A reluctant France, home to one of Europe's most lucrative gambling markets, may soon see sectors of its monopolistic Internet gambling industry liberalized.



 

Looking back to the mid-2000s, France played host to a legal battle that pitted Web gambling operators from outside France against the country’s established race betting and lottery monopolies, plus a commercial casino industry ravaged in recent years by a smoking ban and tough economic conditions.

Put generally, the foreign providers - based in EU member states and operating from jurisdictions like Alderney and Malta - argued that European Union law guarantees their right to offer gambling services across borders in the 27-member bloc, France included. The French government argued that the right to offer gambling to its citizens belonged exclusively to government-sponsored operators or operators licensed in the country and approved by the government.

The foreign companies took their case to the EU’s top regulatory body, the European Commission. Charles McCreevy, then the EC’s Internal Market commissioner, was a willing ally, and between 2006 and 2007 applied steady pressure on France to open its online market to foreign competition.

Tensions during that two-year period climaxed - twice.

First, in September 2006, Bwin’s co-chief executives, Manfred Bodner and Norbert Teufelberger, were nabbed by French authorities while unveiling a soccer sponsorship deal in Monaco. And in October 2007, Petter Nylander, chief executive of Unibet, was detained in Amsterdam, then extradited to France. All three were later released.

Under threat of legal proceedings in the European Court of Justice, the French government acquiesced to European Commission pressure and in April 2008 announced plans to unveil draft legislation paving the way for an open market. Or as French officials put it, an ouverture maîtrisée, or “controlled opening”. This would prove telling.

A year of stop-start speculation and delays - due primarily to concerns about tax rates and funding for the horseracing industry - would follow before the French government finally publicized legislation in March 2009.

Eric Woerth, the government’s budget minister, who is tasked with overseeing the liberalization process, told reporters at the time that France’s gambling market was being expanded to “adapt to Internet reality”. In doing so, he said, the government hoped to reclaim some of the significant sums of money that are flowing to offshore operators, who are part of a global market valued at between €8 billion and €10 billion.

In addition to creating a new licensing and regulatory authority called ARJEL, the legislation proposed to open pari-mutuel betting, fixed-odds sports betting and poker to commercial online competition. The government is understood to have chosen these sectors, in part, because they are popular, but also because they are perceived to be the least addictive forms of gambling. Notably, the bill does not include provisions for offering online casino gambling or spread betting.

While the exclusion of slots and table games came as a blow to the country’s land-based casino brands, the proposed taxation and betting-payout regime became a lightning rod for Internet industry criticism.

The government developed a turnover-based tax scheme that would see horse betting operators levied at 15.5 percent, sports betting operators at 8.5 percent and poker operators at 2 percent. On sports betting operators, moreover, the government laid a maximum payout ratio of between 80 percent and 85 percent of winnings.

While the proposed tax regime has been lambasted by a number of Internet operators, some analysts believe the payout ratio remains the bigger threat to commercial viability.

“We view the payout level as the potential pitfall,” says Ed Birkin, a London-based analyst with Barclay’s Capital who covers online gambling stocks. “Whilst there remains a maximum payout of 85 percent, the odds will remain uncompetitive compared to those offered by operators without licenses, regardless of the tax rate. The more savvy sports bettor who has become accustomed to more favorable odds is likely to stay with, or migrate to, a non-licensed operator.”

Then, while the bill was being reviewed by the European Commission, and before it could be debated in the National Assembly, an advertising battle broke out between online operators who were positioning themselves ahead of the market’s opening and the incumbent operators, who argued the right to advertise was theirs, exclusively, until new legislation was enacted. Woerth brokered a truce that allegedly saw all advertising for online gambling, legitimate or no, come to a halt.

Amid escalating tensions, the bill finally received its first reading in a legislative committee last July, during which most of its provisions passed without amendment. Arguably, the most controversial among them was the so-called “right to bet,” which requires operators to obtain permission from sports leagues before offering odds on games. In return for that permission, the leagues would be entitled to a 1 percent tax on turnover.

In October, though, is when the fireworks truly began.

Seven months after its publication, the bill was finally debated in the National Assembly and drew an astonishing 1,500 proposed amendments.

One of them required private operators with French customers to close those businesses for up to six months after the legislation was enacted, while Française des Jeux and Pari Mutuel Urbain, the country’s state-sponsored lottery and horse betting monopolies, would continue to operate as normal. Graham Wood, an English consultant who advises gambling industry clients on market entry into France, said the amendment was intended as a “punishment” for the unlicensed offshore industry.

Another amendment effectively banned betting exchange operators from licensure, which, predictably, did not go over well with the world’s largest betting exchange, London-based Betfair.

“The government could yet right some obvious mistakes and create an effective system of regulation, but if the aim was to legislate for the 21st century consumer, the current law as drafted falls about 30 years short,” says Mark Davies, Betfair’s managing director.

A measure of relief came earlier this year when the mandatory shutdown was removed from the legislation by the French Senate.

“The issue of the closure of French accounts is not in question [and] operators will be able to carry on working with French players between the law being passed and licenses being handed out,” Senator Franocis Trucy said.

But on the other hand, penalties for Web sites that continue to operate in France once the regulation is in force will be increased, and once they’re licensed, operators will have to transfer all their French customers to French sites.

A Senate committee also is considering an amendment that would give the government the power to apply filters to gambling sites without a court order.

In the meantime, the country’s established land-based operators are far from satisfied with the way things are going and last month three of the biggest, Groupe Tranchant, Lucien Barrière and Joagroup, filed suit in Paris Criminal Court against online operators Sportingbet, 888 Holdings, Unibet and Bwin to have their licenses withheld for two years, alleging the four have violated the law by setting up French-language sites without legislative approval. 

Despite the hostility the French government expects about 100 operators will apply for licenses, and about half will get one. Party Gaming, one of the Web’s largest publicly traded operators, has indicated it will apply, with poker its likely vertical of choice. Party rival 888 will also be applying. “We will get a license, we will be regulated, and we will be aggressive,” CEO Gigi Levy has said. “But clearly, it could have been a whole lot better.”

In the meantime, some online operators are leveraging business-to-business assets in supply deals with some of France’s gaming operators and media groups. Bwin, Europe’s largest publicly traded Web operator by revenue, recently inked a deal with media giant Éditions Philippe Amaury to build an online offering. Irish bookmaker Paddy Power and its technology supplier, Orbis, have reached an agreement to supply Pari Mutuel Urbain with needed technology and other services. CyberArts, a California-based software developer, has landed the contract to supply Française des Jeux with an online poker system.

As commercial activity ramps up ahead of the expected liberalization, and despite government hopes of issuing licenses before the World Cup in South Africa, industry observers are taking a conservative view on 2010.

“The implementation of new regulation is scheduled for Q2 2010, but in reality, we hear it could be as late as Q1 2011,” says Lorien Pilling, who is head of research at UK-based Global Betting and Gaming Consultants.

With an estimated 3 million French citizens currently betting online with foreign Web sites, GBGC projects the market will be worth $681.5 million in 2010, rising to $808.8 million in 2011.

“It could be 2012 or 2013 before the French market settles down and real growth in its e-gaming market takes off,” Pilling says.