The continued growth of Gibraltar’s world-leading eGaming sector
The talk was all about collaboration, embracing new technology, and keeping customers safe, when industry experts met to consider the future of gaming at the KPMG eGaming conference, Ray Spencer reports
But just below the surface, spoken only sotto voice, was growing concern at how two US businesses – Amazon Web Services (AWS) and Google – are limbering up to use the Cloud and enter the eGaming market internationally.
There is a perceived risk that the two firms might gobble up US online gaming revenue – predicted to dwarf that of the UK and Europe combined – and be transformative for the gambling industry worldwide, much as has been seen with online video streaming and terrestrial TV channels.
In January, Amazon was linked with development of a cloud gaming service streaming to homes and last summer Google revealed its xCloud, while Apple is interested too and Sony is trying to develop what has been dubbed ‘the Netflix of gaming’.
Speaking at the 9th annual KPMG eGaming conference, attended by 280 professionals at Gibraltar’s 5-star Sunborn Hotel, Peter Isola, senior partner of ISOLAS law firm, held: “The issue now is how gaming operators can use the opportunities presented by Google and Amazon cloud services: how, as a jurisdiction, can we measure the footprint to ensure we maintain the level of regulation that we have established.
“It is important to us that the gaming company’s footprint remains in Gibraltar economically.” Isola’s remarks brought into sharp focus behind-the-scenes activity to recast Gibraltar’s Gambling Act by the autumn to ensure it remains the premier jurisdiction for licensed online gaming companies and their suppliers.
“We still have the original remote gambling licenses”, Peter Montegriffo, a partner specialising in eGaming at Hassans law firm, noted. “The proposed reforms are not just about regulation of tech, but must also take account of substance requirements and tax developments. Some of the models adopted in other jurisdictions need to be reviewed. There should be renewed consultation before any final position is adopted,” he declared.
Basically, the issue is about servers and where they can be located and what each does. Andrew Lyman, Gibraltar’s Gambling Commissioner, explained: “The present licenses for gaming companies are predicated on location of technology and we want to maintain some regulatory discretion over what we do and don’t grant, so I think we will end up adding ‘mind and management’ to the legal criteria. Rather than drop the IT provision, we are more likely to say we want to retain discretion.”
Reviewing servers
Ten new licences were issued in 2018-9 to six companies, split evenly between gaming operators (B2C) and games developers & suppliers (B2B). Companies have significant resources and investment in Gibraltar, yet others, particularly start-up B2B firms, want to be on The Cloud, which potentially lowers operators’ costs to fund things like, compliance, ensuring Responsible Gambling (RG), and flexibility. At present Gibraltar does not permit server use beyond its territory.
Consultation with the industry also involves B2B companies – they account for half of the 30 eGaming licenses – and many want to be on webservers like Google Cloud or AWS, because “they contend that the cost of bandwidth here is relatively expensive, and the cost of kit”, Lyman declared, “so we’ll probably end up licensing the B2B software and supply chain to Gibraltar’s B2C licensees, but with some flexibility on IT infrastructure”.
After the £10,000 application fee, gaming companies at present pay £100,000 for their licenses and B2B’s pay £85,000, although they don’t pay gaming tax. “We will look at how small start-ups might initially be assisted by a reduced charge”, but as Lyman observed: “I am certain that whatever results, we are not going to make everyone happy! If we are too liberal with our licensing regime, some who have built size and scale here – people and offices – will say it’s unfair, while others want to supply Gibraltar firms using remote servers and they must pay for the privilege.”
In the UK, where gaming companies already can use remote internet servers, there has been pressure on profits after fixed-odds betting terminals – dubbed “the crack cocaine of gambling” because of their reported addictive effect on players – maximum stake was cut from £100 to £2. The Point-of-Consumption tax for UK online bets has also been raised from 15% to 21%.
Profit pressure grows
“That has put further pressure on Gibraltar-based gaming companies, because we are paying more tax direct to the UK, reducing profitability in Gibraltar and making the local 10% corporate tax rate less beneficial as there is less to tax”, Gibraltar Betting & Gaming Association (GBGA) spokesperson, Paul Foster, explained.
“Over the past year or more, there has been lower profitability generally for gaming companies, because of compliance costs and greater regulation”, Foster declared. Most companies had taken a profits hit of between 5 – 10% as a result, some being up to 20% down.
Hence the interest in embracing the US market – which last summer permitted sports betting in all States – to offset other pressures, and all major firms are securing alliances with US casino and other gambling operators.
GBGA’s Foster was emphatic: “Concern over Amazon and Google is not misplaced – we can never rule them out – so we should be wary as an industry. They are saying they can cover all of the US, but at present they are not involved in any eGaming. There is no such thing as ‘the Cloud’; it’s just somebody else’s server.”
Foster, who is Digital Compliance and RG Operations Director for GVC Group, Gibraltar’s largest on-line gaming company, insisted: “The eGaming industry wasn’t created in the US, it was born in Europe and we know how to do it – they don’t. They are recruiting from Europe, but all European operators are going out there and securing their own local agreements. You will never be able to go in The Cloud throughout the US, because it’s state-by-state rather than Federal regulation.”
Gambling Commissioner Lyman revealed: “We have a generally risk-averse license regime. At one time we would only accept established brands, now we are slightly less risk-averse and have included a couple of well-managed B2C start-up businesses. Not all start-ups necessarily will succeed, but if we didn’t accept them, we would simply drive them to other jurisdictions.”
The first to benefit from license relaxation for start-ups two years ago was Addison Global, (AG) with former William Hill Operations Director Juergen Reutter as chief executive: in August 2018 AG launched MoPlay, an on-line betting and casino gaming site employing 80 people at the Gibraltar World Trade Centre. Mobile-focused Lottomart, another new B2C was licensed in January.
UK guarantees access
The UK – at present the largest eGaming market – has guaranteed continued access for Gibraltar businesses after leaving the EU (Brexit), which equally affects Gibraltar, but it also has prompted companies with EU customers to make contingency arrangements. Some EU states insist that gaming servers be within the bloc and this has led most affected companies to seek operating licences additionally in Malta or Ireland.
In February, GVC re-located two servers and some staff to Ireland in preparation for its EU-facing online gambling business, utilising Malta eGaming licenses, but it emphasised: “Our online businesses will continue to be headquartered in Gibraltar” where it opened in 2008 and now employs over 1,000 people locally, 15% up on a year ago.
BetVictor and William Hill, with around 350 staff each, and Lottoland (some 250 staff) and 888 (230 staff), are amongst others publicly committed to remain in the jurisdiction.
But in late May, bet365, Gibraltar’s second largest online gaming business with around 550 staff locally, confirmed it was relocating most operations to Malta, where it has a large office complex “to maintain and enhance operational efficiencies”. Foreshadowed a year ago, the move prompted on-going government negotiations over how many and which posts must stay to satisfy Gibraltar license obligations, including still having a degree of substance in the territory, such as offices, staff and some ‘mind & management’. Interpretation of those requirements will be a government decision.
Recruiting scramble
Almost all gaming companies have been scrambling to attract bet365 staff, and holding recruitment fairs. “There are a lot of vacancies, because Gibraltar has been suffering, particularly since Brexit negotiations began, in obtaining talent and it has left open a number of job opportunities. Without a shadow of doubt, the market will easily absorb every single person wanting to stay,” asserted GBGA’s Foster.
Albert Isola, Minister for Business and responsible for eGaming, insisted: “Gibraltar remains the best jurisdiction in the world from which to do well-regulated, reputable online gaming business”. Two weeks after bet365 confirmed its Malta move, Gamesys, a prominent UK-based gaming operator and games developer formed in 2001, launched a new UK sportsbook site, Virgin Bet, that sits alongside fellow group Gibraltar licensees, including Profitable Play and Leisure Spin.
Gibraltar’s eGaming firms today employ around 3,800 people, 300 more than a year earlier) and in total contribute around 25% to the local economy. Minister Isola insisted: “The sector continues to make a very significant contribution to the economy in terms of corporation tax, PAYE and gambling charges and fees.”
Tax changes neutral
Gambling taxes previously were based on Gross Gaining Yield (GGY) – stakes minus payout – at 1% with a £425,000 cap pa that benefitted larger operators; now there’s a more progressive GGY tax rate of only 0.15%, but with no limit.
As a result, in 2018-19, the government found revenue from gaming duty and licences down £1.5m to £12.5 million, but in the current year revenue has been forecast to be £14m, broadly flat year on year. No separate figures are available for the sector’s PAYE and business tax income.
“There continues to be a lot of consolidation in this industry”, Hassans’ Montegriffo noted, but also revealed: “I have evidence of significant private venture capital funds looking to invest in existing gaming operations in Gibraltar and elsewhere; there is still a keen appetite for growth in this area and to chase opportunities as they open up.”
The government believes “there is a major opportunity for operators to expand into Asian markets from Gibraltar” and the review of gambling, now being led by retired Gambling Regulator, Phil Brear, is expected “to build one gold regulatory standard again that is fit for the future”.
No rush to enforce
On the planned introduction of fines for license transgressions rather than revoking them, the Regulator maintained: “Gibraltar, essentially, is a compliance-based regime and we work on the basis of the lowest form of intervention to achieve the objective, which means I don’t want to rush to enforce action – though I couldn’t rule it out.
Through structured site visits to operators, Lyman is discussing standards and identifying areas where improvement is needed. “For example, companies have been very focused on the UK, but international business is also being done from here, not just within the EU, and I need to ensure that similar standards are applied across the entire business,” he said.
GBGA’s Foster commented: “The current regime is a very blunt instrument and we don’t like it as an industry. We believe there’s no point in having rules if nothing happens when they are broken and if we want to build a better regulatory framework then we need reasonable and proportionate enforcement.”
In November, the UK Gambling Commission (GC) revealed nearly £14m in penalty packages will be paid by three online casino companies over failings to put in place effective safeguards to prevent money laundering and keep consumers safe from gambling-related harm.
Gibraltar University is establishing what it hopes will be a world-leading charitable research facility focusing on aspects of Responsible Gambling (RG) with a budget of more than £2m a year funded through an industry levy and also fines.
The GBGA believes that any UK fines paid by Gibraltar-based companies should be given to a Gibraltar RG project to help problem gamblers. The plan is for the University to establish an international RG Centre of Excellence with firms collaborating by providing anonymised data and the research findings shared with all contributors. At present, privacy laws prevent data sharing on individual problem gamblers.
Prof Catherine Bachleda, project leader, explained: “There is a lot of information out there in companies that have their own research programmes, in data held on customer experiences, age profiles, etc. and on what works and what doesn’t.”
£2m for information sharing project
Andrea Lazenby, Lottoland’s compliance director, suggested: “In the last year there has been a sea change – a new appetite to collaborate and discuss the agenda for future action in relation to RG. Customers are more savvy today and are asking what we are doing.”
Yet Sarah Hanratty, deputy chief executive of Senet, an independent RG standards UK industry body, maintained: “If there is collaboration, there needs to be tangible change. From my experience with the alcohol industry, [collaboration] needs to be done quickly; it will come about only when industry chief executives meet to give the subject focus.”
Ian Ince, Playtech’s head of regulation and compliance, felt: “Regulators also need to collaborate more on standards required – some have a less generous approach to the industry. Media and public agencies are prompting regulators to take action that is not well researched and with a knee-jerk reaction. The risk is that regulators are more interested in what the Guardian or Daily Mail newspapers are saying, rather than listen to the industry about what really is happening.”
Regulatory difference
Gibraltar and UK gaming authorities have committed to “greater regulatory alignment”, but industry sources in the jurisdiction suggest the stances on regulation and enforcement “are going to stay quite a long way apart”. One source who chose not to be identified, claimed: “It’s very strict in the UK in terms of investigations and not working with the industry, whereas in Gibraltar it’s more a case of working with the industry to find solutions.”
While pointing to a similarity of regulatory approach in the UK and Gibraltar, Lyman (who was involved in the establishment of the UK GC) conceded: “The UK GC works in a difficult political and media environment, as I have found also with other European regulators, and still has been effective in raising regulatory standards.
“There is however, collaboration based on commercial understanding between the Gibraltar regulator and licensees on compliance and policy”, Lyman suggested: “The UK GC will continue to take its approach, but that will not stop me being collaborative in Gibraltar.”