Episode Transcript
[00:00:09] Speaker A: Hello, everybody. Welcome back to Right to the Source. My name is Robin Harrison and I'm here with the man himself. It is Ed Birkin. Ed, how are you?
[00:00:18] Speaker B: Good, thanks, Robin. Nice to be back.
Let's try and make this one a little bit more upbeat and shorter than the last one.
[00:00:24] Speaker A: We did get a bit gloomy last time. Everything was going wrong. And so today, to lighten the mood, we are going to talk about what is being seen by the industry as a potential tax rise in the uk. Now, it's not necessarily a tax rise as far as we know. What we currently know is that there is a consultation out with the Gambling Commission and with the government. Sorry. To consolidate three different kinds of tax in the uk. And of course the industry reaction has been don't make this tax rise by stealth. It's obviously. When was it? I think it was last year. There was talk about potentially in the budget raising the gambling tax and that didn't happen. But now we have this proposal to consolidate three different taxes. What are you thinking about that? Do you feel this is a tax rise by stealth?
[00:01:18] Speaker B: Look, I mean, if we take it at face value, they want to simplify things, reduce administrative, reduced costs from the admin of doing the different taxes and, you know, two of the taxes are at 15%, one's at 21%. You know, why not go down to 15% now, come to the real world, away from unicorns, then. I don't even think it's a stealth increase. I think it's. I'd be very, very surprised if it wasn't all just put at 21%. Maybe they bring it all down to 20%. So they say, you know, we've, we've kind of met in the middle somewhere, albeit that's not really the middle, but yeah, I mean, at the end of this, is the industry going to be paying more or less tax? Anyone who thinks it's going to be less tax, I think is just. Just dreaming, quite frankly.
[00:01:56] Speaker A: So what, what, what, if any, impact this had in H2's kind of projections for the UK market, because I think 2025, the estimate was around 22 billion in GGR.
[00:02:09] Speaker B: Yeah. So what we don't do is change our estimates based on speculation because we could, if it got to the point that it was looking pretty certain that it was going to increase to 21%, then we do analysis on it. But at the moment it could be, you know, any number between, let's say, 15 and I don't even want to put our number higher than 21%, because then it's out there, but, you know, you don't know what it's going to be. And just for every potential murmur of what regulation could be, would just be changing every single model constantly on stuff that isn't right. So we can only do it based on what we know. I mean, it's probably going to make me unpopular with the industry and a lot of our subscribers. But let's say it went to 20% across the board. I mean, it's not, it's not ridiculously high tax. Yes. They don't take bonuses out of that. Obviously it'd be better if it's on net win, as it effectively used to be. So you're not being taxed on effectively free bets, which is a bit unfair and puts you at a disadvantage against operators, illegal operators. But I think there's bigger issues than tax rate. And this is something that when I was back in a decade ago, when I was an analyst back at Credit Suisse and Barclays, you know, we look to when markets are regulating. One of the big focuses are what's the tax rate? What's the tax rate? And then you speak to some of the operators and yeah, they care about the tax rate. But when you look at Germany, you know, the issue isn't a 3% tax rate on turnover. I mean, that's not ideal. And with slots, it obviously changes the RTP so much that your product's pretty crappy. The issue is the €1 limit. Know, you look at Sweden versus Denmark and the channelization rate, which I think we'll probably touch on with talking about how Finland's going to regulate. Again, we have a much lower channelization rate in Sweden than we do in Denmark, even though it's got a lower tax. You know, they around Covid, they've put on deposit limits and online casino. So there's a lot more issues in the tax rate. And for me, the biggest concern in the UK industry at the moment and ongoing is affordability checks. Even though the gambling commission is trying to backtrack and say, we never told you you had to do these affordability checks because customers are complaining when clearly they said you have to do affordability checks if anyone's spending above average.
[00:04:17] Speaker A: Financial risk checks. Financial risk checks, yeah, they're being rebranded. It's fine, it's fine.
[00:04:24] Speaker B: So, yeah, I mean, look, no one wants to pay more tax if suddenly you have to pay 5% more tax on your betting. It's not ideal for operators by any means. But, you know, let's be Fair. The majority of revenues in the UK come from my casino, which is already the higher tax rate rather than betting. And I think there's the other issues outside of tax, which is what's pushing players to illegal operators.
[00:04:45] Speaker A: Illegal operators. Again, it's just the government.
[00:04:49] Speaker B: So yeah, look, I think anyone in the industry who's sensible is going to realize that as much as they fight it, the government are going to take more tax. You don't lose votes by tax and gambling and you definitely, when the government's going bust, you don't take less tax. So it's going to go up, it's just by how much.
[00:05:04] Speaker A: And I suppose in particular there's going to be a lot of talk around horse racing within this because that's the sector and I think we mentioned it in previous podcasts where it's already struggling, it's already kind of on its knees and then for the tracks, the betting operators to be hit with this additional levy potentially that could really be a bit of a kind of like coup de grace for that whole sector.
[00:05:28] Speaker B: Yeah. And this is something that Rajdhu been writing a report on optimum market tax rates for different jurisdictions. And I think it's important we made this point that you take into account these levies when setting the tax rate because you could say, oh, we've got a 10% GDR tax and that sounds great, but if suddenly you've got sporting levies and you've got Social Security levies and other things, what is the effective tax rate overall? And while you know, I think the levy is important for horse racing and horse racing is important for the gambling industry and by and large most operators are happy and support the levy effectively, it is a substantial increase on the effective tax rate for horse racing. And while a simplified tax system is probably welcome for most people, I actually think there should be a carve out for racing to take into account the fact that they have higher fees and therefore the tax rate should be lower. Otherwise you know, there's just not the incentive for the sports betting operators to invest in that product because it just costs them even more money.
[00:06:28] Speaker A: Even though it's supporting an industry.
[00:06:30] Speaker B: Yeah, it's supporting an industry. I mean let's be honest, letting operators job is not to support horse racing, it's only to support horse racing as much as horse racing benefits them. Yeah. So if you're William Hill Lad Brooks and retail. Yeah, of course if you're an online only bookmaker who's not got a big horse racing product, you know, they're probably going to be more focused on other things, virtuals, esports, stuff like that, where they're paying less overall tax. So I used to have a share in a racehorse. Clearly it didn't win anything. Love the horse racing industry, my own horses.
You know, I think for that to survive and flourish, you know, increasing the tax on horse racing with the levy on top I think is just another nail in the coffin. Hopefully, hopefully the government can see that. But when they're talking about standardizing everything, it doesn't look as though it's going to be spared at the moment.
[00:07:19] Speaker A: No, it doesn't. And there we go, getting into doom and gloom again. So let's talk about something slightly less doomy and gloomy. Let's talk about the illegal market. We can't get away from this. And obviously over the weekend there's been some interesting back and forth about the scale of that unlicensed crypto business, you know, the crypto betting business. And there's been some competing and contrasting figures about how big that market actually is. Now the interesting thing about the timing for this is with all our travels to Brazil, one of the things that really kind of came through was, well, there is this sort of like, for like, industry and that it is a website to which they drive people to bet. There seems to be this kind of like secondary industry where there's no website, there's no brand. It's essentially just like a link sent anonymously to go to a website. So with this kind of market sizing and with this kind of like illegal crypto piece, I mean, like, what's your view on this? I mean, like, where, what, what are we looking at in terms of this kind of market size?
[00:08:21] Speaker B: Yeah, well, I think, let's just clarify. Not all crypto is illegal and not all legal gambling is crypto. So crypto is a valid payment form. And yes, there were numbers reported widely, including the financial times, of $80 billion of, you know, size of crypto GGR. And then there were other people who came out and questioned that number and said they think it's nearer 10, $12 billion. So obviously being a leading gambling data, we were asked, our view, which not publicly, but we've had some subscribers and so we've done some back of the envelope numbers ourselves. Now, interesting, the data that was, the analysis that was done on social media and Twitter where all this came out, was looking at some blockchain analysis and they're saying it's actually relatively simple to track or it's easier to track than fiat currency. Got to that kind of number of 10, 12 billion. We've looked at it a completely different way start. We've launched this very nascent but proprietary player surveys across a number of markets. And I've just had the data in for Latin America. I think it's about six, seven thousand players. And one of the questions we're asked is about how much of you or what deposits, what deposit withdrawal d is and cryptos on the options. And 4.1% of responses were crypto. Now this isn't taking into account if these players are higher spending. We haven't done that analysis yet. We have the data, but on that time. And bear in mind only 20% of these people who said they use crypto for deposits and withdrawals use crypto only. They also use other other methods such as bank transfers, credit cards, debit cards. But if you look at our total online gambling GGR number got about $150 billion at the moment. I know that excludes some of the black market activity in Asia particular. So look, if we've, we increase, let's just say we double it for that to get some round numbers, $300 billion and we apply this 4% of crypto again very back in the fag packet. We need to do analysis on higher spending players using crypto perhaps, or not. But that gets you to a number of around 12, 12 and a half billion. And that kind of fits quite neatly with the figure that these other analysts were doing crypto analysts were doing using blockchain and I think looking at some stakes reported data. So in answer to the question of some of our subscribers, you know, we would estimate that crypto GGR is probably around the $10 billion mark. I think based on the market size and based on what players are saying and based on what operators are telling us, the 80 billion dollar mark just seems implausible. Now yes, crypto is used a lot more in legal gambling markets. That is true and is definitely a way of facilitating it and hiding it. And that does make especially in Brazil with analysis of the Pix Beta a lot more problematic. But if crypto is only 4% of the market, then that makes things a bit better. If you kind of believe some of the other numbers out there, which imply cryptos 25, 50% of the market, which no op, I mean apart from stake and crypto, it's just not a number, then that would make the illegal market analysis much harder.
[00:11:28] Speaker A: And so with these player surveys, I mean, what's that telling you about why people bet with crypto? What's the kind of like the real drivers. Is it like utility anonymity or is it something else?
[00:11:44] Speaker B: I mean, to be honest, we haven't explored why people use different payment methods. However, we do ask them what's their choice of operator and why if they use illegal sites and why they use illegal sites. So once we've had more time to analyze the data, we probably will find. I would be surprised if you didn't find some correlation between players who use crypto, probably higher spending players, but I don't have the data to back that up yet. Use illegal sites and then also why they use illegal sites. You can probably triangulate that to get some idea as to why people use crypto.
[00:12:13] Speaker A: Okay. And then moving swiftly on because we're trying to make these episodes far shorter. Let's talk about Finland. So it's something that we've been covering in IGB recently and looking at the, really the kind of motivators behind the regulatory framework that they're developing. And one of the things that's come out is they've looked extensively at Sweden's model and looking to replicate that in this kind of long awaited market liberalization. Move away from Vikhouse as a sole legal provider to kind of essentially channel a lot more of that player activity that's already going offshore into that legal market. Looking at the Swedish market, I think, I'm sure we've mentioned it in the past episode, Sweden felt like it went from kind of like green to red very quickly. You know, it went very quickly from this kind of, we're open a long last, we're ready to do business and then hang on a minute, we don't quite like this business. So with Finland kind of pursuing that model and that sort of, I suppose, kind of similar to what we've seen in other markets really just kind of, I don't want to use the word meddling, but that's what's in my head. I'm going to say it, you know, where it's constant kind of tweaking and changing. I mean, does this, does this bode well for Finland?
[00:13:30] Speaker B: The fact that Finland is opening up on a kind of holistic, very high level view, you know, good news, good news for operators, good news the industry. I have concerns over the potential of the Finnish market. If you look, we say about Sweden and what they did and you know, start changing things and you know, under the auspice of player protection, etc. But without really appreciating how it just drives people to illegal operators because say it probably every week. You can't stop people betting and there's a lot of illegal operators who will target markets. I just think Finland is going to go down the same route. If you look at what Vikhouse have done and PAF have done in Finland over the past few years and there's nothing wrong with this, but they have been implementing more restrictions and player protection methods and you know, that's fine. That works on a land based betting machine. You know, if you have a land based slot machine and you want to have people registering and spend limits and things and you're happy to have a low revenue from it, that's fine. But that doesn't. If you start trying to, and I don't know if they will, but if you start trying to implement that same ideology onto online slots, then all you're going to have is a huge illegal market. And you know, atg, the horse racing previous monopoly on in Sweden, they've come out and said that they believe the Swedish channeling rate is between 69 and 80 something 84%.
Our numbers for 2024 is at 71%. So towards the lower end of that. And if the Finnish, and I did read the article by Connor, you know, if the Finnish regulators, government are looking at Sweden as their model, then I just don't see why their channelization is going to be anything different. And that's in Sweden, open for 90% channelization?
[00:15:11] Speaker A: Well, if you look at Finland, I mean currently it's probably around 50% if not a bit lower, their channelization rate. So you could argue that they would see 70 plus as a massive improvement.
[00:15:25] Speaker B: Yeah, I mean, opening the market at all, you're going to hope the channelization rate goes up. You're going to have at least one person on there. But are you happy with 70%? I mean we used to talk about an H2.
You reference the UK and maybe Italy and you know, wanting channelization above, you know, 95, 97, 98. I mean that's just, it's since COVID that just those numbers don't exist. So I think 90% is a, is a fair target. But 70% is. I mean with 70%, you know, that's almost quite. But almost half of your legal market is still offshore. I mean that's not, that's not a number you should be happy with.
[00:16:02] Speaker A: So what's the sort of like a realistic channelization rate for a European country? I mean, obviously, you know, just to caveat that I'm not saying this is the right channelization rate, but what is sort of feasible these days. You know, if the days of, you know, 95 plus are, you know, kind of like gone since pandemic. I mean, what's kind of what represents successful channelization in your view?
[00:16:29] Speaker B: I think in terms of ggr, because the higher spending players will be more affected by restrictions. You know, I think before when markets talking about target of 90%, I thought that was a bit of a low target. I think actually 90% plus is probably a fair target now. And if they're getting around the 85 to 90%, you know, I think there's room for improvement. But you know, I think that's, I don't think that's a terrible level when you're looking at, you know, Sweden, 70% just come to. Our data in ATG are saying a similar thing. So I think we can take that as a reasonable estimate. Our data on Netherlands and the KSA's data are both saying it's around 50%.
So when you're getting between 50 and 70% channelisation in these, these other countries in Europe, 85, 90 suddenly doesn't seem such a bad number.
[00:17:18] Speaker A: And an interesting thing that came up again in his article, it's on igamebusiness.com and it's written by Mr. Connor Reynolds. Please read it if you haven't.
Everyone goes back to Denmark. Everyone says there is no ideal regulatory model, but at the same time, everyone in Europe at least always goes back to Denmark as a model that works. But that's a very small country.
Is that kind of fair to say this kind of slightly increasingly kind of like mythical Danish model, is that the model that everyone needs to follow and can it actually be applied to a market where instead of like, I don't know, like 5 to 10 million, something like that, we're talking about a market of kind of like 40, 40 million plus?
[00:18:08] Speaker B: Yeah, look, I don't think the Denmark model is perfect, you know, I think the channelization rate, as we said, around 85% is one that is okay. Now I think it's. If you look at elsewhere in Europe compared to Netherlands, Sweden, you know, and they have put through a tax increase already which has been absorbed by a number of operators, but there aren't a huge number of operators in the market and it's not big countries, as you said.
But we did some analysis. Unfortunately we got access to some operator data under NDA when we're talking about the, the initial tax increase, 18 to 22% and the profit margins these companies are making are not very high. And I Suppose the concern is if you had further tax or even if you had further restrictions, the non tax restrictions that impacted top line, but particularly an increase in tax, you know, I think that would start to push some of the smaller operators into being loss making, exiting the market. And that's when you have channelization issues.
So given there's a concentration at the top of some of the bigger operators, you see the rest of the tail and any further tax increases or other restrictions I think could really start to have a distortive effect on the market. So yes, Denmark is, is doing okay at the moment, but I wouldn't view it as like the golden thing to follow. And I think there's, you know, the focus should be on trying to get this 85% up to 90, 92%, ideally higher, rather than kind of saying we're actually doing okay compared to our neighbors. You know, what are the restrictions can we kind of put in place based on where we are or can we get more revenue out of this? I think you should be building on the channelization rather than looking to further restrict or increase the costs of the operators.
[00:19:59] Speaker A: Brilliant. And that seems like a good point to end on because we have got things under or just over. Sorry, 20 minutes. So there you have it. Denmark isn't the panacea that everyone thinks it is. Crypto numbers aren't quite as high as you think they are. And UK tax rate not a given, but we're expecting an increase.
So thank you very much for your time. I hope you've enjoyed listening. We're available on YouTube, we're available on Apple podcasts and I'm pretty sure that if I look again, we will be available on Spotify as well. So this has been another episode of Right to the Source with Robin Harrison and Ed Birkin. Thank you. It.
