Sweden, regulation and the end of the grey market?

Sweden is arguably the spiritual home of the online gambling industry. It’s the effective birthplace of many of the leading operators and suppliers and it continues to lead the way in terms of innovation through the likes of Casumo and Dunder. So, it feels strangely appropriate that major changes ahead in Sweden could reshape the very soul of this online gambling world.

It’s hard to overplay the importance of Sweden to the online gambling industry. From this small market we’ve seen Kindred, Betsson, NetEnt, LeoVegas, Casumo and early pioneers such as Boss Media and PokerRoom emerge, and it remains the gold standard for the dot.com sector in Europe. It’s the market where new brands emerge in a relatively uninhibited operating environment with the additional benefit of zero tax. But that is all set to change.

On the face of it what is planned in Sweden is straightforward. The market is set to move from a confusing semi-regulated status to modern, fully regulated, liberalised online gambling legislation. But for arguably Europe’s most important grey market to move towards a taxed and regulated regime is hugely significant for the sector and could set the stage for the next act in online gambling.
What happens next
The Swedish government has proposed the regulations enter into force on 1 January 2019, with licence applications submitted from July 2018 and there is no reason to expect any Dutch-style delays. But it’s not all good news, with the government saying somewhat ominously: “The central government will regain control of the Swedish gambling market.” The intent seems to be less on the British model and more to create a market similar to its Danish counterparts where the state monopoly retains a significant portion of the overall spend and the regulator has the private sector on a fairly short leash.

“We are now proposing legislation entailing that operators receiving a licence to conduct activities targeting Swedish consumers must comply with Swedish rules. This will also give us the tools to keep those without a licence out,” Minister for Public Administration Ardalan Shekarabi says. The law also proposes tightening the penalties for unlawful gambling activities and promoting unlawful gambling, with a new criminal classification, gambling fraud, introduced.

It’s an attempt to seize control of one of Europe’s most congested and lucrative gambling markets. There are dozens of sports betting operators and hundreds of casino brands battling for a share of the approximately €700m online gambling market in the country, and it’s one perceived as having the lowest barriers of entry. As one of the few easy-to-access grey markets in Europe it attracts both locally focused operators and international brands attempting to increase their revenue, although many have underestimated how difficult a task this can be.

With a near 10 million population, it’s punching well above its weight in terms of per capita spending already, but it’s possible there is still the capacity for a big uptick in consumer spending on the back of a fully regulated market. Comparing it to the UK the per-capita spend is roughly a third lower at around €70 and using that crude metric suggests growth of as much as 30% from current levels is possible. But this is perhaps optimistic, and the final results are likely to depend significantly on the eventual market conditions.
Sweden’s unique market conditions
One huge factor is the role of the two monopoly operators active in the market. Lottery operator Svenska Spel has been aggressive in its moves online with a poker room and a sports betting product, amid frequent requests to be permitted to offer casino games. Alongside this there is the horseracing monopoly ATG, which generated around €200m in online revenues in 2017. If ATG is included in the revenue estimates then the market is even larger, and closer to €900m annually, according to Svenska Spel’s own estimates.

“We, and most of our colleagues in the industry, are cautiously positive to the proposed re-regulation. It will open up the market and increase transparency and options for players” – Cherry CEO, Anders Holmgren

Taking Denmark as an example, the per capita spend for 2017 is estimated to be around €80, compared to the circa €90 predicted from the UK market. It’s reasonable to expect under non-restrictive market conditions for Sweden to at least match Denmark and it’s quite possible it will surpass it and reach UK levels of per-capita spend. But it’s not correct to assume this growth will all filter neatly into the hands of the private sector, or even to the 18% level you can argue is needed to maintain current revenue levels.

Svenska Spel reports, based on its own research, that it held a 21% share of the Swedish online gambling market in 2016, although this was mostly through lottery sales with a minority through online sports betting and poker. Horseracing monopoly
operator ATG was given a 23% market share, others 2% and the remainder, 54%, held by the grey market operators. However, discounting online lottery sales and horseracing this is a market with 80-90% in the hands of foreign operators. And Svenska Spel and ATG are going to want to claw back some of this “lost” revenue.
The winners and losers
The big players currently are Kindred, bet365, Cherry, Betsson, LeoVegas, Mr Green and Casumo. LeoVegas is one of the largest casino operators in Sweden with €72.7m in revenues from the market in the rolling 12 months through September 2017. Its rival operators don’t break down the region by country, but Kindred reported rolling 12-month casino revenues from the Nordics of £144.8m with £66.8m coming through sports betting. These are sizeable chunks of revenue and the gradual but inevitable move towards regulation has undoubtedly been one of the drivers to ramp up international revenues and decrease reliance on Swedish revenues over the past few years.

“From a Cherry financial perspective, Sweden is less important as it was a couple of years ago,” Anders Holmgren, CEO of major Nordic operator Cherry, says. “Revenues are more evenly distributed from European countries, Scandinavian countries (Sweden, Denmark and Norway) amounted to 40% of our 2016 revenues.” But there is no doubt the market move is hugely important to the future success of not just Cherry but a number of other major names in the sector. So how is Holmgren feeling in advance of a potential tumultuous change?

“We, and most of our colleagues in the industry, are cautiously positive to the proposed re-regulation,” he says. “It will open up the market and increase transparency and options for players, and create a potential for companies with high ethical standards and understanding of sustainable business models. Cherry has a long history, and since the company was established in 1963, we have been in the centre of the gaming/gambling industry in Sweden, and I am sure we will retain a very strong position.”

With Cherry’s deep history in the market his confidence is fairly well founded, but it’s far less clear exactly who the winners and losers from a regulated Swedish market would be. It doesn’t feel like a market where everyone can win. While there could be enough underlying market growth to sustain the imposition of 18% GGR tax and a more competitive market, it’s a market where Svenska Spel is set to become a fierce competitor in online casino. And we should also see renewed interest from some of the larger gaming operators not currently active in Sweden.
Sizing up the long-term
Holmgren is certain Cherry will benefit from the regulated market, but is less certain on the final market conditions than he is on Cherry’s place in it. “It is hard to predict, however I expect the market to continue to be competitive, and the smart and agile people and companies will be the winners,” he says. “I expect all companies with a strong business model and products, as well as a committed management, to be able to make an entry. But they should be prepared for a tough market and need to take a long-term view.”

So, what is the long-term view for Sweden? Even if we assume a number of smaller operators will pull back from the market it will remain fiercely competitive following regulation with not just the incumbent online giants, but the existing monopoly operators fighting for a share of the new regulated market. “I would expect the competition to increase in the near term, as many new players will try to enter the market. However, as we have many domestic and international companies already in the market, I foresee that the toughest competition will level out after a few years,” Holmgren says.

There is certainly precedent for this. In Denmark what occurred initially was that the market was dominated by the ex-monopoly operator Danske Spil with only a handful of foreign operators, notably bet365 and Unibet, taking any meaningful share. Since 2012 the market has settled down and LeoVegas recently demonstrated its potential as a new market to launch into and take share, but it wasn’t a simple process. And it may lead to some big changes in the overall market structure.

One aspect that seems almost inevitable is a thinning of the market with the rise in costs and competition forcing some more M&A activity. “As we have seen in similar situations, the M&A increases following a regulation, I expect the same to be true for Sweden,” Holmgren says. We’d expect Kindred, Cherry and Betsson to lead the way as they look to protect share, but it’s equally likely we will see a reverse of the current situation in the UK with British-focused firms looking to buy into the market.
The final analysis
But the big question is how the market is controlled by the Swedish regulator. Building a business for the long-term is only going to be possible with a regulatory regime that works with rather than against the new entrants. “Of course there will be a period of trial and error, and I trust the regulators will be a benign watch dog in the initial period, trying to guide rather than punish,” Holmgren says. And if the Danish example is one to follow that is likely to be the case after some initial pushing and shoving for position.

And should Sweden manage a seemly transition that protects both the existing monopoly operators and placates the “offshore” market it may have a knock-on impact on the rest of the Nordics. Will Norway and Finland, which have clung rigidly to the rights of the local monopolies to control gambling so far, begin to loosen their approach to egaming? “They are for sure watching closely what is going on in Sweden and the Netherlands,” Holmgren says.

But they will not be the only ones, and the transition period as we move towards regulation in Sweden is likely just as important as the final result. When it comes to online gambling Sweden’s importance goes beyond its pure GGR contribution. “Sweden and the Nordic countries are important to Cherry for many reasons,” Holmgren says. “Sweden is a very competitive and resourceful market, and this drives development in the gaming industry in all aspects, from a strong entrepreneurial scene where people can realise their ideas to a capital market with good understanding of the industry and potentials of each company.”

And the death of grey market Sweden could be the final nail in the coffin of the dot.com sector in Europe. With Eastern Europe rapidly descending into tightly regulated local markets and the Netherlands moving towards regulation, those markets that remain look increasingly hostile to the industry. And from 2020, what is really left of the “dot.com” market? In many ways it’s a bun fight over Germany and a lot of legal contortions to remain active in most of the other territories. In some ways the death of the Swedish unregulated market can be seen as proxy for the death of Europe’s grey markets generally. And it’s not clear yet if this is a good thing or not.