What is the Value of a Licence? By Andrew Tottenham, Managing Director, Tottenham & Co June 5, 2019 at 2:45 am Although this article is mainly about the value of a licence for online gambling, I will start with land-based casinos. Originally, licences were granted to casinos for two reasons: as a means of controlling both who could own a casino and where a casino could be located. With regards to ownership, jurisdictions around the world have tried to control that by demanding that licensees must prove they are “fit and proper” to hold the licence. Jurisdictions control the number of gambling venues, or at least the location, through laws or regulations. Some of this control is through taxation; for example, Germany’s high taxation on casinos discourages there being many of them. I have seen an Interior Minister in one region in Germany, who wanted to drop the region’s gambling tax to encourage an investment, come up against the Finance Minister, who refused to reduce the tax because he felt it would lead to discord amongst the other regions and an uncontrollable number of casinos. Aggressive progressive taxation, as we see in France, actually encourages many small casinos as opposed to fewer larger casinos, because the tax paid by four small casinos would be less than one large casino. France does control the location: casinos can only be in spa towns. Although that definition has broadened somewhat, cities and towns that want casinos have to apply to the Central Government for the designation. Some countries reserve gambling to a State monopoly in the belief that it will curb supply and cause less harm. That still does not eliminate the clash between revenue goals and social goals. Until 2005, the UK only allowed casinos in permitted areas, with numbers within each area controlled by the dreaded “demand test” – applicants had to prove to a licensing justice that sufficient unstimulated existed for the proposed new casino. The 2005 Act froze the number of 1968 Act casinos and allowed 16 more, although lost in the dim mists of history is the fact that the Advisory Panel that determined where these 16 should be were advised to recommend areas which represented “a good range of types of area, and a good geographical spread of areas across Britain” in order to “best test the social impact and regenerative benefits” of casinos. In other words, the 16 were to be a test of social impact before deciding where to allow further casinos, probably to get around EU freedom of establishment rules – in brief, limitations of economic activities are only allowed for social impact reasons. As far as I know that test has never formally been carried out, but I digress; further discussion will have to wait for another article. The US first saw casino gambling in places other than Nevada and New Jersey, the two states that now have the strongest association with gambling. The first location was in Deadwood, South Dakota, shortly followed by three mining towns in Colorado, albeit with limited stakes and prizes. Although the broad location (the casino needed to be in one of the three towns) and the floor area to machine ratio was defined, the number of casinos was not, and so location within the town became the differentiating factor. Similarly, in states in the US that allowed riverboat gambling, we saw a game of leapfrog. A riverboat casino would open near a large city and do well; another entrepreneur saw how well the casino was doing and opened one closer to the market, to the detriment of the original riverboat casino; and then another would open closer still … and so it went on. Location was all. Once you had the best location, you could be reasonably confident that no one could build and open closer to the market and so the health of your business was assured. In jurisdictions that controlled the number and location (and size) of casinos, part of the value of the license was it gave the operator a geographic monopoly, or at least an oligopoly. Competition was fixed and limited. But this does not work the same way for online gambling, since there is no good way to restrict location or size. Yes, the number of licenses might be restricted but even one online casino or sports book represents a (potential) presence on every smartphone and computer in the country, and that doesn’t include operators who target jurisdictions from the outside – I will come on to this later. As I have written before, I find it strange that policy makers will seek to reduce the amount of land-based gambling and at the same time legalise and regulate online gambling. Is there less competition when there are ten online gambling licences in a country compared to forty? Hardly. So, if a licence does not provide value through limited competition what does it provide? Regulators and some operators will argue that it provides value in that consumers can be assured that they are dealing with reputable companies, that the games are fair, and that disputes will be handled impartially. That has to be true but many just players assume that to be the case with all operators with whom they are able to place bets, until they discover otherwise. However, with a licence comes responsibility, and responsibilities means costs. Licensees have to comply with all state regulations, and as we have seen, the costs of non-compliance have been very high. Firms have been fined very heavily for failures in AML processes and for failing a duty of care to their customers, where gamblers lose more than they can afford. Stride Gaming was recently fined £5 million for non-compliance issues. It also saw reduced revenues in the last quarter; was this reduction the result of full compliance? Was this fine and the costs associated with compliance some of the reasons that the company put itself up for sale? In “white” jurisdictions, the cost of obtaining and maintaining a licence is not insignificant. Legal advice, probity investigations, and software testing are not free. For large established companies, some of these charges are one off and others are easily absorbed. But for small start-up companies they can be prohibitive. Licensees must pay tax and pay it in the jurisdiction where they generated the revenue. Tax rates in most European countries are high, 25% of GGR, or in the case of Poland´s online sports books, 10% of betting turnover! Some jurisdictions are now forbidding advertising, either partially or completely, and obviously licensees have to comply. Unlicensed operators have no option but to abide by bans in traditional broadcast and print media, although Norway is struggling to stop online operators advertising on television channels that are available in Norway but broadcast from other countries. But unlicensed operators can and do continue to advertise widely using online media. Licences in places like Malta or Alderney had some value in that, until recently, they allowed companies to be located in their jurisdiction and freely – or so they thought – offer gambling services into all other EU jurisdictions. However, developments in EU jurisprudence have led to countries being able to demand that online gambling operators be licensed and pay the relevant tax in that country if they wish to legally offer online gambling services to the citizens of that country. In addition, some governments demand that parts of the system must be located in that country. For those that wish to target EU countries, the value of a licence in Malta or Alderney is much diminished. When you weigh the benefits of an online licence against the costs, it does start to look as if the balance is starting to tip towards not having a licence. Land-based companies, whether operators or suppliers, are comfortable with increases in the cost of licenses and compliance, because that increases the barrier to entry and reduces competition. In the online gambling space, operators and regulators need to be careful that they do not tip the scales too far, because increasing the costs associated with a licence does not necessarily result in increasing the barriers to entry or reducing competition.