There is only one criterion that can provide a reliable measure of the success of gambling regulation. That is the channelling rate. The channelling rate indicates the percentage of legal offers in the regulated market. In other words: how high the proportion of players is that could be channelled to legal operators. What is left over is covered by the black market.
As player protection can only be achieved if the player to be protected plays in a licensed and state-controlled environment, it follows that the higher the channelling rate, the better. It is the only indicator as to whether a regulatory system is effective or failing. It is therefore extremely important.
It is also of central importance for the assessment of the still young gambling regulation in Germany. But it is precisely here that opinions differ as to how high it really is. The current debate is extremely controversial. The highest regulatory authority in Germany, the “Gemeinsame Glücksspielaufsichtsbehörde der Länder” (GGL) in Halle, Saxony-Anhalt, estimates the total share of the black market in Germany at 2% to 4%. A statement published on the GGL homepage in November 2023 states the GGL estimates that there are currently between 800 and 900 websites offering illegal online gambling, e.g. virtual slot machines, online poker, online casino games, so-called secondary lotteries and sports betting.
It is therefore crucial to ask why players choose the black-market offer, to analyse what they miss in the licensed offer and to find out what needs to be changed
However, the GGL expects that the proportion of these offerings will decline overall in 2022. The regulator assumed that the illegal websites identified represent a market volume of between €300-500m ($326-543m). This corresponds to about 2%-4% of the licensed market. According to the GGL, this survey is based on, among other things, the recording and analysis of visitor activity on illegal websites, the analysis of offers from illegal operators and the evaluation of affiliate marketing networks.
A few months ago, on 15 March 2023, GGL Co-Chairman Ronald Benter quoted almost similar figures for the sports betting market alone. Speaking at the Gambling Symposium at the University of Hohenheim, he said that, according to the GGL’s own market analysis, the channelling rate in the sports betting sector was well over 95%. He had projected this figure onto the available tax collection data, according to which less than 5% of betting taxes paid are generated by operators that do not hold a German sports betting licence. However, this view does not take into account all the unlicensed sports betting operators that (illegally) do not pay taxes in Germany.
So much for the GGL - analyses from the industry come to completely different conclusions. They see around half of the players in the black market. On 20th November 2023, the German Sports Betting Association (DSWV) and the German Online Casino Association (DOCV) published an “analysis of the latest developments in the online gambling market as a result of the Interstate Treaty on Gambling”. This study is called the “Schnabl study” because it was conducted by economist Professor Gunther Schnabl of the University of Leipzig. Schnabl concludes that the channelling rate, i.e. the proportion of usage of licensed services, is around 50.7% while 28.9% of usage is accounted for by non-licensed EU operators and 19.9% was accounted for by unlicensed offshore operators. The latest reference month for the analysis was March 2023.
Let’s take a quick look at what distinguishes the Schnabl study from the GGL analyses. First, the data collection methods are different. The GGL analyses internet traffic. Schnabl observes the user behaviour of a representative selection of players. The user behaviour of around 25,000 people who are active online in Germany was recorded. This means that every visit to domains, URLs or apps for online services of all kinds is recorded in a click stream (browser history with exact times) for each participant in the group.
As player protection can only be achieved if the player to be protected plays in a licensed and state-controlled environment, it follows that the higher the channelling rate, the better
The results of the analysis are not only interesting in terms of the level of channelling. They also provide intriguing insights into other user behaviour, such as the technology used. It was found that around two thirds of the participants analysed, played on computers (desktops and laptops), with the remaining third using mobile phones. As only the use of online gambling offers is relevant for this study, more than 700 gambling domains were initially identified that contain a real-money gambling offer in German, that can be accessed from a German IP address (without the use of a VPN) and that accept a German residence of the user upon registration. The number and duration of visits to the specified online gambling sites were recorded for each participant per month.
This study concludes that a significant percentage of German online gambling takes place in the unlicensed, illegal market. The study found that the channelling rate, i.e., the percentage of use of licensed offers, was around 50.7% in March 2023, while 28.9% of use was attributable to unlicensed EU operators and 19.9% to unlicensed offshore operators.
Around half of the time spent by German players is therefore currently spent on illegal online gambling services. An analysis of the data over time shows that the number of recorded uses for licensed operators fell from 1,293 to 995 between January 2019 and March 2023, while the number of uses for non-licensed operators increased.
Schnabl also reports estimates that show at least three quarters of online gambling turnover is generated on the black market. With more than 75% of illegal offers being used, this also results in significant tax losses amounting to several hundred million Euros.
By the way, it is important to distinguish between the percentage of players and the percentage of stakes when examining the channelling rate. If, for example, 20% of the players account for 80% of the stakes, the percentages have a very different weight depending on the basis.
Schnabl concludes that the channelling rate, i.e. the proportion of usage of licensed services, is around 50.7% while 28.9% of usage is accounted for by non-licensed EU operators
One could spend a long time discussing which of the two studies best reflects the actual market situation. What is certain is that the findings are worlds apart. It is also clear that they can only ever be estimates and forecasts, the value of which depends on the quality and completeness of the underlying data.
Who has the better insights? Black-market operators will not make their gross gaming revenues generated in Germany available. It is not possible to track the exact amount of all stakes flowing into the black market from all players in Germany, nor the actual number of all players connected to the black market or their proportional share. However, the industry sometimes has its own sources of access to data. Software providers know the turnover of their B2B partners. They can (representatively) compare sales and developments.
Software providers that deal specifically with consumer traffic and search engine analyses can create their own surveys. The question of what needs to be done can be left open. As long as it cannot be ruled out that the channelling rate in Germany is more in line with the estimates of the industry and its associations, the top priority of those responsible for regulation must do everything possible to win back the lost players. We are talking here about effectively combating the black market, nothing else. This does not mean years of enforcement attempts against illegal operators which, even if one or the other withdraws from the market, only ever hit the tip of the iceberg.
The main goal of the new Interstate Treaty on Gambling, which came into force in July 2021, is to channel players into the legal market, where they can play in a protected, state-controlled area. By channelling players into the unlicensed market, the existing player protection mechanisms of the current regulation are completely ineffective. Player protection does not take place.
It is therefore crucial to ask why players choose the black-market offer, to analyse what they miss in the licensed offer and to find out what needs to be changed to make them feel at home in the licensed market again. The discussion should seek to find these answers. They are the key to a maximum channelisation rate. The results of different approaches to analysis will hardly differ once the rate is high enough to speak of successful canalisation.
Dealing with these questions and their answers, with the figures and information obtained, must be open and transparent. The resulting conclusions must be drawn consistently, swiftly and independently, so that in the end it may not be called: Outside reality is inside the regulator’s office.
