Can the UK Remain at the Centre of the iGaming Industry?

Posted by Harry Kane on Tuesday, July 30, 2019

Let’s start with a basic assertion; the iGaming industry in the UK is firmly established as the most progressive and lucrative in the world. This is borne out by the figures too, with the market’s GGY having peaked at £5.6 billion in the year ending September 2018.

This represented a 2.9% increase from the figures recorded in March, which in turn followed on from growth of more than 13% during the previous year. At first glance, there are no immediate signs that this rate of growth will diminish significantly in the near-term, whilst iGaming brands in the UK are currently focused on expanding into the burgeoning U.S. marketplace.

If you delve beyond these headline figures, however, you’ll see that there are winds of change blowing throughout the iGaming industry in the UK. These could alter the landscape of the sector considerably, whilst making it difficult for the UK to maintain its hard-earned status as the capital of the world’s iGaming realm.

How Did the UK Become the World’s iGaming Capital? A Brief History

As Brits, it’s all too easy to take the prevalence of online gambling for granted in the UK. After all, virtual sports betting and casino gameplay has been widely accessible ever since Tony Blair’s government passed the ground-breaking Gambling Act back in 2005, whilst the growth of iGaming in the UK has dragged games of chance kicking and screaming into the consumer mainstream.

However, a trip to the U.S. quickly puts the size and the scale of the UK’s iGaming market into perspective, with online casinos and betting sites still banned in various states throughout North America.

The recent decision of the US Department of Justice (DOJ) to reverse its opinion on the 1961 Wire Act also means that interstate gambling remains prohibited in the States, creating a scenario where iGaming growth will be restricted for the foreseeable future.

Back in 2011, the DOJ was of the opinion that the Wire Act (which had moved to ban all forms of interstate gambling) should only be applied to sports betting, and this paved the way for multiple U.S. states to launch huge-scale online casino and poker operations.

The most recent decision represents the latest setback for an industry that has continued to take one step forward and two steps back over the course of the last 20 years, whilst it also takes some gloss off the decision of the U.S. Supreme Court to strike down a 1992 federal law that effectively banned sports betting in all but one of the 50 states.

Whilst the U.S. may be slowly moving in the right direction in terms of legalising online gambling and realising the full potential of its iGaming market, it’s actually one of many countries that is battling to overturn archaic and largely outdated legislation.

As a result of this, it’s little wonder that the UK has become the epicentre of the world’s online gambling industry, particularly its own unique approach to legislation and regulation.

One of the most progressive elements of the 2005 Gambling Act was its focus on deregulation, which made it far easier for companies to secure licenses and create profitable business models (both for firms based in the UK and offshore).

This involved many of the barriers to entry that once surrounded the market, whilst also increasing the amount of money that was subsequently reinvested into the economy (we’ll have a little more on this shortly).

In essence, this created a competitive marketplace that was extremely player-centric, with online gamblers able to compare operators and benefit from incredibly lucrative promotional offers. This has slowly but surely established a loyal player base, whilst inviting a growing number of casual players to register online.

The Gambling Act also made it easier for operators to advertise online and through television, both during live sporting events and regular broadcasts. This has helped iGaming to emerge as a prominent feature of the UK entertainment industry, and one that arguably becomes increasingly mainstream with every passing year.

This coincided with the smoking and tobacco advertising ban in the UK, creating a significant revenue gap for sporting events and brands nationwide. As a result, organisers turned to new sponsors to fill this void, and the UK’s profitable iGaming brands were more than happy to step up to the mark.

This has also enabled gambling brands to forge lucrative relationships with sports stars and teams over time, with iGaming now synonymous with football and a host of other sports. We’ve also seen a number of high-value sponsorship deals emerge from this, boosting the profitability of operators whilst also exposing them to a larger number of players.

We touched earlier on taxation too, and another piece of legislation saw the levy applied to any winnings accrued by a player completely scrapped. This has certainly helped to increase demand in the marketplace, with both casual and serious gamblers now incentivised to play more frequently and optimise their profitability.

Until recent regulatory changes, the Remote Gaming Duty (RGD) was capped at 15%, with this levy payable by all operators who allow players to wager online. This is a competitive tax rate that has incentivised operators to base themselves in the UK and invest in their own growth, creating a self-sustaining market that generates huge revenues for the UK Treasury.

So What Has Changed in the UK Marketplace?

After a period of sustained and impressive growth for the iGaming market in the UK, the beginning of 2018 ushered in something of a sea change for operators nationwide.

It was at this time that the UK Gambling Commission (UKGC) unveiled a new set of core strategic objectives through 2021, which were focused primarily on the protection of vulnerable players and the safeguarding of the industry’s reputation as a whole.

Since this time, the UKGC has implemented a number of new measures, from removing the restrictions placed on withdrawals and the lessening the impact of operator wagering requirements to aggressively sanctioning firms that fail to protect vulnerable players adequately.

The Commission has also moved to punish operators that have failed to impose stringent anti-money laundering legislation, and in total UK firms paid a staggering £19.6 million in penalties during 2018 alone.

Whilst this sum is barely 0.13% of the GGY recorded by the iGaming marketplace in 2018, it betrays a dramatic increase in a relatively short period of time. It also includes a record £7.1 million fine for the online casino operator Daub Alderney, which runs a number of different sites and was found guilty of anti-money laundering and social responsibility failures.

The popular Paddy Power Betfair brand was also hit with a £2.2 million fine last year, with other firms also being heavily sanctioned for allowing customers to gamble significant sums of cash in short period of times without having their means verified.

Whilst this change in regulatory approach has hit operators hard and placed a considerable squeeze on their profit margins, this is not the only challenge facing the UK market.

In fact, the industry is arguably been placed under even more pressure by the introduction of new legislation by the UK government, whose Department for Digital, Culture, Media and Sport (DCMS) has launched a significant crackdown on fixed-odds betting terminals (FOBTs) throughout the UK.

These high-stakes machines have historically allowed gamblers to wager up to £300 per minute on virtual games, but after an extended investigation at the beginning of 2018 the Culture Secretary announced that the maximum betting stake for FOBTs would be slashed from £100 to just £2.

This represented a seismic blow to offline operators, many of whom are also big players in the iGaming space. More specifically, bookmakers reported an FOBT spend of £1.7 billion in the year ending September 2015, with this accounting for a whopping 56% of their profits during this time.

The controversial cap was rolled out nationwide in April by the UK Chancellor, and operators have been forced to reconsider their growth strategies whilst also counting the cost of dwindling share values. Whilst most multi-channel operators would have considered investing more of their time and money online, these plans have also been impacted by a proposed hike in the aforementioned RGD levy.

As part of his autumn budget statement last year, Chancellor Philip Hammond announced that the RGD rate would increase from 15% to 21% in October 2019, with this dealing yet another blow to operators in the UK.

At the same time, increasingly progressive iGaming regimes in countries such as Spain are stealing a march on their UK rivals, having recently announced a 5% reduction in the levy applied to gross gaming revenues. Significantly, this has fallen from 25% to 20%, which means that it will soon offer a more appealing proposition to operators than the UK.

The Spanish government has also empowered enclaves like Ceuta to offer further tax cuts to operators, with this partially autonomous region currently applying a meagre 10% tax on net profits. At the same time, iGaming firms need only pay corporation tax at 12.5%, and with this in mind it’s little wonder that UK-based operators are already considering relocating overseas.

There’s no doubt that these type of tax breaks (which were once commonplace in the UK market) will becoming increasingly appealing for British iGaming firms, particularly those that are active both on and offline and are having their profit margins continually squeezed.

As if these considerations weren’t enough, the spectre of Brexit is also contributing to a perfect storm that threatens to significantly undermine the UK gambling sector. At present, the UK looks likely to leave the EU with or without a withdrawal agreement on October 31st this year, with the prospect of a no-deal Brexit one that will impact heavily on the industry.

This continued uncertainty is certainly hindering the ability of operators to plan for the longer-term, whilst a sudden break from EU legislation will also prevent UK firms from selling into European nations and pooling their resources with their contemporaries in countries such as Spain, Italy and Sweden.

What’s Next for the Marketplace?

Whilst it’s easy to see how the UK became the capital of the global iGaming space, it should also come as no surprise that this hard-earned reputation is currently under threat.

Even aside from the current challenges facing the region’s iGaming market, we must also consider the continued political uncertainty and the potential for further legislative changes in the future. One of the biggest concerns is the current Tory leadership campaign, which could ultimately trigger demand for another General Election and the ushering in of a new Labour government.

It’s no secret that Labour’s deputy leader Tom Watson advocates a more aggressive regulatory stance for the iGaming market, in order to counter the significant social challenges posed by online gambling.

There appears to be a pressing need for this too, with the UK’s first gambling addiction centre for children set to open in September and a staggering 450,000 youngsters aged between 11 and 16 currently betting regularly nationwide.

According to Watson, the 2005 Gambling Act (and even the updated iteration published in 2014) now exists as a piece of analogue legislation in a digital world, and one that has been overtaken by the growth and evolution of the nation’s iGaming market.

He’s therefore pledging a significant overhaul of iGaming legislation in the UK, which would almost certainly lead to the introduction of more stringent regulations and a less progressive marketplace.

This may even include a full review of all remote gambling licenses that have been issued since 2014, during which time companies will have to demonstrate their corporate responsibility and capacity for preventing harm to their customers.

Given the challenges that operators have faced in terms of recent failures and financial sanctions, it would prove difficult for some companies to continue selling their verticals. This could well create a scenario where the size and competitiveness of the market is reduced significantly, leaving the UK far behind its rivals in Europe and even the States in the longer-term.

This should be a huge concern for operators, and there’s no doubt that the UK market is gripped by uncertainty at present. Whatever happens, it seems unlikely that the UK will remain the capital of the iGaming space for long, particularly with nations such as Spain on a significant upward trajectory.