With the rise of regulations across many EU jurisdictions, and also recently in the US, many operators are faced with the following decision: operate in a regulated environment or take the illegal route. While many jurisdictions are still in the process of implementing their directive, or are facing internal disputes on the best path towards regulation, it is very likely that within the coming five to 10 years most European and North American jurisdictions, as well as some South American countries, will move from their current 'state of confusion' towards a much clearer regulatory framework.
One way to describe this change is the transition from a 'no country' environment, which would normally include reliance on a universal licence (Malta, Isle of Man and others) to a 'dot.country' operation, which adheres to local regulation and licensing and often requires a dedicated gaming platform. Those local entities could come in a variety of forms: ‘pure’ online gaming operators, partnerships between online platforms and local gaming (or non-gaming) brands, or state-owned monopolies.
It therefore does not come as a surprise that many of the large i-gaming operators have announced that their strategy going forward will be to pursue opportunities in distinctly regulated markets. Some have even significantly reduced, or completely withdrawn, their presence in unregulated markets as such activity might become a challenge when pursuing licenses in regulated jurisdictions. Other operators continue to rely solely on a general EU licence which, for now, continues to provide access to some markets. And then there are those that completely disregard any regulatory framework and operate wherever they can.
In parallel to the regulatory changes we hear more about mergers, acquisitions, partnerships and overall consolidation. In part, this is the industry’s way of addressing regulation and a way for companies to better position themselves to compete in such controlled environments, which come with increased operational complexities and overall higher costs. Besides mergers and acquisitions between online operators, we are seeing more collaborations between online and land-based operators and strategic partnerships between online operators and national non-gaming brands.
So far, affiliates have been fairly shielded from the regulatory developments. It is true that affiliates felt the impact of regulation due to the lower number of operators to promote, reduced dependency on affiliates, tighter marketing and promotional budgets, and the operator’s need to promote specific products in specific markets. Nonetheless, for most affiliates these were manageable adjustments which did not impose significant changes on their part.
Many will agree that the traditional role of affiliates in a regulated environment will be reduced, but I believe that there will always be room for affiliates to play an important role in the acquisition of users due to their unique ability to attract qualified and valuable players. However, I also foresee that long-term changes in market conditions and in the overall business landscape will create a much bigger challenge for affiliates and, unless they adapt, might put them out of the game.
Regulated gaming in the US
In Europe, most licensed operators have evolved from the online gaming industry and are therefore familiar with affiliate marketing and how gaming affiliates operate. So far, there have not been any specific requirements affiliates have had to adhere to, but it is very likely that, as the industry consolidates and matures, operators will choose to standardise the way they do business and may impose stricter requirements on their affiliates. This could translate into an expectation for a higher level of transparency and commitment, steady and ongoing communication, and tighter collaboration. As these organisations grow, we see more decision makers from outside the industry who are less likely to continue to support some of the traditional business and financial standards which are synonymous with gaming affiliates.
While opportunities in regulated US markets are still fairly limited, affiliates who currently continue to promote unlicensed gaming operators might face the consequences of this decision when it’s time to obtain their licenceThe business environment in the US is different. Gaming in general, and online gaming where available, is governed by regulatory bodies like Gaming Control Boards or Divisions of Gaming Enforcement. Their mission includes ensuring the integrity of the gaming industry and protecting the public interest by maintaining a legitimate and viable industry. They do so by setting policies, establishing regulations, determining corporate and individual qualifications and suitability, and issuing licenses.
Regulators are the ones who set the tone for a state’s gaming regulations and its enforcement. Gaming companies who wish to operate in the US. need to meet strict requirements, both while applying to obtain a licence as well as to maintain such licences. The potential consequences of not complying can range from heavy fines to licence suspension.
To this visibly strict and heavily regulated environment we need to add the conservative nature of the operating companies. While they now operate online, they were not born online and are therefore not the typical gaming operators we are used to seeing in Europe. Often, these are organisations which were built to succeed in the hospitality and land-based casino industry and have now been requested to add an online component to their existing offering. While some of the employees, especially in product and marketing, will come with online gaming experience, we often see that general management, legal, compliance and finance are primarily trained to support the hospitality and entertainment sides of the business.
The affiliate mystery
The term ‘affiliates’ is quite clear to anyone who has spent some time in the online gaming industry, but this is often not the case in the regulated US gaming industry. In the past few years I had the opportunity to meet with many representatives of regulatory bodies, lotteries and land-based operators from different states where online gaming is being considered. One question they keep raising is “who are those affiliates and what is their role in online gaming?” The fact that the question is being raised is positive and shows that those formal and often conservative organisations recognise the importance of affiliates in the success of the online gaming business. However, in order for this opportunity to materialise and become successful, affiliates will need to adapt as well.
In regulated US markets, affiliates are considered vendors of services, and just like any other company who wishes to provide services to licensed gaming operators and get paid, they need to obtain some form of authorisation. This can range from a simple registration form to an actual licence. While the requirement may vary by state, the core objective of the authorisation process is for the regulator to maintain control over who is allowed to participate in the operation and promotion of gaming in their jurisdiction, as well as to maintain control over the flow of money.
In traditional marketing, be it online or offline, advertisers have full control over their media and message. They decide what, where and when to advertise, and will therefore be held accountable for any violation of the regulations. Affiliate marketing is different in the sense that operators give up some control over their message and where and how it is presented. This might create some challenges related to accountability and enforcement, and the fact that affiliate earnings are directly tied to the gaming activity (especially in revenue share deals) just adds another level of complexity.
The road ahead
Regulators (and some operators) do not really understand affiliates, what they are and how they operate. Since we fear what we do not understand, it is understandable why regulators would treat affiliates with extra caution. Education, closer interaction between affiliates, operators and regulators, and gaining more hands-on experience would certainly help establish greater trust and collaboration. But while we wait for more US markets to regulate there are several things affiliates can and should do:
Pick a side. Just like with operators, affiliates need to decide if they want to be on the white or black side of the industry. While opportunities in regulated US markets are still fairly limited, affiliates who currently continue to promote unlicensed gaming operators might face the consequences of this decision when it’s time to obtain their licence. Just recently, director David Rebuck of the New Jersey Division of Gaming Enforcement (DGE) issued a bulletin which gives affiliates a 150-day deadline to make a simple choice: comply with state and federal gaming regulations and stop promoting illegal sites, or leave the New Jersey market altogether, but know that choosing the latter will not only ban you from the New Jersey market, but might also risk your future chances of working in other jurisdictions. Today’s actions might impact tomorrow’s opportunities.
Elevate your business standards. Establishing a proper business entity in a reputable jurisdiction and accepting the formalities of the regulated North American business environment (including the required agreements and documentation) will go a long way towards improving the chances of obtaining a licence and capitalising on future opportunities.
Understand and respect the regulations. Each market has its own set of unique regulations and requirements. Understanding and following them is not an easy task but is necessary towards gaining the trust of operators and regulators alike.
Be transparent and forthcoming. Transparency is required to establish trust and accountability. While you are not expected to share all your secrets, operators should know how and where you market to players so they can ensure the accuracy of your content and that it meets all regulatory guidelines.
Throughout my years in the industry I have learned that many affiliates adhere to these standards regardless of regulation, but one must remember that perception is often determined by first impression. Online gaming affiliates are known to be creative, innovative and resourceful, and also informal and outgoing. While these are powerful attributes, adapting to a culture of compliance and formalities will give affiliates a fair chance to follow the regulated path taken by the leading operators rather than risking being pushed to the sidelines of the gaming industry.
Itsik Akiva is an i-gaming expert and founder of the Boston-based Headway Consulting (www.headwayconsulting.net), which specialises in devising and executing marketing and product strategies for gaming companies in regulated and emerging markets. Itsik brings 10+ years of experience of setting up and managing affiliate programmes and is a regular speaker at gaming and affiliate conferences.