Policy choices are becoming more stark – they are also becoming more disruptive.
Italian and French regulators have published performance statistics for their markets for Q1 2016; the UK Gambling Commission has not yet (it does not provide quarterly stats), but results can be triangulated from public company filings. They tell a clear story which many in the industry have known intuitively, but now the evidence bears out: light touch regulation maximises potential, maximises tax yield and minimizes illegal activity. The opposites are equally true.
On the face of it, the French gambling market is following international trends: horseracing is material but struggling to grow; sports betting is growing strongly but getting more competitive; poker seems to have turned a corner but is still a very difficult market: plus ca change. However, France has a swingeing turnover tax (7.5% for sports, 2% of the pot for poker; a further 8.5% for horseracing not included in tax calculations), and has banned casino. Veterans of the industry may remember that France was the #2 market of the casino businesses bought by WHO in 2008; it is reasonable to assume that the French have not stopped playing casino games online just because they are not authorised by l’etat. Equally, turnover taxes directly affect the price of sports bets; it might be reasonable to assume that some shrewd French punters prefer value over regulation. These market forces lead to a black market: we believe a big one. Optically however, revenue growth is an anaemic 6.0%.
Italy, on the other hand, has been liberalising its online gambling market, in terms of participants, product and tax. On the face of it, this has led to material growth: 21.4% between Q1 2015 and Q1 2016. By liberalising, Italy has (and continues to) bring successful gambling businesses into the regulatory framework (more visible revenue = statistical growth). It has also increased regulated product flexibility, which has the short-term impact of reducing the attractiveness of non-licensed supply and the long-term impact of increasing regulated innovation. Finally, by moving (most) products to a gross profits tax, it allows regulated supply to be competitive on price. We believe that underlying Italian market growth is a far less impressive 8.2% underlying, but regulatory capture has materially increased. Regardless of exaggerated growth, the Italian government should see this as a fiscal and social responsibility victory of some note.
Great Britain has taken a very different approach to gambling regulation from these two of the “Original Six” for some time. It worked out in the late 1990s that statist principles of keeping crime out were probably becoming counter-productive, although legislation and regulation did not catch up until 2005-2007. Fulfilling a national stereotype, GB worked out the fiscal limitations of turnover tax much faster: the government proposing GPT in early 2001 and delivering it several months later – the UK gambling sector has (corporate avatism notwithstanding) never looked back since.
France, Italy and the UK have broadly similar populations. They also have broadly similar GDP. Broadband, smartphone and banking penetration varies more, but not by much (especially choice vs. adoption). Anyone who believes one culture has a greater tendency to gambling than another (in this context) should probably travel more. And yet the British commercial remote gambling sector is over 3.5x bigger than that of France or Italy.
What is even more remarkable is when effective vs. real tax rates are compared. An element of this analysis is subjective, since no-one can know the size of a black market. However, the data triangulates well. GB charges a 15% tax on all products and collects substantially all of a large, vibrant and growing market. Italy has moved to GPT and now collects much more tax on a more visible market, which has (probably) been unshackled from growth restrictions. France attempts to collect c. 50% in tax but succeeds in collecting less than 20% of the available tax in a market stunted by regulation.
The evidence is now clear. If a jurisdiction bans or restricts products, it will create a black market. If a jurisdiction imposes a turnover tax, it creates a price differential opportunity in favour of black market operators. If a jurisdiction removes both of those barriers, it creates a much larger, more visible and effectively regulated remote sector. This may be at the expense of more traditional channels (land-based) and products (lottery, horseracing), but it is hard to argue that is at the expense of the customer or keeping crime out (the opposite can be more cogently argued). Policy choices are becoming more stark – they are also becoming more disruptive.
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