Paul's Blog December 3, 2018

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Sports-betting, online casino gambling, and i-Lottery may not be new game categories for most jurisdictions around the world, but they are for the U.S. and they promise to drive a period of rapid expansion in the games-of-chance markets in the U.S. 

  There are a number of stories in today’s news that sorta capture the zeitgeist of what we can expect.  First is the outspoken advocacy by MA state Treasurer Deborah Goldberg on behalf of  the Massachusetts Lottery.  As Ms Goldberg puts it “I have maintained that if sports betting comes to Massachusetts, we (referring to the Lottery) must have a seat at the table.”  And as re online i-Lottery: “This session I will continue to work with the Legislature for the authorization to sell products online to ensure modernization and growth of the Lottery.”  Ms. Goldberg has sponsored bills to enable the state Lottery to implement sports lottery and offer traditional lottery products online.  Even so, the outcome of her efforts remain uncertain. Commercial interests are all lining up to prevent the state Lottery from offering either sports lottery or even traditional lottery games online.  It will take well-conceived strategy and fierce advocacy for state Lotteries to win the fight for the right to operate in these emerging game categories and distribution channels.  

If the competition for regulatory positioning is just in the first quarter of the game in the U.S., it’s in the middle of the third quarter in Europe.   ZEAL Networks is a holding company that holds large equity positions in multiple companies that traverse both the legal and the “gray” market models.  Gray market means they don’t always operate with proper license in the jurisdiction where the player resides.  ZEAL has operated under a cloak of secrecy for the past number of years, owning equity positions in gray market operators like Tipp24 (based in London but selling into Germany and other jurisdictions without license) but also owning equity positions in operators like Lotto24 which appear to comply with all laws and regulations even in the consumption jurisdiction.  This corporate configuration has enabled ZEAL to pursue markets legally where they are able to get properly licensed, and illegally I mean without proper license where they can’t get a legal license or it’s just more profitable to operate without a license.  Now, after spending many years working this hybrid model to build up a multi-national customer base of more than 5 million, they want to go completely legit, shed their black-hat bad-actor label, and be granted license to operate a lottery brokerage service in Germany and elsewhere.  This will, it would seem, put them into a position to expand their customer base even further, actually a lot further. And then, once they double or triple their customer base, they can re-asses to decide if being legit is more profitable than operating in the gray market.  That’s what they did five years ago.  Tipp24 was operating legally in Germany until 2013.  When the regulations became disagreeable to them, they decamped to London and continued to operate in Germany but without license to do so.   Now ZEAL Networks wants to “discontinue the German secondary lottery business of Tipp24 and transform it to a locally licensed online broker.”  Of course, if ZEAL ever decides that they do not care to abide the rules any longer, they can simply revert to gray market strategies with the added benefit of a greatly expanded customer base.  As per the CEO of ZEAL, “Together with our plans to regain control of Tipp24 and transform its German business models, this puts us in an excellent position to accelerate online growth in both the EUR 8.7 billion German lottery market and EUR 270 billion global lottery sector - as a locally-licensed broker, licensed operator, and lottery investor.”

The world Lottery Association (WLA) just last week adopted new by-laws that require members to maintain legal operations everywhere, not just where the headquarters is located, and not just in most of the markets that you operate in, but in all markets where the consumer resides.  It will be interesting to see if Zeal Networks applies for WLA membership now that they are legal, and to see if past actions that are inconsistent with current by-laws disqualifies them from membership. 

The European gaming markets are more dynamic, competitive and progressive than anywhere in the world.  It will be hard for operators to thrive without a serious application of ingenuity and innovation.  Another key to success is multi-national collaboration.  Danske Lotteri Spil, Française des Jeux, Norsk Tipping and Veikkaus have formed a Joint Venture Company to share resources and foster innovation in order to build a wider and more efficient digital gaming offer.  The aim is to develop liquidity games and to offer an enhanced range of games to the consumers.  The name of the venture is Lotteries Entertainment Innovation Alliance AS (LEIA).  Olli Sarekoski, Chairman of LEIA and CEO of Veikkaus explains “The consumer behaviour in the Lottery industry is changing rapidly which requires faster development and adaption from both the operators and suppliers. We are happy to announce this new Joint Venture and I believe we will be stronger together in the long term in delivering strong value propositions to each market.”

Malta has long been a safe harbor for online gambling operators who violate the laws of regulated markets.  An interesting display of the dynamic flow of deal-making and alliance-building between adversaries -  two Maltese operators were fined by the UK Gambling Commission (UKGC)  for violating anti-money-laundering rules.  At the same time, Malta is entering into an agreement with Italy to improve the effectiveness of methods to prevent illegality in the online gambling markets.   

Both the Federal Trade Commission (FTC) in the U.S. and the UKGC are tackling the issue of how to, or even whether, to regulate “Loot Boxes”.  It is interesting to see how they frame the issue.  The FTC is addressing the question from a legalistic POV.  Is the Loot Box player experience “gambling” or not?  The UKGC takes a broader view towards assessing the social impacts, studying the nature of the play on the part of minors and such.  I think we can expect the games-of-chance space to be disrupted by new game styles like Loot Boxes that defy easy classification.