The end of the monopoly

I have written this text for http://www.lotterydaily.com, and Charlie Horner has edited it.

Besides Norway, my home country, Finland, is the only country in western Europe where the entire gambling business is still based on a monopoly system. Some years ago, Norway seriously considered changing the system, but in the end, the country ended up with the opposite solution and only started strengthening the monopoly system. Finland reached the same solution, as a result of which the previous three gambling companies were merged into one monopoly company. That new company, Veikkaus, has been operating for almost six years, and the results have been anything but what was hoped for.

What is wrong with the monopoly system, and what are the reasons for failure in Finland? First, a few basics need to be explained.

It is a general fact that monopoly reduces business because the market economy does not get to work in the best possible way. Monopoly causes inefficiency, which has been considered a good thing in controlling the gambling business. According to the legislation of many countries, gambling is a business that has been prohibited in principle and which the state has then given an exemption to a company to operate. The basic idea has been to limit the activity significantly and thus protect people from the harmful effects of gambling. This kind of activity worked well in a situation where business was only done in the retail channel, but the situation changed radically with the internet.

It is generally thought that doing a gambling business and responsible operation are mutually exclusive things. This is fundamentally a wrong way of thinking. There is no direct correlation between gambling sales and the number of gambling problems, and increased gambling sales do not automatically increase the number of gambling problems. Responsibility measures to prevent gambling are not the best possible way to prevent gambling problems. We must definitely try to reduce the problems, but there must be more effective tools than making it more difficult to play.

The basic idea that monopoly itself prevents gambling problems is completely wrong. If that assumption were valid, Norway and Finland should have the fewest gambling problems in Europe. However, this is not the case; the situation is even the opposite.

Generally, wrong assumptions cause incorrect operating models and unrealistic goals. The functionality of a good gambling system does not depend on whether the system is monopoly or license-based. I believe that a monopoly can be a good model, but it requires excellent regulation to work, which correctly understands business fundamentals. Simply restricting the operation robs the system of its legitimacy in customers’ eyes. In such a situation, the official restrictions no longer work. Similarly, a license-based system can cause unnecessary problems if the regulation is not up to date.

What has gone wrong in Finland? In Finland, the state tried to protect the gambling system based on monopoly when it decided to merge the previous three companies (Fintoto, RAY and Veikkaus) into one company. The goal was to enable more efficient business operations when there was no longer a need to prevent competition between Finnish companies. The assumption was to increase gambling revenues and satisfy customers who receive international-level products and services from their own company. The single company model was also believed to help prevent gambling problems, as customers’ total gambling and potential problems can be monitored from one system.

The Lottery Act, which entered into force at the beginning of 2017, strongly emphasized responsible gaming. The legal text stated that Veikkaus’ task is to prevent gambling problems. In fact, this was the sole function of the gambling company by law. Not a word was mentioned in the law about the two other big goals mentioned in connection with the change, a competitive offer and a moderate increase in the level of profits.

New Veikkaus has had difficulties getting permits for new products and services from the beginning. At the same time, international gambling companies have continued their product and service development, the results of which have been easily available to Finnish customers via the internet and mobile channels. Although offshore companies have not been allowed to do marketing in Finland, information about the companies has spread widely, and an increasing number of Finns play money games for companies other than Veikkaus. Veikkaus, which used to take good care of its channeling task, has fallen from the top ranks of the development of the gambling world. Because of this, active Finnish gambling customers have moved to other companies.

The situation has escalated little by little. Veikkaus’ sales and GGR have decreased every year of the company’s operation. Veikkaus’ GGR was around €1.8bn when the company started operations. According to this year’s forecast, the GGR is about €1.0–€1.1bn. The drop has been in six years by about 40% Veikkaus’ market share of all gambling in Finland was at the 90% level, but now it is only about 2/3. Veikkaus has only 50% of gambling in digital channels, compared to 73% six years ago. The worst situation is in particularly competitive areas, in fixed-odds betting and online casino games, where Veikkaus’ market share is only about a third. That has happened in a situation where Finland further tightened gambling legislation from the beginning of 2022 and made it more difficult for offshore companies to operate.

The poor business results could even be justified in some way if the primary goal of reducing gambling problems had been realized. The previous nationwide gambling problem research was conducted in 2019. At that time, it was found that there had been no significant change in the overall level of gambling problems. On the other hand, the number of players suffering from serious problems had increased somewhat. After 2019, Veikkaus’ sales and GGR collapsed. Unfortunately, we will have to wait at least a year before we know how this has affected the number of gambling problems. The following nationwide research will be made next year, and the results will probably be known in early 2024. According to Veikkaus’ small-scale survey, gambling problems have decreased somewhat, but it does not seem that a tremendous change has occurred.

Veikkaus is not allowed to develop its business, and at the same time, the number of gambling problems does not seem to be developing as expected. Gambling has become more difficult for Veikkaus due to stricter responsibility requirements, e.g., mandatory identification and strict loss limits. As a result, customers have increasingly transferred their gambling to other operators. Finns’ overall gambling seems to be slightly increased after the Covid-19 pandemic, but at the same time, Veikkaus’ GGR continues to fall sharply. The new stricter monopoly legislation seems to be driving customers to offshore companies. The money flows outside of Finland, the customers are no longer under the supervision of the Finnish authorities, and the number of gambling problems does not decrease.

The situation cannot continue like this, and now it is better for everyone that the gambling system in Finland would change. That opinion was said by the CEO of Veikkaus in August when the company reported its H1/2022 result. Veikkaus, therefore, announced that it no longer considers it reasonable to continue as a monopoly company, at least in competitive gambling areas. A similar announcement by a monopoly company led to a rapid change in the gambling system in Denmark and Sweden. Judging from the comments of the political parties, the same will also happen after the parliamentary elections held in Finland in April next year.

No one yet knows what Finland’s new gambling system will be like and when it will come into force. I’ll try to help political decision-makers design the best possible model for Finland, where legislation and regulation are based on a comprehensive understanding of the gambling business. I believe that new, much better legislation will come into force in Finland within 2–4 years.

Development of Finnish gambling situation – August 2021

I have written this short analysis of the Finnihs gambling situation together with my business partner Reijo Anttila.

Market situation H1/2021

The Covid-19 has continued to have a negative impact on gambling activities in Veikkaus’ physical channels. Gaming arcades and slot machines have had to be partly closed.
Compulsory identification-based gaming of physical slot machines came into force in the decentralized slot machines in January 2021. That will significantly reduced Veikkaus’ gross gaming revenue.
Mandatory identification of slot machines in Veikkaus’ own gaming arcades came into force in July 2021. The foreign slot machines used by Veikkaus did not have an identification feature ready. As a result, these slot machines had to be closed in Veikkaus’ gaming arcades. Slot machines will be reopened when it is possible that customers can identify themselves in those machines. According to unofficial information, the customer’s obligation to identify himself has collapsed the gaming margin accumulated in Veikkaus’ gaming arcades.
Veikkaus started collective bargaining in August 2021. According to the company’s announcement, its purpose is to reduce approximately 200 jobs from the point-of-sale organization. In addition, the company is working to make organizational changes for hundreds of its other employees.
In September 2021, the gambling limits for digital, fast-paced gambling will be extended to include slot machine gaming at the physical point of sales. That will further reduce Veikkaus’ revenues. Until now, physical slot machines have been allowed to be played as much as customers want, but in the future, the player will have to set a limit on both daily and monthly consumption. According to the experience of the digital channel, the limits will be set tight. It is estimated that there are tens of thousands of problematic slot machine players, and playing of that group will go down a lot. It is quite possible that some of the declining gambling is likely to move to the digital gambling services of offshore operators.
According to information obtained from various sources, the gaming revenue of offshore companies in Finland has been growing strongly during the Covid-19 period.

Gambling in Veikkaus’ physical channel, in particular, is undergoing a considerable change. According to Veikkaus’ H1 / 2021 interim report, only 45 % of gambling took place in the physical channels, and 55 % came from digital sales. In 2019, the physical sales channel accounted for almost 60 % of total sales. At present, about 65 % of all Finnish gambling takes place on digital channels. Within a couple of years, that share will exceed 70 %.

Drafted Lottery Act 2021

The project to reform the Lottery Act in accordance with the Government Program was launched in January 2020, when a preparatory working group was appointed.
The working group completed the proposal in late 2020. Opinions on the proposal were given in early 2021.
The critical points of the drafted law are:
- The law provides for payment blocking to limit the availability of offshore gambling. Blockings are targeted at gambling companies that market in violation of the Lottery Act. The law does not define what is considered illegal marketing. The regulator (the National Police Board) makes an interpretation. The regulator maintains a “blacklist” of illegally marketing gambling operators. Banks and payment service providers are required to block payment transactions to “blacklisted” gambling companies.
- Provisions on mandatory player identification are added to the law. In the beginning, of course, this only applies to Veikkaus’ operations, but it can be considered a policy that will be valid later also in a possible licensing market situation.
- A provision is added to the law to extend the decision prohibiting the marketing of gambling that violates the Lottery Act to natural persons. In addition, there will be the possibility of imposing an administrative penalty fee for marketing in breach of the Lottery Act.
- According to the bill, Veikkaus will be allowed to market horse and sports betting, even though they are considered to be gambling products that can cause significant gambling problems.
- The law specifies the provisions concerning Veikkaus’ marketing and supervision of the implementation of gambling. In addition, conditions on the placement and self-monitoring of slot machines will be added to the law.
- The Act adds provision on the possibility for Veikkaus to establish a subsidiary engaged in business between companies (B2B) for non-gambling activities and on the conditions and restrictions concerning the subsidiary’s operation to be installed.
The drafted law was sent at the end of April 2021 to the EU notification process. The start of the EU process was so urgent that the opinion of the Legislative Evaluation Council was not available before the process started. A subsequent opinion of the Evaluation Council noted several shortcomings in the preparation of the law. Particular attention will be paid to the fact that the preparation work has not explored other possible options (e.g., legislation based on a licensing system). The explanatory memorandum to the Lottery Act also lacks financial calculations and impact assessments of the law to the operations of the Åland-based PAF company.
In July 2021, Malta issued a “detailed opinion” on the law in the context of the EU notification process. The “detailed opinion” challenges the Finnish state to justify the necessity and proportionality of the decisions. Finland has three months to give its answer and make any necessary changes. Although the measures in the law appear to be significant in order to achieve the stated goals, the result is probably that the bill will be essentially the same for consideration by parliament. According to unofficial information, Finland has already answered and apparently made only minor changes to the bill. The law is expected to be submitted to the Finnish Parliament in the coming weeks – in September 2021.
The probabilities of whether a proposal will go through at all, whether it will go through as it is presented, or whether it will go through modified will vary all the time. The collapse of Veikkaus’ financial result favors rolling the change in the law on a tight schedule. The outcome of the changes in the law will not significantly change the situation. So, a serious debate on the transition to a licensing system is ahead in any case.
According to the information, it seems certain that the current model, in which the beneficiaries’ revenue is directly linked to Veikkaus’ income, will be dismantled. A working group has been appointed to prepare for the change, which is expected to present a proposal by the end of 2021. The goal is for the change to take effect from the beginning of 2024. Breaking the direct link between the beneficiaries and Veikkaus’ income also requires an amendment to the Lotteries Act. As a result, the law will have to be reopened in either 2022 or 2023. In this context, it is theoretically possible that other significant changes could be made to the law.

Political situation

Political turbulence is severe. The governmental program binds government parties, but the situation is difficult due to Veikkaus’ revenues collapse. Politicians would like to support Veikkaus’ market position, but there are no ways to do so. According to current information, the Lottery Act is going to be accepted in parliament. However, there has been debate about the rationale for monopolistic gambling legislation, and MPs, also from governmental parties, have expressed differing views.
The connection between Veikkaus and its beneficiaries will be severed by 2024 at the latest. Before that, the state subsidy received by Veikkaus’ beneficiaries will already decrease considerably. Veikkaus’ revenues will be transferred to the state budget, from which the beneficiaries’ grants will be paid in accordance with the budget decisions made by the respective government.
A political debate has begun on changing the entire gambling system. Veikkaus’ market share of all Finns’ gambling will fall below 70 % in the coming years. In digital channels, Veikkaus’ market share is close to 60 %, and in the competitive gambling product areas (casino games and fixed-odds betting), it is estimated to be only about 35 %. Based on these developments, it is no longer sensible and possible to continue with a monopoly system. The question is mainly at what stage the system will be converted to license-based and what kind of multi-license system will be created.
It is unlikely that the next Finnish government will decide to continue with the gambling monopoly system. The next population survey on gambling problems will be conducted in 2023. It is assumed that the number of gambling problems will not decrease significantly in that survey. Reduced slot machine gambling lowers the gambling problems experienced to some extent. It is doubtful that this effect will be seen in the population survey, as the share of digital gambling has exploded in both gambling and the number of gambling problems.
The share of digital gaming in Finland’s total gambling will soon reach 70 %. Veikkaus’ market share of that gambling has fallen rapidly to 60 %. In certain competitive product areas, Veikkaus’ share of gambling is already at a very low level; for example, in fixed-odds sports betting, it is estimated at only about 25 %. In such a market situation, the monopoly system can no longer continue.

Does the proposed Finnish gambling legislation make sense or not?

I have written this column for http://www.lotterydaily.com (published February, 1st), and Conor Porter has partly modified the text.

The Ministry of the Interior Affairs has published a proposal for Finland’s new gambling legislation early in January.

The preparatory work done by the officials lasted for almost one year. I think that they did a great job, as Covid-19 certainly made the process significantly more complicated and, nevertheless, the work was done on schedule. The outcome of the work was also excellent given the assignment of the task. Officials are not responsible for the fact that the political mandate of the work was anything but sensible.

The aim of Finland’s current Government Program is to secure Veikkaus’ monopoly and operating conditions. In addition to this, the objective is to combat gambling problems and to channel gambling to Veikkaus’ responsible and controlled offering.

The Government Program also states that other gambling companies’ marketing will be addressed, and ways will be sought to restrict gambling to other gambling operators’ sites.

Based on the gambling policy guidelines mentioned above set out in the Government Program, the Ministry of the Interior Affairs set up a working group in early 2020 to prepare the guidelines for Finland’s new gambling legislation. The starting point for the legal reform was that the Finnish gambling system would continue to be based on a monopoly system.

Therefore, the working group did not have the opportunity to carry out such proper preparatory work as analyzed and sought the best possible solution as a basis for the Finnish gambling system. The mandate stated unequivocally that the preparation should be based on a monopoly model. Therefore, well-functioning licence-based models in other countries were not even studied.

I have stated on many occasions that I am always, in principle, objected to monopolies. On the other hand, during my Veikkaus-years, I’ve understood that there are business areas where competition should be limited. Gambling is definitely an activity that states must regulate because of potential problems.

However, this does not mean that a monopoly is automatically the best solution for restricting operations. It is lousy preparation if not all possible sensible alternatives are analyzed, but one of the essential things is decided without examining them. On what grounds can the Finnish Government claim that, in preparing the matter, it has promoted the interests of its citizens in the best possible way by prohibiting the examination of possible better alternatives?

As a whole, the proposal for new gambling legislation is a huge disappointment. Maybe I expected too much when I hoped to see things change. Now I feel that just a few changes are promised, and they are taking some things in the wrong direction. Hopefully, even concerning the gambling problems, there are developments in the right direction. But I am not sure about it.

The number of gambling problems in Finland has changed incomprehensibly little during the 21st century compared to the fact that gambling has increased significantly. The share of Finns suffering from gambling problems has been at the level of about 3% from year to year.

Instead, the number of people suffering from serious gambling problems has increased somewhat, and I hope that the new legislation will help this unfortunate development. I will return to this topic shortly after commenting on the policies made on physical slot machines.

The Finnish gambling policy’s core problem has been the discrepancy between business profit expectations and the responsibility requirements set at the same time. The Finnish state has not been able to decide which issue it considers more important. Therefore Veikkaus, the monopoly operator, has had challenges in understanding what the owner wants from it.

Revenue expectations have been high, but at the same time, instruments to respond to competition have not been allowed to be used. It now seems evident that responsibility has gained and is gaining more weight. On the positive side, the choice has finally been made, but I think it is far too late and no longer enough to save the situation. Now there is a significant risk that the gambling problems will not develop in the desired direction. At the same time, gambling profits will collapse, and above all, Veikkaus will permanently lose its future competitiveness.

Mandatory identification for gambling is coming, which is now introduced a few weeks ago in physical slot machines. The requirement to register for other gambling products will take effect over a few years. It is a good reform in terms of responsible gambling, but it is also a reform that will significantly impact the decrease in gambling revenue. The potential positive impact of identified gambling on business is based on the utilization of customer data.

However, it seems that Veikkaus’ ability to use data as a modern business company will be restricted or even denied. This shows that decision-makers have no understanding of what can be done with customer data. Using it is not automatically the same thing as adding gambling problems. It seems that the Finnish state no longer even wants Veikkaus to operate a profitable business anymore, but at most just put its products on offer, as was the case in the 1980s. I’m sorry on behalf of Veikkaus’ knowledgeable and skillful employees because they do not get to do the job properly.

There have been significant changes in slot machine operations over the past year. Veikkaus voluntarily decided to reduce the number of those machines a lot. However, the number of slot machine locations did not decrease in almost the same proportion. The change that has now come into force, making slot machine play only possible for registered customers, is a good thing. The explanatory memorandum to the new law states that slot machines’ placement should aim for solutions that minimize the gambling problems.

However, many would like to see slot machines removed from public open spaces, but that is not the case. I have never understood why slot machines can be kept in entirely open spaces in Finland. Slot machines are an integral part of gambling, but I think the machines’ correct location would be mainly in arcades and other age-restricted areas, following the Danish model. However, this is not the case in Finland, even after the new gambling legislation.

One of the most positive reforms of the proposed legislation is the clarification of the marketing of gambling. The premise is that marketing should be moderate and channel gambling to games that don’t cause so many problems. The weakness of the current legislation in force has been the definition of marketing and product information provision.

Several years ago, I was among those who planned the current gambling marketing policies, and I am ready to raise my hand and admit a mistake (as in basketball). I am glad that from the new legislation, the possibility to share product information is removed. Appropriate legislation should contain as few interpretations as possible, and the situation now seems to be improving.

The introduction of payment blocking will cause my blood pressure to rise. It could be the best solution for everyone, that I advise you to read a blog written by Aki Pyysing on the subject (https://www.sijoitustieto.fi/sijoitusartikkelit/viisikko-blokkaa-pelkasta-rajoittamisen-ilosta – unfortunately only in Finnish). However, it is enough to say that this reform makes no sense.

The reform’s economic impact is entirely non-existent, and this will not reduce gambling problems, so why is such nonsense done? In light of Norway’s experience, the blockings may restrict banks and major payment companies’ activities. Still, they will be replaced very soon by new service providers beyond the control.

Personally, the most exciting reform proposal is the opportunity for Veikkaus, or its subsidiary, to start a new type of business. I was the CEO of that kind of subsidiary, Veikkaus Solutions Ltd, and most recently, my job in Veikkaus was to prepare for re-starting a new business. Now it seems that Veikkaus would again have the opportunity to establish a subsidiary for non-gambling activities. The intention is for the subsidiary to provide gambling products and services to other operators and not engage in consumer gambling activities.

This is an excellent thing in the long run. Sales contracts for gambling products and services today are based almost exclusively on the revenue share model. The compensation received by the selling company is based on how much the customers of the buying company end up buying those products.

Hopefully, the Finnish authorities will not interpret such sales for gambling purposes. A massive opportunity for Veikkaus, which is still one of the best lotteries globally, would be to start international B2C gambling operations. Selling gambling products directly to customers in other countries would generate significantly more revenue than trading among gambling companies. However, B2C operations are not possible under the Finnish monopoly system. It would have been one additional primary reason for moving to a license-based system.

In conclusion, the answer to my question in the title is NOT. This reform, as a whole, makes no sense. I consider it a much better option to omit this proposed change altogether and move on to the licence-based system’s preparation. The rationale for the licence-based model would be worth its own separate column.