Eying the future of Online Gaming
April 7, 2011
How will the global online gaming market shake out over the next few years? The analysts at PricewaterhouseCoopers have gazed into the proverbial crystal ball and have come up with the following scenario for worldwide online gaming by 2014.
Throughout the next few years, ongoing uncertainty and diversity around the regulation and legality of online gaming in different territories will make it difficult to define and track revenues across a coherent global market. However, regulation will continue to evolve and progress in most countries, as governments seek to improve consumer protection and reap tax revenues from online gaming spending and profits.
In the United States and Europe/Middle East/Africa (EMEA), this evolution will initially take the form of the creation of the regulatory “walled gardens,” especially in the European Union (EU). (See sidebar for an explanation of walled garden.) However, by 2012–2013, there will be growing momentum behind moves to [secure] online gaming liquidity and align regulation across borders, especially in skill-based games such as poker. These trends will take much longer to emerge in Asia and Latin America, given Asian governments’ generally greater desire to control both gambling and Internet activity, and the online games industry’s early stage of development in Latin America.
Here is a summary of what we think the online gaming industry will look like in each region in 2014:
There is a popular misconception in many other parts of the world that all forms of online gaming are outlawed in the U.S. due to Unlawful Internet Gambling Enforcement Act (UIGEA). In fact the real prohibition is on interstate gaming, and the legal position within states varies widely between the five disciplines of casino, horse betting, other sports betting, poker, and lottery. Indeed, a move towards walled garden regulation of online gaming is being seen at the state level, as various jurisdictions seek to establish their own licensing and tax regimes to generate needed revenue.
Alongside the moves by states to develop in-state licensing regimes, some tribal casinos are also looking to break into the online gaming market—although their ability to do so may be weakened by the fact that the industry does not speak with a single voice on the issue.
On the federal level, legislation to legalize and regulate online poker is expected to reach the statute book within the next two to three years. This legalization of interstate online poker games in 2012– 2013 will serve to legitimize the online gaming market in general, boost usage, and act as a catalyst for developments in other online gaming disciplines. As different states’ regulatory walled gardens for poker start to integrate and standardize, online betting on horse racing will expand beyond the states where currently legal, and embark on a similar regulatory path.
The growth resulting from these trends will see a blend of new onshore and offshore providers enter the U.S. market. These entrants will include the U.S.’s major “bricks-and-mortar” casino operators, which are already readying their plans for the online market. Social networking sites will be a key distribution platform for online gaming services, resulting in collaborative partnerships between gaming brands and social networks to capitalize on this opportunity.
Lotteries will also expand their reach and scale through growing interstate collaboration and online pooling, combined with new online offerings.
However, other online casino games will remain outlawed throughout the forecast period, and sports betting will continue to be tightly controlled by the sports leagues themselves, probably preventing the entry of new operators into the market.
Most of the legal online gaming in the world currently occurs in EMEA, and the United Kingdom has the largest legal market, reflecting the fact that it has one of the most open online gaming regimes of any country. While other countries in EMEA are not moving to the extreme position taken by the UK, we are currently seeing a wave of walled garden regimes being introduced by countries across Europe. Italy legalized online wagering in 2007. In France, the first wave of 11 companies were awarded licenses for online gaming from mid-2010, followed by further waves taking the number of licensed operators to more than 30.
A number of other EU countries are also considering legalizing or regulating online gaming with the goal of increasing their tax receipts. This list of nations includes Belgium, Ireland, Austria, Czech Republic, Greece, Norway and Denmark. South Africa was expected to legalize online wagering several years ago, but there have been delays in the legislation. However, there is some expectation that online wagering may be legalized in 2011
But it is important to note that the trend towards legalizing online gaming is not uniform across EMEA, with a number of countries having taken steps to ban or limit online gaming. This list includes Germany, Poland, Russia Turkey and Israel.
Going forward, development of the legalized and licensed online gaming market in EMEA will be led by Western Europe and South Africa, with progress elsewhere restricted by cultural factors in the Middle East, and concerns over organized crime in Central and Eastern Europe. As smaller EU nations begin to introduce their own in-country licensing and tax regimes over the next two to three years, particularly for poker, operators will want to build critical mass to make money from new services.
As a result, pressure for interstate liquidity pooling will grow, stimulating bilateral agreements between countries and greater regulatory involvement at European Court level. However, the requirement for each operator active in a country to submit to local licensing and taxation will remain.
Online games of chance will remain largely unlicensed and excluded from the regulatory regime as in the U.S.; but the EU market will differ in that online sports betting will become increasingly prevalent across borders. Following the example of the successful EuroMillions lottery, online access to inter-country lotteries will also grow.
Although participation in online gaming is widespread across Asia Pacific, it is illegal in virtually all countries. Except for sports bets that can be made online in Australia, the Philippines is the only country where online and mobile gaming is permitted.
In the Peoples Republic of China, online gaming is not permitted but is estimated to be widespread, and the government is stepping up its efforts to enforce online gaming restrictions.
Japan is estimated to have one of the world’s largest online gaming markets, with more than 10 million people wagering at online casinos, despite the fact that Internet gaming is banned in Japan and there are no online Japanese casinos.
In India, online gaming is banned in Maharashtra, but there is no specific legislation in other regions. India is considering legalizing online gaming in the Goa region, with an online lottery rather than online poker or casino gaming.
The fact that online gaming is currently illegal in virtually all countries in Asia Pacific except Australia and the Philippines means that widespread development of legal, licensed services across the region is still some way off.
While the illegal online gaming market is clearly buoyant, the licensed market will still be fairly small in 2014, with many governments focusing more on enforcing existing regulations than creating new ones.
The legal market will be largely limited to the existing market in Australia and the Philippines, and a handful of state level walled garden markets in India.
In Latin America, Chile is currently the only country with a legal online gaming market, although it is soon expected to be joined by Argentina.
Online poker is very popular in Chile—there are already more than 50 online casinos, with more expected to be launched in the next few years. Argentina is planning to legalize online gaming in 2011, with online bingo likely to be a popular offering, given that bingo is the currently the largest gaming category in Argentina.
The legal online games market in Latin America will still be at an embryonic stage in 2014, led by Chile and Argentina. In many countries, the restrictions on growth imposed by national regulation will be compounded by low—but rising—penetration of fixed and mobile broadband services.
Like the U.S., Canada has seen significant action at the state level, focused on regulating and taxing online gaming, reflecting the moves towards walled garden in both the U.S. and EMEA.
However, Canada has already begun to progress beyond the walled garden stage, and is some way ahead of the U.S. in enabling the new state regimes to join up to allow interstate online gaming. For example, British Columbia has now formed a partnership with Quebec and Nova Scotia to offer online gaming.
Canada has also seen a significant step forward in terms of online offerings from tribal casinos. The Kahnawake Gaming Commission—which licenses and regulates online casinos, online poker rooms and online sportsbook sites in the Mohawk Territory of Kahnawake—recently signed a memorandum of understanding with Antigua and Barbuda, which will allow licensees in one jurisdiction to operate in the other.
Over the next few years, Canada will remain somewhat ahead of the U.S. in joining up the state-level walled garden regulations into a coherent national regime, with interstate collaboration expanding more quickly than south of the border.
The growth resulting from these trends will attract new onshore and offshore providers into the Canadian market, which will be seen to some extent as a test-bed for offerings and models that may later be applied in the U.S. when regulations allow.
Excerpted from PricewaterhouseCoopers’ Playing to win, the outlook for the global casino and online gaming market to 2014. Reprinted with permission from PwC.
SIDEBAR: What is a “walled garden”?
The concept of the walled garden emerged during the early days of the Internet, as a way of describing the efforts by several service providers to create and control ring-fenced areas of the Internet for their users. The idea was that users can roam freely within the “garden,” but cannot go outside it. Ultimately, this approach proved unsustainable.
In the context of the regulation of online gaming, walled garden describes a situation where the authorities in a particular territory seek to license, regulate, and tax online gaming between providers and players within their own borders, without allowing cross-border activity.
SIDEBAR: Push for intrastate online wagering in U.S. continues despite setback
U.S. Rep. Barney Frank, D-Mass.
The legislation would have allowed licensed state casinos to run Atlantic County-based online portals offering poker, blackjack and other table games to subscribers of legal age. State Sen. Ray Lesniak, the bill’s author, claimed the measure would create 500 high-tech jobs and generate $100 million in additional revenue for the state’s ailing casino industry. The bill received majority support from both parties on its way through the legislature.
Christie, however, had a number of well-reported issues with the online gaming measure. He objected to provisions within the bill that gave a large amount of the tax proceeds generated from the additional gaming income to the state’s horse racing industry and feared the measure would have a negative impact on tottering Atlantic City casinos. He also believed the legislation would lead to an uncontrolled spread of brick-and-mortar cyber casinos.
It remains to be seen what impact the Christie veto would have on similar intrastate online gaming initiatives in Iowa, California, Florida and Nevada. The Iowa Senate is currently debating an bill that would legalize online poker for state residents, who would have to open an account with a state-regulated casino before receiving a password to log on to a virtual poker table. It’s estimated that 150,000 Iowans illegally play online poker, depriving the state of roughly $35 million per year in taxes, according to the Des Moines Register.
The California Legislature is mulling over two online gaming bills—one that would legalize online poker for state businesses and gaming tribes, and another that clears the way for all forms of online betting. The online poker bill, SB 40 introduced by Sen. Lou Correa, recently received the support of the California Nations Indian Gaming Association. A study commissioned by an online poker group and conducted by former State Finance Director Tim Gage claimed two million Californians regularly play online poker, wagering $13 billion each year, reported the Ventura County Star.
Florida is also considering an intrastate online poker bill which would allow state pari-mutuel facilities to operate the business. Nevada introduced a bill to legalize Internet poker.
Meanwhile, on the federal level, U.S. Representatives John Campbell, R-Calif., and Barney Frank, D-Mass., re-introduced a bill seeking to overturn the Unlawful Internet Gambling Enforcement Act and establish licensing and regulation of online wagering.
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