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IN-DEPTH 25 February 2019
No industry is an island
Gambling consultant Steve Donoughue assesses the future of low-tax gaming jurisdictions in Europe in light of Brexit and point-of-consumption regulation
By Gambling Insider

It is one of the truths of the gambling world that nobody can be as lucky as the Netherlands’ top gambling lawyer, Justin Franssen of Kalff Katz & Franssen. Blessed with looks, charm and intellect, he has also been gifted the lifetime privilege of speaking at conferences worldwide about when the Netherlands will finally legalise online gambling. He has been doing this expertly for what seems to be an eternity and will undoubtedly be waxing lyrical about it well into his dotage. For the rest of us on the conference circuit, Britain’s biggest national act of self-harm, Brexit, provided us with a conference speech topic that lasted for just a few months before we were forced to move on to topics more exciting, as its impact on the online gambling industry was forecast to be minimal.

Let us be certain; Brexit, unfortunately, is still happening. There is an ever-growing chance the UK will crash out of the EU with no deal at 11pm on 29 March 2019 and the excreta will truly hit the fan. Planes will stop flying, insulin will run out and fruit will rot on the trees. However, what will not happen is a fall in online gambling. At the very least, British staff wishing to work in Malta will have to queue for longer at Malta International Airport; at worst they will need visas and permission to work. But given how accommodating the Maltese government has been to its British visitors over the last two centuries, and especially those working in the industry, there’s little chance this will be overly onerous.

Brexit will have a variety of impacts on the differing offshore online gambling jurisdictions. In some ways, this forecast hasn’t changed much since we were making speeches about it a couple of years ago. Malta, the largest gaming island, will carry on and grow as a licensing jurisdiction. Gibraltar, on the other hand, will suffer the risk of an unfettered Spain making the activity of crossing the border harder and harder. This, in turn, will make it more difficult for the majority of expats who live in Spain to actually get to work.

The likelihood of this goes up with the increase of internal issues regarding Catalonian independence, as Gibraltar has historically been used by Spain as a distraction from internal strife. Some operators have already stated they are scouting out offices in Malta ready for a move should the Spaniards become even more intolerable. Unfortunately, the British navy doesn’t have enough ships to park one in the bay and all the sailors will be on riot duty at Dover.

Then we consider the islands of Alderney, Jersey and the Isle of Man. Bizarrely, if you apply for a British gambling license, when you go through the list of countries where your key equipment is supposedly located (obviously it’s in the Cloud), you have to put United Kingdom if it’s theoretically located on one of these islands. There is no option for the Isle of Man, Jersey or Alderney, even though they’re staunchly not part of the United Kingdom. They’re Crown Dependencies, running their own governments for hundreds of years, and in the case of Alderney, the first European jurisdiction to offer online gambling long before Great Britain.

You would’ve thought they’d be on the list when you consider Bouvet Island is. Bouvet Island is an uninhabited sub-Antarctic island and dependency of Norway located in the South Atlantic Ocean and not a known online gambling jurisdiction. Such is the sophistication of the Gambling Commission. The key thing is they have never been in the European Union so Brexit means little to them.

The Isle of Man has the most to look forward to of these islands, as it is home to a significant cluster of operators and supporting businesses. This is unlikely to change; its strategy to grow as a luxury destination may be more difficult, though, due to the climate and timezone (the 1950s). Alderney and its bigger brother Guernsey have suffered more due to the imposition of the Point of Consumption (POC) tax than most.

The point-of-supply system was the tiny island’s raison d’etre and now that’s gone. At least Gibraltar and Malta have the weather, so Alderney is no longer the go-to destination if you want a license; which is a shame, as they are a very accommodating bunch.

But now it seems they are the disaster recovery destination of choice and that’s not all that bad, is it? You can’t put a data centre in a Wicca Man. Poor Jersey, however: it took them a decade to break through their Methodist hate of gambling to change their laws and try and ape their neighbour Alderney. Just when they finally pass the law, the then White List is closed and Point of Consumption comes in. If you want a low-tax jurisdiction that is more fun than Alderney but doesn’t have all that nasty sunshine of Malta or Gibraltar, Jersey is the place for you. They should market it to gingers and goths.

In reality, these islands have taken their hit because of POC and Brexit is theoretically of little account. But I fear this may not turn out to be the case, because these Channel Islands are actually what the more rabid form of Brexiteer wants a future Britain to be; a small tax-free island on the edge of a bigger landmass offering financial incentives with no restrictive laws protecting workers.

If the UK becomes the offshore island of the European mainland, what will these islands do then? How do they differentiate themselves? It's far too cold to grow marijuana.

I also don’t think Malta and Gibraltar will have it all their own way. One thing we can be certain of is a post-Brexit UK will have a regulatory environment much the same as it is now. We can also be certain it will also be in step with other European mainland jurisdictions and that they will all have an increasingly anti-gambling political narrative.

Europe is beset with populist politics and part of that includes a reaction to an increasingly popular and public online gambling industry. There will be ever-increasing calls for restrictions on advertising, registration and massive increases in money and controls for problem gambling. The regulatory pendulum is swinging the other way.

What this means is we have two diverging approaches to regulation and government approval of gambling. Firstly, the operators on the islands are loved ever more for their growing contribution to the domestic economies. Yet, on the mainland, their activities are being ever more restricted and taxed as governments and regulators pour more and more un-evidenced scorn upon them, dancing to the tune of a populist press.

Then what? Who knows?

Brexit may well have a severe impact on the UK economy. The Organisation for Economic Co-Operation and Development estimates a hit of 4% of GDP; and that all forms of revenue will become welcome and HM Treasury will order the reining in of the Gambling Commission’s dogs and a return to a regulator which actually supports the industry it regulates (as it's statutorily supposed to). Equally, the economic shock of Brexit to the rest of the EU may be significant enough to make mainland jurisdictions feel a financial pinch, so they loosen things up to stimulate gambling-derived tax revenue.

But, more than likely, we will suffer a further shift to the populism financial shocks cause, as they did post-2008; with that comes a further dislike of the perceived immorality and capitalist rapaciousness of gambling. This will mean Britain and the EU further tightening the screw on our industry and, with that, lobbying Malta and Gibraltar to follow suit.

So, the future is bleak my friends – and we are all doomed. God bless Brexit and can you please help me dig this bunker?

Steve Donoughue has been a consultant to numerous international gaming companies, advising them on a wide range of issues from penetrating new markets to political strategy. Steve has ensured projects not only comply with legislative requirements, often in a changing political landscape, but are commercially successful.
DISCUSS THIS ARTICLE
IN-DEPTH 16 August 2019
Roundtable: David vs Goliath – Can startups really disrupt the industry?

(AL) Alexander Levchenko – CEO, Evoplay Entertainment

Alexander Levchenko is CEO of innovative game development studio Evoplay Entertainment. He has overseen the rapid expansion of the company since it was founded in early 2017 with the vision of revolutionising the player experience.

(RL) Ruben Loeches – CMO, R Franco

Rubén Loeches is CMO at R. Franco Group, Spain’s most established multinational gaming supplier and solutions provider. With over 10 years working in the gambling, betting and online gaming industries, he is skilled in operations management and marketing strategy.

(JB) Julian Buhagiar – Co-Founder, RB Capital:

Julian Buhagiar is an investor, CEO & board director to multiple ventures in gaming, fintech & media markets. He has lead investments, M & As and exits to date in excess of $370m.

(DM) Dominic Mansour – CEO, Bragg Gaming Group:

Dominic Mansour has an extensive background of nearly 20 years in the gaming and lottery industry. He has a deep understanding of the lottery secto,r having been CEO at the UK-based Health Lottery, as well as building bingos.com from scratch, which he sold to NetPlay TV plc.

What does it take for a startup to make waves in gaming?

DM: On the one hand, it’s a bit like brand marketing; you build an identity, a reputation and a strategy. When you know what you stand for, you then do your best to get heard. That doesn’t necessarily require a TV commercial but ensuring whatever you do stands out from the crowd. Then you have to get out there and talk to people about it. 

AL: Being better than the competition is no longer enough; if you’re small, new and want to make a difference – you have to turn the industry on its head. Those looking to make waves need to come up with a new concept or a ground-breaking solution. Take Elon Musk, he didn’t found Tesla to improve the existing electric cars on the market, he founded it to create the industry’s first mass-market electric sports car. It’s the same for online gaming; if you want to make waves as a startup, you have to bring something revolutionary to the table.

JB: Unique IP is key, particularly in emerging (non-EU) markets. As does the ability to release products on time, with minimal downtime and/or turnaround time when issues inevitably occur. A good salesforce capable of rapidly striking partnerships with the right players is vital, as is not getting bogged down too early on in legal, operational and admin red tape.

How easy it for startups to bring their ideas to life? How do they attract capital?

AL: It depends on the people and ideas behind the startup. Of course – the wave of ‘unicorns’ is not what it used to be. Some time ago the hype was a lot greater in terms of investing in startups, but that’s changed now. Investors now want more detail – and even more importantly, to evaluate whether the startup has the capacity (as well as the vision) to solve the problem it set out to address. That’s not to say investors are no longer interested in startups – they certainly are – but now more than ever, it’s important for startups to understand their audience as well as dreaming big.

JB: To get to market quickly, you need a great but small, team. If slots or sportsbook, the mathematical engine and UX/UI are crucial. Having a lean, agile dev team that can rapidly turn wire framing and mathematical logic into product is essential. Paying more for the right team is sometimes necessary, especially when good resources are scarce (here’s looking at you, Malta and Gibraltar).

Building capital is a different beast altogether. You won’t be able to secure any funding until you have a working proof of concept and, even then, capital is likely to be drip fed. Be prepared to get a family and friends round early on to deliver a ‘kick-ass’ demo, then start looking at early-stage VCs that specialise in growth-stage assets.

How do you react when you see startups coming in with their plan for disruption?

RL: We welcome the innovation and fresh thinking startups bring. This is particularly the case in Latin America, with a market still in its infancy. One area we’d especially like to see startups making waves is in the slot development sector. Latin America is a young market that needs local innovation suited to its unique conditions – especially in regard to mobile gaming.

Operators eyeing the market have Europe‐focused core products, which creates a struggle to work to the requirements of players and regulators. To succeed there, it has become more important than ever to work with those with a knowhow of the local area to adapt products and games to besuitable from the off; we welcome the chance for local talent to develop and grow.

Do you think it’s easier for established companies to innovate and establish new ideas? 

AL: From a financial perspective, yes. It is without a doubt easier for incumbent companies to establish a pipeline of innovation via their R & D departments, as well as having the tools to hand for data gathering and analysis.

But it stops there. Startups hold court in every other way. Not only are they flexible, they can easily switch from one idea to another, change strategy instantly as the market demands and easily move team members around. Established companies know this – and this is why we’re seeing an emerging trend for established companies to acquire small, innovative online gaming start-ups. They have the right resources and unique ideas, as well as the ability to bring a fresh approach to businesses’ thinking.

RL: For me, it’s always going to be established companies. Only with the resources, industry experience and know‐how can a company apply technology and services that truly make a difference. Of course there are exceptions. But when it comes to providing a platform that can be approved by regulators across multiple markets – as well as suiting an operators’ multiple jurisdictions – it is simply impossible for a couple of young bright minds with a few million behind them to get this done.

DM: I actually think it’s harder for established companies. It’s key to differentiate between having a good idea and executing one. That’s where the big corporates struggle most. They’re full of amazing people with all sorts of great ideas but getting them through systems and processes is nearly impossible.

Is it essential to patent-protect innovative products?

AL: It’s a very interesting subject. If we take IT for example – patents can actually become a block to the evolutionary process within the industry. Of course, getting a patent future proofs yourself from the competition copying your concept but, having said that, if you’re looking to protect yourself from someone more creative, smarter and agile, you’ve probably lost the battle already!

In our industry everything is moving faster and research takes less time than the development itself. No matter how good you are at copy pasting, you can’t copy Google or Netflix. The most important thing is not the tech itself but rather its ‘use-case’ – or in other words, does it solve what it’s meant to solve? Competition is healthy and the key to innovation. If you spend your whole time looking behind you, you’ll never be able move forwards.

JB: Tricky question, and one that depends on what and where you launch this IP. It can be difficult to patent mathematical engines and logic, mostly because they’re re-treading prior art. Branding, artwork and UX is more important and can easily be copied, but the territories you launch will determine how protectable your IP will be once patented. US/EU/Japan is easy but expensive to protect in. But China/South East Asia is a nightmare to cover adequately. Specialised patent lawyers with experience in software, and ideally gaming, can help you better.

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