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The IT Implications of the Latest Gambling Legislation

Global gaming expert Steve Donoughue, Senior Associate of, and Dr Peter Chadha - CEO of DrPete Inc - examine the IT implications of the latest UK gambling legislation.

The UK Gambling (Licensing and Advertising) Bill is well on its way to becoming an Act of law. For Westminster, this has been a not overly controversial 'cleaning up' exercise; moving Britain to a system of national licensing, after the debacle of 2009 addition of Antigua & Barbuda to the White List. However, the implications for the gambling industry, particularly relating to IT management, are significant.

A Law unto Itself

In essence, the Bill is relatively straightforward: An operator will need a license from the Gambling Commission if their gambling facilities are used in Great Britain (even if no equipment is located there). This will make the operator liable for Remote Gambling Duty and they will have to pay 15% of Gross Gaming Revenue on gambling transactions placed in Great Britain.

From a purely operational point of view, the revenue issue is where the controversy starts because Britain’s move to a national licensing regime severely affects the business models of the offshore operators.

Gibraltar is considering seeking Judicial Review as it believes this legislation is purely revenue-raising and not, despite government claims, about increasing consumer protection. The new law would also affect operators based in The Isle of Man, Alderney and Malta. The online industry has lobbied that a 15% tax rate will cause a grey market, but HMRC appears unmoved. Given Westminster's current penchant for clamping-down on tax avoidance, it doesn’t take a gambling pro to recognise a dead cert that the Gambling Bill will become law.

Technological Trials and Tribulations

The new Bill doesn’t just mean additional cost in time and money for operators and obtaining a licence is only the first hurdle. From an IT perspective, it could have a serious impact on delivery of services.

For example, operators will have to inform the Gambling Commission when they move equipment from one location to another and allow enforcement officers access to equipment/premises. They will need to ensure all gambling software is sourced from licensed providers along with further technical amendments being required to poker networks, payments and player accounts.

The over-riding issue is that all gambling software used in the UK will need to abide by UK technical regulations, which may not be the same as those of the jurisdiction in which they are located.

For start-up operators, or those originating in the UK, software compliance may be less challenging. However, for overseas operators, or those that have been part of a merger or acquisition (M&A), these issues will need to be addressed rapidly.

A Mobile Minefield?

In the last year, gaming has continued its worldwide expansion toward billions of gamers as new platforms such as tablets and smartphones have taken off. The traditional gaming companies and major entertainment brands are having to adapt to the digital shift and the barriers between social casino games and real-money online gambling companies are falling.

All of this means rapid development of new, responsive gaming software; larger servers and data storage operations and greater cross-border gambling activity, presenting something of a compliance nightmare for those operating in highly regulated markets such as the UK.

M&As throw up their own particular challenges. For example, William Hill’s acquisition of Sportingbet and JV with Playtech may appear relatively straightforward, given that Hill are UK-based. But, as has been seen so often when one company takes on the infrastructure of another, their IT team is likely to have inherited a legacy that included a host of non-compliant applications lurking behind the firewall.

While IT due diligence is critical before a gambling merger, thorough assessments are required before any IT changes are implemented, even within established, compliant infrastructures.

What Price People?

The sheer scale and growth of the online gambling sector has soaked up significant amounts of human resource. Operators need to build and maintain a strong team to handle fast-moving IT developments, but also include experts that understand the regulatory issues that legislation such as the UK Gambling Bill present. Having an IT specialist as part of a public affairs team could help avoid nasty surprises further down the line.

Value the experience of your existing IT experts – they are a scarce commodity - but also be prepared to draft in additional resources and expertise as required.

What’s the real impact on UK POC?

In the second analysis piece Peter Marcus the former COO of William Hill Online and UK Managing Director of Betfair looks at the potential impact of Point of Consumption Tax in the UK.

So now we know to our “great surprise” the UK Government want to have the POC tax on gaming at 15% and want it to be in place by the end of 2014. So will this happen and if it does what will be the real impact?

Is POC at 15% fair?

As someone who has moved two sportsbooks over to Gibraltar you may be surprised by my initial response, I personally do not have a major issue paying Gross Gaming Taxation on sports betting and gaming revenue on two conditions –

  1. It’s fair and everyone pays it (after all the main reason that so many companies moved their operations and management to Gibraltar was that they could not continue to pay 15% when others paid around 1%.)
  2. The rate set and rules attached allows the industry to continue to prosper grow and most importantly give good value to its end users. We need to learn from France where the ridiculous level of taxation has encouraged in the words of ARJEL significant levels of non-licensed betting and unfair, uncompetitive and tragically poor odds to the end user.

I would argue that the UK tax should be slightly lower, I think 10% would give the UK Government what they want, minimise unlicensed activity and actually maximise the Governments revenue whilst still ensuring competitive prices for the end user, but comparing the rate to other European countries it’s hard to argue that this tax is unfair.

What I would however argue is that the racing levy needs to change as part of this new legislation, the levy is an archaic system, where betting companies pay and have almost no say in the running of racing. The racing industry will receive significantly higher amounts if all online betting companies obtain UK licenses, they do not in my opinion need that much money nor I am confident that they will spend it wisely. I am fine for betting to pay for racing but I want to see the BHA involve the betting industry in their Board and for the levy amount to decrease as part of this radical change to online gambling.

Is POC going to happen in December 2014?

Obviously impossible to say but I consider this date unlikely. Firstly there is still the potential legal case from the some of the Gibraltar based companies, and there is some merit to their legal arguments which the Government will need to deal with before introducing any legislation. Secondly there is in my view a need for the Gambling Commission in the UK to ensure that non licensed business are stopped from operating in the UK once the legislation comes in. This is not easy to do and I am not in all honesty confident that the GC understands the online sector and black / grey market enough to be effective. If they can’t control it the whole thing will fail.

Finally the previous Gambling Act was rushed through at the end of a parliamentary session with a lot of political compromises which did not benefit anyone, I really hope this is not done again in such a fashion, can they really do all this within a year let alone issue the licenses?

What will the outcome of UK POC be to the Gaming Industry?

There is understandably a lot of doom and gloom written about the end outcome of a 15% GGR tax plus Racing Levy for all online gaming companies and for some operators I fully understand their concern, it will bankrupt them. But for others I believe it could actually be a blessing in disguise. I suspect after the initial shock of POC a few things will happen.

Everyone will have to rationalise their costs, cost control is not a high priority in most gaming companies, there is significant salary inflation and not many companies really run a lean machine. This will all change and the smart companies will start the change now, they will have to get their fixed costs down as the alternative is to cut marketing which in the long run will just hurt their market growth

There will be a reallocation of resources – I don’t think that the whole of gaming will leave Gibraltar there are still significant advantages to staying there including VAT and Corporation Tax not forgetting that people are already established there, why upset a well-oiled machine? But I suspect that some areas of some businesses will return to the UK, technology teams, customer services maybe even trading teams may be cheaper and more effective in the UK than Gibraltar.

I suspect that server farms will move back relatively quickly to the UK, Gibraltar and Malta servers, bandwidth and maintenance are very expensive and form a high proportion of the fixed costs, if they don’t have to be there and can be in the UK or another lower cost location I think that they will move.

For the larger companies I believe that this will be enough to continue to prosper but for the smaller companies I don’t think they have enough slack in the business or economies of scale to do this effectively. Some companies operate at around a 15% margin, that will not even cover the POC tax, I am not sure that they can survive in the long term.

So the smaller companies will go, either being bought or closing down, the larger operators will be able to reduce their costs and gain more customers and actually I believe in the long term thrive.

Sure there will be pain, sure some will lose but that’s always the case in business change, as for the larger operators the companies who prepare for the cost rationalisation and plan for a successful transition to the new tax now will be the winners. I just hope that companies are thinking and planning for the changes - they need to be, it could be less than a year away.

Opinion: Should Hills have divorced Playtech? by Peter Marcus - August 2013

Peter Marcus, former chief operating officer for William Hill Online and UK managing director for Betfair, asks whether William Hill was right to buy out Playtech from the joint venture and discusses what the future might hold for both companies.

The most frequent question I get asked is the following: Who won out of Playtech or William Hill in their JV? Should Hills have gone into a JV with Playtech in the first place and should it have left it? Was Playtech the sole reason for Hills’ success and if so, was it madness to finish the deal?

In business one has a specific need at the time and looks for someone to fulfil that specific need. So when the need goes so can – and should – the partnership.

So what were Hills’ needs in 2008? It had just had a massive failure in technology, the new in-house online software had been ditched, the previous CEO had left and the guy who first introduced online to Hills Ralf Topping had taken charge. It had chosen Orbis for the software but Ralf realised that Orbis, Amelco and the new website was only part of the solution. Online marketing was poor, users would start at Hills but once it “got” online betting or gaming, customers would go to other better operators such as bet365, 888 or Paddy Power.

On top of this there was a management issue, Hills’ online was treated like a retail shop with a web front rather than a shop front, and most operational and marketing functions were controlled by retail who just did not understand how the web was different. Finally in their minds Hill’s competition was Ladbrokes, Ladbrokes and Ladbrokes and the real online competition was ignored.

Take the brand name, new sports product and strong will of the CEO at Hills and add to it the marketing skills, software, and sales skills of Playtech, if managed properly you have a formidable company. Add to that the final ingredient of moving the operation out of the UK’s retail hub and into an independent online hub in Gibraltar and suddenly this joint venture no longer needed to look at Ladbrokes and Coral as its competitors but rather bet365, Paddy and bwin.

This was the genius of the deal put together by Ralf Topping and Mor Weizer and as we all know it worked beyond even their expectation. Sure there were issues, you will always have issues when trying to merge such different skills and personalities and of course there was the infamous strike, but in the end of the initial period, William Hill Online was not only worth a lot more than it was three years before but there was and is still no real sign of the company growth slowing.

So with this in mind, should William Hill have bought Playtech out when it did?

For me the resounding answer is ‘yes’ and it goes back for me to the start of the analysis. Hills now owns and manages a quality marketing team in Israel, it has learnt how to best manage VIPs, upsell to its customers and maintains the two customer service centres it acquired as part of the JV. From Playtech’s side it has learnt sports betting, proven it can offer far more than good software and can through their affiliated marketing and operational expertise grow a stagnant UK sportsbook.

The need for the JV is therefore over. Playtech walk away with their heads held high and a significant profit, and Hill’s walk away with the largest, most successful and in my view most sustainable betting business in the industry. So why would they want to continue?

But both sides should be careful moving forwards. William Hill must be very careful not to forget the lessons and skills that it have learnt in the past four years – its old nemesis Ladbrokes fell fowl of that and its challenges while not insurmountable are now significant. My warning to Hills would be now that you do not have Playtech in the boardroom reminding you of how to run direct marketing and VIP management, don’t fall back into the abyss of big company politics. Remember online has very little resemblance to retail so keep them very separate and don’t dilute in time the lessons you have learnt.

Playtech is clearly trying to replicate the same formula with Ladbrokes and to a smaller extent Corals. But its problems and strategy are different, the willingness of management different and the evolutionary time in gaming different. Playtech need to ensure that it creates the right framework and oversight for this new Ladbrokes partnership and not try and copy what worked before in Hills.

If both sides heed these warnings I think we will be seeing the two companies as leaders of our industry for a very long time.

How to get the I.T. right when gaming firms merge...

This an article appeared in the e-gaming review magazine on managers and acquisitions in online gaming companies. see for further details. (July 2013)

Before you start any M&A you need to answer a lot of questions

According to Digi Capital M&A in e-gaming hit a record $4b in 2012. Whilst this shows that M&A is heating up transactional volume actually dropped by 27%, in effect there were fewer but larger deals. Already in 2013 we have seen the Sportingbet deal, William Hill’s probable buyout of their JV partner and the question of who will Playtech buy next with that money. With the looming UK regulation and its potential impact on small and medium operators, not to mention regulated US Poker this indicates to me that 2013 could be the year when the industry finally starts to truly consolidate.

But be warned it’s also too easy for the M&A to be done for the wrong reasons such as increasing the share price multiple or buying revenue rather than longer term sustainable strategic reasons such as obtaining economies of scale, increasing bottom line revenue, entering new markets or buying expertise. Too often I hear the question “Now we have bought the business what do we do with it, how do we operate and what should the integration plan be?” Operators spend months negotiating the finer legal points around an M&A yet spend very little time before the deal is done even contemplating an integration plan.

Having directed two large and complex integration projects I have devised five golden rules that need to be answered before any lawyer even starts to look at a prospective M&A deal.

  1. Know what you are buying- sure you have seen the numbers, spread sheets and due diligence but what is the culture like, what brought the company its previous success and can that continue? What’s the history and reputation of the company? Is there more than a database on offer? If you can’t answer don’t buy.
  2. How much is the target company really worth – Why do people still look at GGR as a metric? Never accept the answer “we spent a lot of money on branding 18 months ago, we now have a good loyal customers base with great retention so no need to spend at that level moving forwards”. It’s not true the cycle will turn and your metrics will all go the wrong way. In essence does the company’s valuation have any resemblance to future reality?
  3. What’s the M&A strategy? - Do you want to grow in a specific market, do you need a product you don’t have, do you need marketing expertise and what's your brand strategy going to be? More importantly can you cut costs and make the company more efficient and increase bottom line revenue if so how? Will buying a company fix your company’s problems or is it more of a quick band aid job?
  4. Can you integrate and if so how long will it take? - It all starts with technology, be realistic if, how & when you can merge the IT- then add another year. Staff and process integration is slightly easier but still fraught with problems and can only really start after the technology integration. You must pre plan a staff retention strategy for both sides, if not you lose the good ones first.
  5. Don’t try and integrate by yourself bring an expert in - The COO, CTO, CEO or a project manager from the company are not best placed to manage integration, the core revenue will be impacted, they don’t have the time, they don’t have the expertise and they are bias to one side. Use the services of a Gaming Integration Director and team, they have done it before know the issues and are able to independently assess the structure, facilities, employees and brands of the bought and buyer to recommend the best future structure and strategy, then oversee the actual integration.

By following these five rules I believe that the longevity and profitability of our industry can be assured no matter what regulation and taxation is thrown at us.

Peter Marcus was the former Chief Operations Officer for William Hill Online as well as UK Managing Director for Betfair.

Time to look to Europe for real money egaming experience by Peter Marcus

I am sure that this issue will look and feel very different from all the previous editions, it’s no longer if or when online gaming (igaming) will be permitted and regulated in the USA but which State will be next to regulate. It’s finally happened; online poker and in some cases casino will be allowed again in three States and by the time this magazine is printed who knows maybe even California and by some of the Tribes, (OK a bit hopeful but you never know). What’s more in truth few was really expecting this, it was assumed that Governor Christie would veto the bill and we would have many more years of asking when if ever US citizens would be allowed to legally use the internet to play poker, blackjack and casino, yet the conditional veto and record breaking passage of the amended bill also forced Nevada to rush through their legislation and so welcome to a new age, it’s called regulated real money i-gaming in North America.

BUT there is also a big problem, as no one was expecting this to happen, almost no company is ready for it and for some potential licensees and Tribes they have not even got to first base in truly understanding real money i-gaming. Up to now most experts in the US have been talking about social games, token poker etc., this would create interest and a database and in time that database could be used to market real money gaming if it ever came. Well it’s come, the databases are not big enough if even started and I am afraid to say in all my experience of marketing real money gaming around the world very few free or social gaming players convert into to real money players.

I went to an excellent conference last month in Las Vegas called i-gaming North America, a lot of potential operators, potential regulators and potential software providers attended. When I spoke to each of these groups and asked why they were attending most said the same thing, we need to learn about the industry, no one has done real money online gaming here and we need to work out how to do it. A well respected legislator was talking about the challenges his State had to introduce i-gaming especially in player protection, child protection and fair gaming (all totally understandable) and how he was looking to the land based rules to help, I asked if he had looked at the regulations in countries such as the UK, Spain, Denmark, Gibraltar and Malta surprisingly he said he said ‘no, things are different in the US’. Shocked I asked if he realised that many of the European regulated countries have incredibly strict rules on player protection, KYC, AML and so on and have also altered and changed regulations to account for things that worked and things that don’t.

My conclusion from my week in Vegas is that the US potential operators, legislators, Tribes, regulators and providers need a crash course on how to run real money online gaming and for that the obvious place to look is Europe. Operators big and small in Europe have gone through the transitions from free market to local regulation, they have learnt the hard way how to operate in some very restrictive regulatory and fiscal jurisdictions and how to change the gaming model each time to make it work. There is significant competition with major operators in Europe each trying to gain the upper marketing hand and customers moving at will when a better deal comes along. In Europe we have had to learn hard and fast how to offer that little extra, better product, better service, better VIP management to retain customer loyalty and hence profit. More importantly in Europe we have learnt what marketing campaigns work and which do not, we have learnt how to brand online gaming to get customer interest and how to deal with player bonus abuse, fraud and how do payments efficiently. In the last three or four years of European regulation we have also learnt how to ensure genuine customers can gamble within their limits but underage or vulnerable customers don’t go anywhere near our sites, and yes in Europe we have even learnt how sports federations and betting companies can work together to ensure sports integrity and work with the authorities to spot any irregular betting patterns – how much better than pretending betting on sports does not occur in a country. Most importantly we have learnt that the marketing and operations of real money online gaming has very little resemblance to either land based gaming or social gaming, and to date, with the exception of Caesars or the 888/ Treasure Island JV, that’s the only experience that US operators and Tribes have, there is a very steep learning curve to make real money gaming work, one that Europe have already been through.

In essence I implore America don’t try and re-invent the wheel, sure there will be differences between Europe and the US, sure customers behave differently, sure rules need to be right for the culture of the country and so does the acquisition and retention marketing but that’s just as true if not more so for Spain, Denmark or Australia and the European real money online gaming industry have been very successful at understanding those cultural differences whilst ensuring that the lessons from one country are transported to the next.

Many of us have been operating real money online gaming for a long time, I like many others have made some mistakes, made a few bad marketing decisions and learnt the hard way how best to manage and treat customers, but over time we got better, made less mistakes, learnt from past experiences and have made a lot of money for the companies I have worked for. I fear that if American companies and Tribes do not look across the “pond” these same mistakes will be made again and with the type of tax proposed by each State such mistakes could be a fatal blow to those companies.

So my message is you are not on your own, talk to people who have done European real money gaming before, understand how to run a real money operation, contact centre and marketing, use people who have gone through all the changes in Europe and come out the other side profitable. Europe has a wealth of knowledge to assist in making US real money gaming a quick a massive success, use it.!

Peter Marcus was the former Chief Operations Officer for William Hill Online, UK Managing Director for Betfair and CMO for CryptoLogic.