For whom the bell tolls: Offshore operators threaten legal market growth

The offshore gambling market was supposedly a thing of the past. So caught has the world become in the regulation of betting and casino gaming that, for many stakeholders, the idea that the offshore market would survive was foreign.

How could these unlicensed operators compete with the safety and reliability of operators, the argument ran. It also proved to be a serious miscalculation. While consumers care for things like legitimate casinos that offer consumer protection measures, some of the biggest spenders are, in fact, undeterred by such considerations.

Consumers do not understand "legality" in the same terms as a business must to avoid a hefty fine. Rather, consumers go where the best offers are and, for better or for worse, offshore websites often have more wiggle room to make these offers happen.

Regulators and businesses are waking up – offshore markets are alive and thriving

Call it a rude awakening if you will. Regulators around the world are waking up, and politicians, trigger-happy and populism-embracing as they are, have come to learn that there is little sense to give in to impulses.

In the Philippines, President Bongbong Marcos, a people-pleaser, has cautioned against efforts to do away with the domestic online gambling market, correctly remarking that suspending all forms of legal gambling would have an adverse effect in the end, empowering the offshore market.

Offshore gambling operators in the Philippines are said to account for 50% of the total market share, a considerable amount. But it is not just the Philippines that is resisting populist instincts and having a reckoning with the cold facts.

The Netherlands has adopted one of the most transparent gambling frameworks in the world and has surprisingly admitted mistakes. In one such instance, the Dutch Gambling Authority said that a recently introduced increase in the gambling tax has had the exact opposite impact, supposedly driving more people offshore.

The country has also found out that despite very high channelization, i.e., the number of players who choose to play in the regulated market, 50% of the total gambling spending is generated offshore – a gutting number.

This sort of realization is not only dawning on Europe and in Asia, however, with the American Gaming Association (AGA) taking a hard look at the exact number of illegal gambling going on in the country, and found out that $673.6bn is wagered with offshore operators every year.

In other words, one-third of the total gaming market is now controlled by offshore operators, the study suggests. The study also focuses on verticals such as skill-based gaming, which are attacked in numerous states, so the numbers could be a little off, given the AGA’s selection criteria.

The conclusion, however, is not. Offshore gambling is controlling vast swathes of the gambling market, despite tight regulation – perhaps too tight?

Why is offshore gambling thriving in this day and age?

Stating the facts is important, as it allows industry stakeholders to get the raw numbers of what they are going up against.

A recent Yield Sec report did not paint a rosier picture. 71% of the gambling market in the European Union belongs to the offshore (illegal) sector.

This means that €80.6bn is spent with unlicensed operators as opposed to €33.6bn (or 29%) on the legal market. As to the specific reasons why this is, there are competing theories. Here are some of the most commonly attributed causes of this phenomenon:

• Overregulation: In places such as Germany, for example, suppliers are – or at least used to be – required to license every game this release, adding a lot of red tape. Bureaucracy is an omnipresent problem in iGaming in Germany, with companies struggling to bring worthwhile products to market.
• Failed communication: Businesses and regulators, especially in Germany, are not seeing eye-to-eye, especially on matters such as channelization. The gambling regulator, or GGL, still claims that the share of the black market is much smaller than trade groups do, which have put the two groups at odds. Yet the evidence persistently shows that trade group estimates, at least in the European market, are accurate.
• Wishful thinking: Not least, there is wishful thinking in interpreting results. The Dutch Gambling Regulator, for example, could have left things at achieving 90-93% channelization. However, the simple truth is that this channelization rate is not enough to retain the bulk of the gambling spend in the country – in the Netherlands, 50% of all gambling is spent with offshore operators.
• High gambling taxes: Illinois in the United States and the Netherlands in Europe have both passed taxes. In the United Kingdom, a rumored measure is on its way, prompting the British Horse Racing Association to stage protests. Ultimately, though, higher taxes only hurt consumer protection as they make the legal market less agile and capable of attracting consumers.

Perhaps the most reasonable conclusion is this: offshore markets are simply more attractive. Players do not careif you are a legitimate or not legitimate operator, or at least there are millions of people in Europe alone who do not – about 80m based on the Yield Sec survey.

But how can we move past this gridlock?

Chokepoint: Whatever the regulated market is doing isn’t working

Gambling has come under a lot of scrutiny, but regulatory efforts may be misguided in certain instances. The best way to regulate is to ensure that the legal market is dynamic enough and capable enough of outsmarting offshore operators.

Yet, part of the blame seems to rest with regulated entities, too, which are more concerned about aligning their offers with regulatory standards in a pro-forma manner, rather than enacting real changes. Responsible gambling messages have become a strong part of what the regulated market does, and deservedly so, but they often appear to be lip service.

However, the public, lawmakers, and businesses need to realize one simple truth – the offshore market is winning, and no matter how you regulate, unless you make the legal market more attractive, you are going to be playing a fool’s game.

Worthy initiatives such as protecting consumers and raising awareness of gambling-related harm would end up backfiring. Maybe both markets will thrive either way, and rake in billions worth of revenue, but for a society that claims to care about protecting consumers, a lot of the ongoing efforts seem to be focusing on box-ticking.

Image credit: Unsplash.com