do business anywhere in the EU. After all, it’s a right enshrined in the Treaty of Rome, which clearly laid out the foundations for free trade within Europe’s borders. Other industries have no cross-border boundaries, so why should the gaming industry be treated any differently?
Individual member states have been arguing for the last 10 years that betting and gaming is a special case that needs specific legislation. This stance is taken in part because of a fear that unregulated betting can lead to social problems such as underage gambling and gambling addiction. But this argument has trouble holding water when state-owned monopolies are spending millions of euros advertising their products to the very audiences they claim to protect.
“It’s a mess,” says Julian Graham-Rake, former international director for bookmaking giant William Hill and now holding the same position with Rank Interactive, whose brands include Blue Square and Mecca Bingo. “It’s also complicated, and it doesn’t appear as if there will be one pan-European solution. Member states will manage this in different ways.”
Warwick Bartlett of Global Betting and Gaming Consultants believes the issue goes to the very heart of what the EU is all about.
“The Treaty of Rome stands for something or nothing. That is the issue. If it stands for nothing it should be repealed and member states should decide if this is the Europe they originally signed up for. Either way the industry needs clarity, the state monopoly operators do not know where they stand and neither do those operating offshore.”
You can see why the stakes are high. The European gaming market is the biggest in the world, with gross profit put at around US$5 billion in 2009. Measured in gross gaming revenue (GGR, or stakes minus winnings), the European Betting and Gaming Association values the market at around $8.8 billion, and it could hit $15 billion by 2012.
The impact of the global financial meltdown has also heightened the sense of imperative for governments to protect every scrap of income, and with gaming revenues holding up well, despite the economic downturn, it is understandable that they’re not giving up without a fight.
As David Trunkfield, head of gaming at PricewaterhouseCoopers says: “The real problem is that online betting threatens the revenue governments earn from local monopolies. In the Netherlands, for instance, gambling winnings are taxed at 29 percent. Gibraltar, where most British online gambling firms pay tax, takes just 1 percent of the pot. The most likely outcome of all this is that individual countries will try and pre-empt the three main EU bodies [the European Commission, European Court of Justice, the European Parliament] by creating their own frameworks like Italy, France and Holland.”
So how does the game play out with the guardians of the EU in Brussels? Put simply, it goes something like this:
1) A betting company develops and launches its products in a new language and localizes it for an EU country. Part of that process will involve marketing it to potential customers. This alerts the authorities, who take steps to shut it down. Legal action is taken, the two protagonists meet in court. The betting company loses and complains to the EU.
2) The two EU referees of this fight — the European Court of Justice and the EU commissioner for the Internal Market — then consider all the legal implications and pass judgment. And it’s here that the problem lies.
As Susannah Gill, spokeswoman for Betfair, which operates in all EU member states, explains: “The legislative landscape for gambling can, at best, be described as varied and, at worst, incoherent. The European single market should allow an EU-licensed gambling operator to operate throughout the EU. However, individual countries’ governments seek to restrict their consumers’ access to foreign gambling operators in order to try and maintain the market positions, and revenues, of their state-operated monopolies. A number of countries are bringing in legislation to ban or restrict online gambling, but in nearly every case we think such legislation is in breach of European law, and therefore not valid.”
It’s interesting that after being one of the bad boys of Europe for many years, Italy is now leading the way with a local licensing arrangement in what is thought to be the biggest market in Europe in terms of betting turnover.
In the past the Italian authorities have not hesitated to use the country’s own laws to exclude foreign operators and felt the disapproval of the legislators in Brussels. But it has now realized that properly licensed operators offer a good source of tax revenue. The model they have created with local licensing for foreign operators is being held up as a possible solution for the rest of Europe.
Perhaps the real heart of the issue is best summed up by Sigrid Ligné of the European Gaming & Betting Association, a Brussels-based industry lobbying group. She points out that you are dealing with 27 different countries, each with their own culture and attitudes to gambling.
“The problem has been getting countries to understand the industry. There is this view of online gaming as ‘offshore and unregulated’. But clearly the situation in the UK has shown that it is on the whole a very responsible industry that can be run in a proper fashion. Many countries have been forced to look at the issue in a much more constructive way because of the pressure from the EU to play by the rules. Once countries begin to understand and look at the issue in a serious way they have been surprised at what they found.”
FROM VICTORY, DEFEAT
Most of those involved in this debate agree that the worst-case scenario would be 27 internal gambling markets, each with their own rules and regulations. It would undoubtedly put the EU in a difficult position and would be far away from conforming to the principles of the founding fathers back in the 1950s.
There were hopes that the 2003 Gambelli ruling issued by the European Court of Justice would settle the arguments once and for all. It decreed that Italian law ran contrary to the EU principles of freedom of establishment and freedom to provide services. In legal terms the ruling set out to clarify that “the restrictions imposed by Member States on their gambling markets will be only compatible with those two principles if they were justified on the very limited grounds of public order, security or health or on these overriding rulings of public interest.”
To those not versed in the subtleties of legal-speak, it was supposed to mean that member states would fall foul of the EU if they tried to impose restrictions on competitors for purely financial and protectionist reasons.
However, any hopes that were raised by the judgment have long been dashed. In the seven years since, some EU member states have been likened to “recalcitrant teenagers” by refusing to comply with ECJ rulings.
Ask Manfred Bodner, co-chief executive of Bwin, one of the continent’s largest Web gambling operators. His company has been one of the trailblazers, determined to establish its right to offer its products anywhere in the EU. They have assembled a formidable team of legal experts who challenge governments without hesitation if they try to stop what they see as legitimate business activity.
Ladbrokes and Betfair have spent the last seven years since Gambelli fighting the Netherlands in the European courts over the right to be able to offer sports betting and gaming. They suffered a blow in December last year when an important legal opinion found against them. Although not binding, it is usually a good indicator of the way the ECJ is likely to decide.
In the Dutch case it would seem that the state monopoly is acceptable for social reasons. Yves Bot, an advocate general at the European Court of Justice, said a system such as the Netherlands uses may be justified to protect consumers against gambling addiction. For that purpose, a country can offer a betting license to a single company, such as Netherlands national sports betting operator De Lotto, Bot said.
The ruling has baffled both Betfair and Ladbrokes, whose chief executive, John O’Reilly, said in a statement: “There is no logic in the fact that the Dutch monopoly could freely compete against us in the UK, but we are prevented from accepting bets from any Dutch resident that finds us on the Internet.”
It’s the endless contradiction and uncertainty that makes life so difficult for the betting companies.
And it’s easy to forget that the likely losers in all this are the customers, who usually get a much worse deal from the national operators than they would in the open market. Margins are sometimes laughable when compared with what bettors can get privately.
This important issue has now spawned the birth of a new organisation called Right2Bet, which aims to lobby the EU on the fact that it is the consumer who is losing out.
Not surprisingly, it is supported by some of the leading aspiring pan-European operators such as Betfair, Stanleybet and Victor Chandler — whose eponymous chairman has personal experience of the heavy-handed approach of the French state. He was once detained at Longchamp racecourse on Prix de l’Arc de Triomphe day, accused of taking bets illegally. He was later released without charge.
Right2Bet is inviting members to lobby their representatives at the European Parliament to push for a single solution.
The incoming European commissioner for the Internal Market, Michel Barnier, has a bulging in-tray of pending cases challenging protectionist policies in no fewer than nine countries, including the Netherlands, France, Sweden, Denmark, Finland, Hungary, Germany, Italy and Greece. All bar two (Germany and Italy) are close to facing action in the ECJ for refusing to open their markets in compliance with EU law. Their recent moves to comply show that they take the threat of ECJ action seriously.
Oliver Drewes, European Commission Spokesman for Internal Market & Services, said: “Now Commissioner Barnier has taken over, it will be up to him to decide if he will continue on a case-by-case, case-law-based approach, or if he would strive for a total harmonization of this area on the European level.”
By common consent among those fighting the corner of the gaming industry, Greece is by far the worst offender. The government recently has raised the stakes by awarding an exclusive sports betting licence, good for the next 10 years, to the national lottery monopoly, OPAP.
In recent years, British bookmakers Stanleybet and William Hill have unsuccessfully challenged the Greek monopoly in a bid to grab a niche of the country’s lucrative sports betting market. Stanleybet opened betting shops in Athens and in the northern city of Thessaloniki late in 2008, but authorities shut them down and detained their representatives. With sales of €5.5 billion and 5,500 outlets, it’s easy to understand why outside operators want a slice of the market.
It seems there is still a lot of court time to be taken up until the situation in Greece is fully resolved. Julian Graham-Rack puts it quite bluntly: “Greece is so obviously against the principles of the EU and is seriously non-compliant to European law. This is a country that uses the argument about social responsibility on the one hand while spending many millions marketing their lottery on the other.”
All eyes are also on France, where a new framework for opening the country to private competition has been set out — but is it commercially viable? The tax obligation that comes with one of the new French licences later this year effectively means that GGRs will be taxed at 50 percent — hardly conducive to a profitable business in any industry.
So what lies ahead? Clearly, Barnier has a lot to deal with. And, worryingly, even the UK is now muting some kind of licensing agreement for UK operators, partly driven by the need to replace the current funding arrangements to support horse racing. For so long Britain seemed to lead the way with a regulated but open-market approach to betting. But with most of the major operators having moved offshore to avoid potentially punitive tax measures, Government has been forced into a corner.
There is another irony in the way the story is unfolding. A number of state-controlled monopolies are having to turn to the private sector to acquire the expertise needed to successfully run online operations. Witness Danske Spil’s decision to team up with PartyGaming to deliver online poker ahead of legislation that will partially open up the Danish market in 2011.
In France the state lottery operator, Française des Jeux, which is now offering sports betting, and Pari Mutuel Urbain, the horse racing betting operator, have signed deals with LVS — a UK betting software supplier, and Paddy Power, the Irish listed betting firm. Both feel they need the best technology and expertise at their disposal once their markets open up to competition later this year
The realities of the market are forcing the private and state-owned operators, uncomfortable bedfellows at best, to slowly come together in all kinds of ways.
On the front lines with Bwin's Manfred Bodner
It’s quite a philosophical stance given that he — along with his fellow CEO Norbert Teufelberger — has first-hand experience of what it’s like to feel the full force of the law from a state seeking to protect its monopoly position.
The two were arrested in 2006 by French police during a press conference at Monaco Football Club, which Bwin was sponsoring at the time. They were detained and questioned before being released, but it demonstrated the lengths that some states would go to in order to protect their turf.
To many outsiders it may appear unfair that governments try to protect their monopoly position when the principles of the EU are based on the idea of a free and open internal market.
Bodner doesn’t see it like that.
“Fair or unfair are elusive categories in a business environment where state-owned companies defend themselves with all available means against competition. It’s like playing against the referee. And of course the biggest losers in such unethical and irrational business environments, which socio-historically represent the removal of the last medieval structures in Europe, have always been the consumers.”
It’s hard not to admire the determination of Bwin to challenge governments across Europe. With the biggest share of the multibillion-dollar European market, the Austrian company proudly boasts that it offers betting on more than 90 sports in 20 languages. It has made Bwin a US$2.2 billion company and the biggest pan-European player at the table.
Do any kind of Internet search on legal challenges to online betting laws in Europe and the name Bwin pops up time and time again. With no consistency across the EU, court action is the only route open. As a result, they probably have more legal expertise on the subject than the governments they are challenging.
As Bodner explains: “The [European Court of Justice] position has evolved and morphed since Gambelli first paved the way towards deregulation in Europe. Member states along with operators alike found it difficult to correctly interpret and anticipate what constituted legal and rightful behaviour.”
The result? Hundreds of lawsuits across Europe — mostly launched by lottery incumbents defending their comfortable status quo as long as they possibly could. And, after all, this is normal behaviour for incumbents, as shown in plenty of deregulation battles in the past ranging from TV to telephone to insurance.
Bodner believes the way forward will inevitably be about states realizing that trying to prohibit gambling while maintaining state gambling monopolies is no longer arguable.
“States have finally come to realize — largely led by the Italian and upcoming French examples — that proactive regulation represents an income opportunity,” he says. “This will be the defining trend in the coming years, which will see regulations in Germany, for example, where a general Internet and advertising prohibition has crippled state lotteries with a whopping €1 billion drop in revenues last year. Spain and Greece will inevitably follow.”
But he also believes the ultimate solution will be fragmentary in nature, meaning that individual betting and gaming operators will have to join forces to operate in new “mini-business” environments.
There will be no pan-European solution, he says.
“The ‘one-licence-fits-all’ game has been a sweet dream for a while but is of limited feasibility now. As this reality complicates operators’ technical and organisational structures, consolidation in the industry will accelerate.”
A hint of what’s to come perhaps?
Andrew Drinkwater is a UK-based freelance journalist and media consultant. He has written for a number of business and gaming publications, including Forbes, EuroBusiness and Inside Edge, a specialist betting magazine.
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