Client: Stichting Online Gaming Nederland (STIOG) Date: 18 February 2011

Transcription

1 AN INDEPENDENT ASSESSMENT OF VARIOUS TAXATION/ LICENSING MODELS FOR REGULATING REMOTE GAMBLING IN THE NETHERLANDS Client: Stichting Online Gaming Nederland (STIOG) Date: 18 February 2011 EXECUTIVE SUMMARY This report investigates the additional gambling tax revenues generated for the Dutch government by introducing onshore-regulated dot NL market. The report looks at a number of different taxation scenarios and compares them against a benchmark of the continuation of the status quo. Each of the scenarios are considered with no onshore IT requirements and also including the requirement that operators servers are located in the Netherlands and that activity on them is ring-fenced to include only Dutch players. The benchmarks are based on limited evidence that is available from existing onshoreregulated dot country markets such as Italy and France. In doing so the report assesses the issue of cannibalisation, looks at the importance of having all product verticals (fixed odds betting, betting exchanges, casinos (including gaming machines), poker, bingo, etc) included in any regulated dot country scheme, the importance of liquidity, and value to the consumer. As a result is discounts the effectiveness of any gambling taxation calculated in respect to either turnover or consumer winnings. Under both scenarios operators would be forced to pass the additional costs (and migrate their risk) to the consumer thus providing no value which would lead to a non-sustainable position under which offshore dot com sites would continue to dominate. On the other hand a remote gambling taxation calculated in respect of gross win migrates the risk for the operators and as long as it is set at a reasonable level the costs would not be passed on to consumers. The report concludes that two key policy objectives, namely maximising the proportion of Dutch consumer remote gambling activity within a dot NL market place (95% by 2016) and raising 10m in additional gambling tax revenues (in 2012 rising to 15m by 2016), are both met under a 5% gross win tax. Importantly the 5% gross win scenario represents a level that will provide virtually all Dutch consumers with a Dutch regulated and protected remote gambling gaming experience. Under a 20% gross win it is anticipated that the amount of Dutch player remote gambling activity that would take place onshore would at best 59% by This would continue to decline over time and would only sustain a very limited number of operators. Therefore, an increasing number of operators will hand in their license, strengthening the dot com market even further with a continued offshore spiral developing. Hence there is the risk, with a 20% gross win tax the government may jeopardise its two key policy objectives. H2 have concluded that as a result of only limited supply being sustainable within a dot NL scheme under a gross win tax of 20% it is actually feasible that the absolute tax takes of both the 5% and 20% gross win taxes could converge as early as

2 In obtaining a long-term equilibrium in a dot NL remote gambling marketplace it is essential that there is some incentives in the scheme for all stakeholders (government, consumers and operators). Whilst H2 Gambling Capital would not recommend a specific rate at this stage it is believed that a single digit gross win tax would stand best chance of establishing an equilibrium that is inclusive of the needs of the Dutch government, consumer and the operator. Government value is defined as ability to collect money directly from the operators (gaming tax) and indirectly via operator investment in local economy (media costs additional benefits not explicitly included in the findings of this report). Consumer value is defined as the value to the consumer to stay within the local license scheme as their demands (product/choice/prices) are met. As consumer value locks the consumer into the national license scheme, it is also in the interest of the government. In this respect H2 make reference to the current dot FR market in France which does not include all product verticals, has a high tax rate based on turnover and onshore IT requirements that have led to only 25% of the value of French player remote gambling activity taking place within the scheme even though it is not more than six months old. Operator value is the interest to provide its services in a business sustainable manner over a longer period of time. If not, operators will not apply or will be forced to withdraw from the market. In the initial markets to introduce onshore regulated remote gambling, operators have been willing to enter the market but as it becomes apparent that it is very difficult to make a result under the regimes that are in place not only will we see many operators exiting or even going to the wall but they will be unlikely to enter any further markets unless there are more favourable taxation rates and licensing conditions. FURTHER INFORMATION Contact: Simon Holliday Telephone: simon.holliday@h2gc.com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

3 CONTENTS Executive Summary 1 Project Background 4 Aims of Remote Gambling Reform in the Netherlands 4 Approach to a Dutch Remote Gambling Model 4 The Current Netherlands Gambling Market 5 Benchmarking of Other Onshore-Regulated Remote Gambling Markets 6 Summary of Key Issues in Respect of Remote Gambling 10 Forecasts for the Value of/taxation Generated by a Dot NL Remote Gambling Market 11 Conclusions 21 Glossary of Terms 25 Information Sources 26 About H2 26 Further Information 26 APPENDICES Appendix A - Total Netherlands Gambling Market Gross Win 2008 to 2016e 28 Appendix B - Total Netherlands Remote Betting/Gaming Gross Win 2008 to 2016e 33 Appendix C - Total Netherlands Gambling Market Taxation 2008 to 2016e 38 Appendix D - Remote Gambling Sector Revenues/Profitability 2008 to 2016e 43 3

4 PROJECT BACKGROUND Stichting Online Gaming Nederland (Dutch Online Gaming Foundation STIOG) has commissioned H2 Gambling Capital (H2) to undertake the above project. STIOG is the trade association that has been established in the Netherlands to serve as private industry platform in discussions regarding the regulation of the remote gambling sector. In line with the Coalition Agreement the aim is; i) to provide for Dutch customers a national regulated gambling market; and, ii) yield an additional 10m in gambling taxes in the first full year of a licensed remote gambling scheme (aim for this to be 2012). H2 is the most trusted/quoted independent source of gambling industry data/analysis today being regularly cited in public documents such as analysts notes and company annual reports. In addition, the company/its personnel have undertaken nearly 150 bespoke projects on behalf of corporate clients, the financial services sector, regulators and governments over the past decade. The company has undertaken specific economic/fiscal assessment of the impact of various gambling related taxation and change in a number of nations including the United Kingdom, France, Greece and the United States. In addition, H2 s off-the-shelf data offering incorporates top line market value projects where new regulations are introduced or taxation rates/calculation is changed. AIMS OF REMOTE GAMBLING REFORM IN THE NETHERLANDS The aim of this study was to identifying a means/rate of taxation and licensing environment for regulated remote gambling reform in the Netherlands that will enable an inclusive and effective market. In order to achieve this the following aims have been considered. 1) Raise the Netherlands Exchequer an additional 10m in gambling taxation in 2012 (rising to an additional 15m in 2016, year five of the regulated scheme); 2) Ensure there is sufficiently attractive offer for the customer (products/pay-out/bonuses) in order to attract them to utilise sites that are licensed within the Netherlands; and, 3) Maintain similar profitability levels for the operators via fair tax rates and license requirements. At this stage this initial study aims to provide high-level guidance. Going forward it is expected that more detailed work regarding specific scenarios will be required. Indeed this report advises against a couple of scenarios but merely assesses the strengths and weaknesses of a second pair. APPROACH TO A DUTCH REMOTE GAMBLING MODEL H2 has gathered as much information as is possible from STIOG operators and regulated markets regarding market sizing, cost profiles, taxation, etc. Information will be considered from key regulated EU markets such as Italy and France as well as the United Kingdom. All of the relevant economic and demographic information was updated for the Netherlands. It should be noted that there is still only a limited amount of specific information available regarding the impact of onshore (dot NL) remote gambling re-regulation. In fact there is no live market where all products verticals are available where there is an effective onshore remote gambling taxation regime. Macro Market Modelling H2 has drawn on our previous work across the gambling sector in various markets to produce a robust/comprehensive sector economic/fiscal model for the Netherlands. The models will be based on the expected sensitivities of customers to any increases in the effective cost of playing (margins/bonuses) and the impact of changes in rate of marketing spend on the penetration and repatriation of the market. 4

5 In addition to the status quo the model was run to include four taxation and two licensing scenarios. All of the alternatives were selected in order to demonstrate the impact of calculating remote gambling taxation with respect to various measures of value. In respect of a gross win as a measure for calculating gambling taxation, 20% and 5% were selected as examples of actual higher and lower tax rates that have been announced by European jurisdictions. The scenarios, which have been modelled for the purposes of this report, are as follows: 1) Scenario 1: Base Case No Change in the Gambling Regulations; 2) Scenario 2: Interactive Gambling with the current taxation regime i.e. 29% on consumer winnings for betting and lotteries and a 29% gross win tax on all gaming; 3) Scenario 3: a tax of 10% of turnover (Similar to the French model horserace betting 15% turnover tax and sportsbetting 8% turnover tax); 4) Scenario 4: a tax of 20% gross win (The Danish model); 5) Scenario 5: a tax of 5% gross win (The Estonian model). It should noted that in all of the above it has been assumed that the operator may be established anywhere in the EU, without need to be physically located in the Netherlands i.e. no corporate tax will be payable but gambling tax payable in the Netherlands with no duplication in the EU member state where the operator is established. A further four scenarios (6 to 9) have been included, replicating scenarios 2 to 5 but with the additional requirement that all of the IT infrastructure is located onshore and that player activity is ring fenced within the Netherlands. Under all scenarios it has been assumed that an onshore-regulated dot NL market caters for all consumer demand across all key product verticals i.e. betting, casino (including gaming machines and fixed odds games) and poker. THE CURRENT NETHERLANDS GAMBLING MARKET During 2009 the value of the Netherlands domestically regulated gambling market (in terms of gross win and including non-casino gaming machines AWPs) reached 2.134bn generated from a net turnover of approximately 9.0bn. This represented a fall of 5.9% on the prior year and a CAGR of just 0.15% over the five years to this point. H2 expect that the 2010 value of the Netherlands onshore-regulated gambling market will remain fairly flat. Of the 2009 onshore regulated market value it is understood that no more than 26m (betting and lottery) or just 1.2% is remote. Figure1 Historic/Forecast Value of the Dutch Gambling Market (Gross Win - bn) 5

6 Figure 2 The Netherlands Player Gambling Market vs EU (Gross Win - bn) In addition to the onshore regulated market, H2 believe that the international dot com remote gambling market generated a gross win, from Dutch players, of approximately 107m in 2009, up by around 18% on the prior year. This means that in total Dutch consumers lost 2.241bn gambling. H2 are expecting this to rise to 2.264bn in 2010 which would equate to an average loss per adult of just under 171. Compared to the rest of the EU overall the total value of the gambling market in the Netherlands was seventh highest which is in link with the nation s GDP ranking. However, the average spend per Dutch adult was only ranked as the fifteenth highest below the average of 199. BENCHMARKING OF OTHER ONSHORE-REGULATED REMOTE GAMBLING MARKETS Although there are a number of European countries, including Belgium, Denmark, Greece and Spain, in the process of moving towards the regulation of remote gambling markets there are still only a few examples of operational nationally regulated markets. Figure 3 The Netherlands Player Gambling Market vs EU (Spend per Adult - ) 6

7 It should be noted that there are no two markets to date that have been regulated/taxed in a similar manner and there is only limited evidence, with the oldest onshore dot country remote gambling regulations dating back to Therefore, there is no practical evidence to assist in identifying the threshold above which the gambling taxation deters operator in entering a dot country market in the first place or indeed the rate which makes a dot country market unsustainable in the medium to long term. In addition to the onshore-regulated dot country markets in France (dot FR) and Italy (dot IT), we also consider the impact of the Swedish monopoly, Svenska Spel, offering Internet poker, the open United Kingdom market and the attempt to ban the market in the United States. France Onshore dot FR remote gambling licenses only became available in France in June Although operators commenced trading almost immediately (in time for the World Cup) it is still relatively early days to assess the impact on the market and there has been little in the way of hard data to come out of the market to date. The majority of major commercial interactive gambling operators applied for licenses to enter the market. Based on the evidence we have seen, H2 believe that the French model is highly skewed against those operators that have applied for licenses within the system. Due to high rates of turnover taxation for horserace (15%) and sports (8%) betting, a 2% tax on all poker pots, the exclusion of all product verticals (including casino) and the requirement to locate separate IT infrastructure onshore. During December 2010 the chairman of Betclic Everest Group (formerly Mangas Gaming), Stephane Courbit, stated that that high tax and compliance model in France means that the rate of return to the customer is too low meaning that the company cannot afford to operate within its home market. If this is the view of the larger operators in the market it could be concluded that trading is even more difficult for smaller players. Betclic Everest accounts for an estimated 46% (market leader) of the dot FR sportsbetting market and between 15-20% (third largest provider) of the poker market. In order to achieve this position Betclic has significant commitments in terms of marketing and sponsorship (reported to be 30m in sponsorship alone). Consequently it is understood that their dot FR sportsbetting product will be at best running at break-even this year with many other operators expecting to make a loss in the market. Other signs of early cracks in the dot FR market include Ladbrokes pulling out of their joint venture with Canal+ and Unibet not starting to operate their sportsbetting license, with them potentially not doing so pending a review of tax and operational conditions scheduled for later this year. H2 had expected that as a result of the high taxation and licensing costs, the risks to the operator that is generated by a turnover tax and the restriction of the products permitted, that a greater proportion of the market would remain catered for by offshore dot com operators. Initial reports are that the proportion of French player activity on dot com sites could well be larger than was anticipated. Many operators who have remained outside the market, particularly in sportsbetting, have actually seen significant increases in their French business. Operators have reported that over 70% of the market (including casino/gaming machines) remains offshore. A recent PwC report that was commissioned by AJELI (the local French industry lobbying platform) concluded that the additional cost of establishing a separate IT infrastructure within France could be anywhere between 0.433m and 4.077m. In addition, it was concluded that the annual maintenance costs of any IT system would be in the region of 20% of the initial development costs. It is noted that any operator wishing to operate their own platform might be subject to costs at the higher end of this range with any licensee without access to the source code also subject to higher costs. It should be noted that many of the major sportsbetting operators have their own proprietary betting platforms. Furthermore, it should be noted that costs will vary according to the scale of the operator/number of clients though PwC did not reference the exact fixed cost element in their report. 7

8 The PwC report concluded that the IT costs included project management costs, front-end costs, gaming platform costs, hosting and telecoms infrastructure costs, costs associated with CNIL declarations and the costs associated with ensuring compliance with good practice in respect of security. For the purposes of this report H2 have opted to take an initial view that it is reasonable to assume a mean costs across the sector of 2.25m for IT development which would in turn mean an annual running cost of approximately 225k per operator. The number of operators participating in the regulated market would clearly be less the greater taxation rate. H2 have assumed a rate of 5% gross win tax would account for 40 operators falling to 25 over the course of five years, with the other end of the scale there being 25 falling to just 12 over the same timescale. Italy In Italy onshore regulated Internet gambling has been taxed with reference to turnover to date. Though the rate for sportsbetting varies it has been falling and is now typically under 5%. In the case of tournament poker the tax has been on the buy in/tournament fee. However, the majority of operators are still struggling to make a profit from the market. In Italy the opinion is that there has been little cannibalisation of the land based betting shops/corners despite 30% of the sector s turnover now placed via the Internet. Italians like to be seen to gamble and to win and lose as in other Mediterranean countries it is often part of a more social experience. During the last week of January this year a new remote gambling decree (Abruzzi) was published in Italy. Based on their experience of turnover based remote gambling taxation and a requirement for operators to locate their IT infrastructure onshore the Italians have moved to remove the IT infrastructure location requirement and introduce a 20% gross win tax on cash poker and casinos games. Under the previous regime leading operators such as Ladbrokes, William Hill and Sportingbet all entered the Italian onshore regulated market only to leave within a couple of years. Both cash poker and casino are new products to the dot IT market. Neither is expected to be live until the middle of this year so it is too early to say if this different method of sector taxation will be sufficient. Betting exchanges are expected to follow this year completing the product set. The regulator, AAMS, is also open to the idea of pooling liquidity across boarders at some point going forward. With the exception of one group of operators, video lottery terminal (VLT) suppliers, there has been little fear that there will be any increased cannibalisation of land-based business as the range of Internet products are expanded. Part of the VLT suppliers fear is the fact that they are still in the early stages of rolling out the devices across the country. As a result it is expected that the Introduction of Internet gaming machines will be delayed in Italy until the beginning of next year. With only four casinos in Italy and remote casino games yet to be introduced there is little evidence reading any direct cannibalisation between the two market channels. Sweden In Sweden, where the remote gambling market is one of the most saturated in Europe, the international casinos revenues increased at a CAGR of over 10% during the period 2004 to 2007 despite the national gaming monopoly, Svenska Spel, launching its own poker platform during March 2006 and a number of the dot com operators becoming more aggressive in the market since this time. The (Swedish player only) Svenska Spel poker platform generated revenues of SEK385m in 2007 though this had fallen to SEK305m by 2009 (first nine months of 2010 SEK173m as opposed to SEK232m for the same period last year). At its peak Svenska Spel s Internet poker product accounted for around 30% of the total Swedish player market. By the end of 2010 it is believed that the site accounted for closer to 20% of the market value. 8

9 Many believe that Svenska Spel s poker offering has become an entry point for many Swedish players who once they become more proficient and knowledgeable regarding the sector transfer their business to one of the dot com platforms. The platform simply does not offer the liquidity of the dot com platforms (there are ten larger in terms of player volumes), particularly in respect of medium to high stakes games. The later are important, as this is where the majority of a poker operator s income is generated. It is worth noting that whenever H2 have visited casinos (which are operated by Svenska Spel) in Sweden they are busy with the dedicated poker areas often at capacity due to popularity of the game and the effective marketing. Svenska Spel makes their loyalty card compulsory for all Internet players. United Kingdom It should be noted that in the case of the United Kingdom as a result of regulation that permits companies to be established in any EU or White Listed nation that operators who remain offshore service the majority of activity. At present these operators are free to market into and trade in the United Kingdom though the situation is understood to be under review by the current government who are keen to look at options such as consumption tax on gross win. It should be noted that the operator gross win tax was set at 15% for all forms of betting and gaming. Although there has never been any real onshore remote gaming activity licensed in the United Kingdom there were a number of major betting companies licensed there until relatively recently. However, the majority of them have found it difficult to remain competitive in the remote market whilst paying a 15% gross win tax with PaddyPower, William Hill and Ladbrokes amongst the major companies to transfer their interactive betting operations out of the United Kingdom in recent years (in most cases telephone betting remains onshore at this point in time). In terms of cannibalisation the evidence in the United Kingdom is that different groups (demographics) of people use the Internet to gamble compared to the traditional market channels. H2 believe that the more a product is about an experience or a destination then the less chance there is of any significant substitution. The experience of a trip to Vegas or a night out at your local casino cannot be replaced by playing on an Internet casino on a computer at home. However, when placing a bet or purchasing a lottery ticket; there is an element of convenience or value afforded by the Internet. It would be expected that a regulated Internet market would continue to attract a generally, younger, more technically savvy and affluent customer base. In the UK casino attendance and house win continued to increase until 2007 despite the competition from the Internet and the tight regulations on the land based sector. It was only once the 2007 smoking ban was implemented and the recession commenced that the performance of casinos started to deteriorate. United States Following the signing into law of the UIGEA in October 2006 most of leading Internet gambling operators exited the United States market. However, numerous privately owned companies continue to target the market. During 2006 the value of the market peaked at approximately US$5.2bn in gross win. During 2007 H2 estimate that the total value of the United States Internet gambling industry catered for by the offshore operators fell back to US$4.1bn. However, since this time the United State s offshore Internet gambling market has rebounded strongly as less risk averse operators have entered/catered for the market. In addition the liquidity (and resulting cash) generated by Internet poker operators in the United States has allowed them to develop the most attractive offers and market leading positions in Europe. By 2010 H2 estimate that the United States offshore Internet gambling market generated a gross win of approximately US$4.9bn. 9

10 Summary of Other Remote Gambling Taxation Rates Other examples of gambling taxation recently established around the EU are Estonia (5% gross win on all products), Ireland (15% gross win on all products), Demark (20% gross win on all products), Spain (25% gross win on all products) and Greece (5% turnover on Sportsbetting). SUMMARY OF KEY ISSUES IN RESPECT OF REMOTE GAMBLING Cannibalisation Cannibalisation has at times been raised as an issue when looking at the introduction of regulated onshore remote gambling. Any risk to existing licensed gambling activity in the Netherlands has to be assessed in this report as our aim to identify the net upside for taxation revenues. H2 would make the point that the impact on transactional-based activity (betting and lotteries) is very different to that of experience based gaming (casino games, gaming machines and bingo). In the case of the former customers are more likely to transfer their business to a remote channel for either convenience or value. The greatest potential for cannibalisation has usually been in to the bookmaking sector if the local monopoly offers uncompetitive odds compared to the dot com operators or a smaller range of betting opportunities. It is clear that DeLotto s Sportsbetting product has already been impacted with its turnover being just 26m in 2009 though its five year CAGR 1 to that point had been 5.5%. However, in contrast to this it is H2 s experience that interactive gaming creates far less cannibalisation and in fact the net impact on land-based businesses has the potential to be positive. H2 views there as being two direct markets for real money entertainment one in home and one out of home. Gaming is present in both but does not necessarily always compete directly between its in and out of home versions as people often make the decision to stay in or go out. We believe land-based gaming may actually benefit from its remote counterpart due to the heightened profile of the industry through interactive channels, in particularly increased marketing and the opportunity for cross promotion of the two channels. We therefore, believe the two aspects of the industry can be more complementary especially if the land-based player also develops a strong interactive presence. Clearly there will be some people that some of the time would stay at home rather than visit a physical casino. However, H2 believe that this would be more than compensated by the new business that a higher profile and broader market Internet would attract. Furthermore, the remote industry attracts new demographics to the industry and can also be used as an effective shop window for land-based activities e.g. Internet qualification for landbased events such as Harrah s World Series of Poker. People are social animals and so for many; the experience on the Internet cannot replace the live experience. H2 would also make the point that given the current (and growing) value of the Netherlands remote gambling market catered for by dot com operators, much of any potential cannibalisation (especially amongst the more serious players) is already taking place. As outlined above the 2010 value of the Netherlands offshore remote gambling business stood at approximately 125m, with approximately 84m of this coming from gaming. Offshore dot com remote gambling operators commenced aggressively targeting the Dutch market in the mid-2000 s and have really seen strong results from the market since 2007 (the latter being the year after the introduction of the UIGEA in the United States which prompted the vast majority of the leading internet operators to re-focus on the European market). 1 CAGR Compound Annual Growth Rate 10

11 In most European nations the value of their land-based casino markets continued to grow until 2007 when the economic downturn struck. This was the case in the Netherlands where the value of the casino market topped out at 676m in gross win. The value of the nation s AWP market also peaked in the same year at 754m. During the following two years the sectors saw their value fall by 21.5% and 19.4% respectively. H2 believe that there will be a more gradual process of cannibalisation occurring as older customers die off and are replaced by younger customers that are more likely to use the Internet as their primary market channel (but not their only) for all types of gambling. Product Verticals Remote (especially interactive) gambling customers are increasingly likely to want to participate in more than one product vertical. Cross-sell has become an important element of the strategy for the majority of the leading operators. As Internet gamblers want the convenience of having relatively few accounts and the ability to move between product verticals seamlessly. Customers do not wish to open multiple accounts and manage their funds across these. Often there is a charge associated with making deposits/withdrawals. Ring-fenced Markets and Liquidity H2 are of the opinion that open markets are essential if the product is to be attractive to the customer. This is important in the case of any nation but is particularly important in the case of a smaller one such as the Netherlands, Denmark and Estonia. Clearly the Swedish example stresses the importance of liquidity in poker but it is also important for bingo, pool betting and betting exchanges. Indeed any product with a progressive jackpot such as gaming machines. Even in fixed betting the international nature of sport means that operators can manage their risk far more easily where there they have a single international platform. DeLotto were forced to cease taking bets during Euro 08 as their book had become too one sided in favour of the Dutch team. Remote Gambling s Virtuous Circle If a domestically regulated dot country remote gambling market is set up so as not to be profitable for operators a virtuous circle is created whereby its scale continues to decline over time as it suffers from a reduced marketing spend, investment in the product and the continued pull from more liquid sites. This factor is particularly important in an aspect of the gambling sector where either value or liquidity is important to the consumer; i.e. betting or poker. FORECASTS FOR THE VALUE OF/TAXATION GENERATED BY A REGULATED DOMESTIC (DOT NL) REMOTE GAMBLING MARKET Due to the constrains to the length of this report the outputs of H2 s macro economic modelling of the impact on Netherland s market highlighted include the following: 1) The size of the onshore regulated (dot NL) remote gambling market by each major product vertical; 2) The size of the international (dot com) remote gambling market; 3) The impact on the growth of the Dutch regulated land based market; 4) The impact on the business models of the sector supplying the Netherland s remote gambling market. Much of the above are highlighted within the appendices of this report. With far more detail from the models being available for any scenario that needs more detailed investigation. When assessing the effectiveness of each model the benefits for consumers and operators should be taken into account rather than simply the headline taxation take. Consequently, the longer-term percentage of the market that is accounted for by the dot NL scheme and the impact on operators profitability are also key. In addition H2 will be available to provide more information/explanation at the next meeting between the Dutch Ministry of Finance and STIOG and are also able to provide further detail regarding the analysis into any scenarios as required. 11

12 Figure 4 Gambling Taxation Generated by Scenario 1 Status Quo Scenario 1 Base (No additional Value) Case (No Regulated Remote Gambling) Under this scenario we have extended our off-the-shelf current forecasts for the Netherlands to The main purpose of this has been to establish a benchmark against which all of the other scenarios may be assessed. In arriving at our forecasts we have been fairly prudent given the performance of the Dutch gambling sector in recent years and given it is expected that the consumer will be squeezed further in coming years with high taxation and a period of inflation not being offset by any significant economic growth. Consequently H2 would expect the total value of the Netherlands domestically regulated gambling market to generate a gross win of approximately 2.212m, which would be only be 3.7% ahead of its 2009 level. Figure 5 The Netherlands Remote Gambling Market Scenario 1 (Gross Win - m) 12

13 Figure 6 The Netherlands Remote Gambling Market Scenario 2 (Gross Win - m) Consequently gaming/consumer winnings tax is expected to yield approximately 500m per annum with the total benchmark for the five year period 2012 to 2016 expected to be 2.508bn. In parallel without the development of a dot NL regulated Internet gambling market it would be expected that the offshore dot com market would grow to approximately 248m in gross win by This would mean that the domestically regulated remote activity catered for by the Dutch lotteries would only account for just over 16% of total Dutch player spend via this market channel. In total Dutch players would have a gambling spend of approximately 2.460bn by 2016 which would equate to an average of 177 per adult. Consequently, it is expected that the offshore remote gambling sector would make an operating profit of approximately 298m from the Dutch market between the years 2102 to 2016 or an average of just under 60m per annum. Regulated Dot NL Remote Gambling Market with No Requirements to Locate IT Scenario 2 Current Taxation (29% Winning Tax Betting/29% Gross Win Tax Gaming) Should the current Dutch system of taxing gambling be applied to a domestically regulated dot NL remote gambling market, with no onshore requirements regarding IT, then it would be expected that the value of the dot NL market would be approximately 78m in 2012 falling to 49m by This would generate an additional gambling tax take of 36m in 2012 falling back to 26m by In total the Dutch consumer would spend approximately 2.500bn on gambling by 2016 which equates to 179 per adult. By just aiming to sustain the scale of the dot NL remote gambling market at its 2012 level operators would be expected to make a loss of 152m over the period 2012 to In reality, particularly in the sportsbetting vertical, marketing and bonus spend would almost certainly collapse further, particularly in the betting product vertical, meaning the market would provide no value to customers and thus be unsustainable. Under this best case for this scenario it would be expected that the dot NL market would cater for just 29% of the total value of the Dutch remote gambling market by 2016 and this would be set to continue to fall further. 13

14 Figure 8 Additional Gambling Taxation Generated by Scenario 2 (m) Scenario 3 10% Turnover Tax If a 10% turnover tax was applied to a regulated dot NL remote gambling market then it would be expected that the value of this market would be approximately 56m in 2012 and would fall to 49m by This would generate an additional gambling tax take of 21m in 2012 growing to 23m by In total the Dutch consumer would spend approximately 2.379bn on gambling by 2016 which equates to 171 per adult. Operators would be expected to make a net operating loss of 106m over the period 2012 to This would be 404m less than the profitability of the dot com market by this time under the status quo. It would be expected that under a 10% turnover tax the dot NL system would cater for approximately 38% of total Dutch player remote betting and gaming market by 2016 though this will be in decline by this time as operators struggle to sustain marketing spend and bonus levels. This higher than in France due to our assumption that all product verticals are included in a dot NL scheme. Figure 9 The Netherlands Remote Gambling Market Scenario 3 (Gross Win - m) 14

15 Figure 10 Additional Gambling Taxation Generated by Scenario 3 (m) Scenario 4 20% Gross Win Tax If a 20% gross win tax were applied to a regulated dot NL remote gambling market then it would be expected that the value of this market would be approximately 201m in 2012 but fall to 177m by 2016 as some operators exited the market over this period. This would generate an additional gambling tax take of 41m in 2012 falling back to 36m by In total the Dutch consumer would spend approximately 2.481bn on gambling by 2016 which equates to 179 per adult. After initial losses operators would be expected to make a net operating profit of approximately 95m over the period 2012 to However, this would be 203m less than the profitability of the dot com market by this time under the status quo. It would be expected that under a 20% gross win tax the dot NL system would cater for approximately 59% of total Dutch player remote betting and gaming market by 2016 though this level would be on a downward trend. Figure 11 The Netherlands Remote Gambling Market Scenario 4 (Gross Win - m) 15

16 Figure 12 Additional Gambling Taxation Generated by Scenario 4 (m) Scenario 5 5% Gross Win Tax If a 5% gross win tax were applied to a regulated dot NL remote gambling market then it would be expected that the value of this market would be approximately 301m in 2012 and would grow to 383m by This would generate an additional gambling tax take of 20m in 2012 growing to 25m by In total the Dutch consumer would spend approximately 2.501bn on gambling by 2016 which equates to 180 per adult. Operators would be expected to make a net operating profit of approximately 340m over the period 2012 to This would be 42m more than the profitability of the dot com market by this time under the status quo. It would be expected that under a 5% gross win tax the dot NL system would cater for approximately 95% of total Dutch player remote betting and gaming market by 2016 and that this percentage would continue growing. Figure 13 The Netherlands Remote Gambling Market Scenario 5 (Gross Win - m) 16

17 Figure 14 Additional Gambling Taxation Generated by Scenario 5 (m) Regulated Dot NL Remote Gambling Market with Requirements to Locate IT Onshore Scenario 6 Current Taxation (29% Winning Tax Betting/29% Gross Win Tax Gaming) Should the current Dutch system of taxing gambling be applied to a regulated dot NL remote market, with no onshore requirements regarding IT, then it would be expected that the value of this market would be approximately 51m in 2012 but will have fallen back to 32m by This would generate an additional gambling tax take of 24m in 2012 falling to 18m by In total the Dutch consumer would spend approximately 2.471bn on gambling by 2016 which equates to 178 per adult. By just aiming to sustain the dot NL remote market at its 2012 level operators would be expected to make a loss of 186m over the period 2012 to Again particularly on the betting side marketing and bonus spend would almost certainly collapse further, particularly in the sportsbetting product vertical, meaning the market would be unsustainable. Figure 15 The Netherlands Remote Gambling Market Scenario 6 (Gross Win - m) 17

18 Figure 16 Additional Gambling Taxation Generated by Scenario 6 (m) Under this best case for this scenario it would be expected that the dot NL market would cater for just 25% of the total value of the Dutch remote gambling market by 2016 and this would be set to continue to fall further. Scenario 7 10% Turnover Tax If a 10% turnover tax was applied and there was a ring fenced IT requirement for a regulated dot NL remote gambling market then it would be expected that the value of this market would be approximately 37m in 2012 and fallen back to 32m to This would generate an additional gambling tax take of 14m in 2012 growing to 16m by In total the Dutch consumer would spend approximately 2.378bn on gambling by 2016 which equates to 171 per adult. Operators would be expected to make a net operating loss of 158m over the period 2012 to This would be 456m less than the profitability of the dot com market by this time under the status quo. Figure 17 The Netherlands Remote Gambling Market Scenario 7 (Gross Win - m) 18

19 Figure 18 Additional Gambling Taxation Generated by Scenario 7 (m) It would be expected that under a 10% turnover tax the dot NL system would cater for approximately 33% of total Dutch player remote betting and gaming market by 2016 though this will be in decline by this time as operators struggle to sustain marketing spend and bonus levels. Scenario 8 20% Gross Win Tax If a 20% gross win tax were applied to a regulated dot NL remote gambling market and there was a ring-fenced IT requirement then it would be expected that the value of this market would be approximately 133m in 2012 but fallen to 118m by This would generate an additional gambling tax take of 27m in 2012 growing to 24m by In total the Dutch consumer would spend approximately 2.478bn on gambling by 2016 which equates to 178 per adult. After initial losses operators would be expected to make a net operating profit of approximately 1.1m in 2016 but a net loss of 88m over the period 2012 to This would be 387m less than the profitability of the dot com market by this time under the status quo. It would be expected that under a 20% gross win tax coupled with an on shore IT requirement the dot NL system would cater for approximately 46% of total Dutch player remote betting and gaming market by 2016 with this percentage falling slightly over time. Figure 19 The Netherlands Remote Gambling Market Scenario 8 (Gross Win - m) 19

20 Figure 20 Additional Gambling Taxation Generated by Scenario 8 (m) Scenario 9 5% Gross Win Tax If a 5% gross win tax were applied to a regulated dot NL remote gambling market and there was a ring-fenced IT requirement then it would be expected that the value of this market would be approximately 200m in 2012 and would grow to 256m by This would generate an additional gambling tax take of 16m in 2012 growing to 18m by In total the Dutch consumer would spend approximately 2.471bn on gambling by 2016 which equates to 178 per adult. After an initial loss in the first year operators would be expected to make a net operating profit of approximately 83m over the period 2012 to This would be 215m more than the profitability of the dot com market by this time under the status quo. It would be expected that under a 5% gross win tax the dot NL system would cater for approximately 79% of total Dutch player remote betting and gaming market by 2016 and that this percentage would continue growing slightly. Figure 21 The Netherlands Remote Gambling Market Scenario 9 (Gross Win - m) 20

21 Figure 22 Additional Gambling Taxation Generated by Scenario 9 (m) CONCLUSIONS Based on the results our analysis for the purposes of this first framework study and the experience of the remote gambling sector that we have developed over the past decade, H2 made a number of initial observations regarding a regulated the dot NL remote gambling markets. The Remote Gambling Market is Different to the Land-Based Market In order to realise the full potential of a dot NL remote gambling market the Dutch government should take on board the inherent industry dynamics in order to enable the market to operate at the optimal level from day one. The remote gambling sector with numerous operators available at any time to the consumer and near perfect information (odds comparison and other affiliate sites) regarding pricing and bonusing means that the elasticity of consumer demand is far higher than it is in the landbased sector where there are typically only limited suppliers/products on offer in any local market. Taxation Take is Not the Only Factor The overall tax take is only one factor in the regulation of a successful and sustainable dot NL remote gambling market in which there is also the policy objective to provide a regulated, protective and attractive environment for the Dutch consumer. In order to make a remote gambling market attractive to all stakeholders (government, consumers and operators) and sustainable in the long-term, an equilibrium has to be established which is attractive and sustainable to the state, consumers and operators. This will involve enabling operators to offer value for money whilst having the opportunity to secure a reasonable return on their investment. Both consumers and operators are generally willing to pay a small premium for being about to participate within a market that is regulated within the country it serves. Remote Gambling Taxation Calculated with Respect to Either Turnover or Customer Winnings are Unsustainable The method with which the taxation of the remote gambling sector is taxed is key. Any taxation that is calculated with reference to operators turnover creates an additional risk, which is passed on to the consumer thus impacting the attractiveness of the product. Any taxation that is calculated with reference to consumer winnings directly impacts the pay-out and so also reduces its value. 21

22 Figure 23 The Equilibrium Remote Gambling Market (Win-Win-Win) Global Competition "#$#% Global Competition Legal Marketplace/Taxation Freedom of Product Choice/Competitive Price -.%,$#',) &'()*+%,) Global Competition Provide a High Quality Product/Return on Cap Ex Global Competition Source: egaming Sector/H2 Gambling Capital It is our conclusion that a consumer winnings tax would make any remote sportsbetting market so uncompetitive that it would not be sustainable. Likewise any tax on turnover would significantly impact the ability to attract activity to take place within the dot NL scheme. A turnover tax on gaming would be completely infeasible, as it would erode all of the margins in of most of the products. Calculating taxation with reference to gross win provides a model where by the value for consumers is not directly impacted and there is no additional risk for the operators. However, it should be noted that within a higher gross win taxation model operators will reduce their investment in the market and there will ultimately be a level at which some of the cost will be passed on. Lower Rates of Gross Win Tax A low rate of gross win taxation would maximise the proportion of activity that takes place within the dot NL programme whilst not significantly increasing the overall gambling spend. Under the status quo Dutch adults are expected to lose an average of 177 in 2016, even under the 5% gross win tax this will only increase to approximately 180. The lower the tax rate and the cost of operations, the higher proportion of a nation s players remote gambling spend will be captured within the licensed national (dot country) regulated scheme. For instance, at a 5% gross win tax 95% of Dutch remote gambling activity would be expected to take place within the dot NL scheme within five years. At lower rates of gross win tax operators profitability will progressively increase but this will allow them to invest more in building out the local license model in terms of the quality of the products on offer, a higher spend on customer acquisition and the development of customer loyalty. Attractiveness of the product is very important as the most valuable players (high-rollers) have the highest price awareness and elasticity (hence their demand levels are very sensitive to any change in the effective price whether it be bonuses or margin). Conversely the higher the tax rate and the cost of operations, the greater the level will remain on offshore dot com sites. This will be driven by both supply (there will always be some operators willing to cater for a market either offshore or illegally within a market whatever the risk) and demand from the consumer. 22