MONOPOLY – THE RIGHT SYSTEM?

I have recently analyzed a lot of different gambling systems and their real objectives and effects. Last week, my company The Finnish Gambling Consultants published a “white paper” report on the current state of the Finnish gambling system and its alternative solutions. We have got familiar with the gambling systems in Denmark, Norway, and Sweden, which differ quite a bit from each other and from the Finnish system. It has been interesting to note that it is possible to have different solutions to achieve similar goals. So what is the right solution? In order to answer this, you need to know what states are really aiming in the area of gambling.

There have been two very interesting news from Norway about gambling business. First, the University of Bergen published an extensive study on gambling and, above all, gambling problems. According to that research, the number of gambling problems seems to have increased in Norway. The difference in research methods makes it difficult to compare the results both between different years and between different countries. Despite this, I dare say that Norway has more gambling problems than other Nordic countries. Why is this a strange result and how can it be possible?

Norway has a strict monopoly system for gambling. State-owned Norsk Tipping has the exclusive right to all other gambling products except horse betting which games are run by Rikstoto. There are some smaller companies in Norway that are licensed to run small-scale gambling, but this is not relevant in this context. The Norwegian state has imposed strict restrictions on Norsk Tipping’s operations. In Norway, it is only possible to play gambling products as an identified customer and there are strict maximum loss limits for gambling. So it seems that in Norway, the goal of the state has been to curb gambling and gambling problems, and not just to maximize the revenue from gambling.

In recent years, Norway has sought to restrict gambling for offshore gambling operators. The country has introduced a blocking of money transactions, which has made the customer’s money transactions to foreign gaming companies quite difficult. In addition, the country is making serious efforts to prevent foreign gambling companies from showing TV advertising in Norway, regardless of whether the TV channel is Norwegian or not.

Denmark and Sweden have opted for a quite different gambling system than Norway. Denmark decided to move to license-based gambling system less than 10 years ago, and Sweden followed to similar system from the beginning of 2019. In practice, only lottery and instant tickets games have remained in monopoly and other gambling verticals can be licensed. The volume of gambling has increased in both countries and players as a whole are losing more to gambling than before. Despite this, at least the number of gambling problems does not seem to have increased and the number of problems is clearly lower in both countries than in the strict monopoly country of Norway.

How can such outcome be possible? Studies show that there is a correlation between the volume of gambling and the number of gambling problems. The more you play, the more gambling problems you experience. However, studies have been conducted in situations where the actual amount of gambling has been known. This may no longer be the case in today’s digital world, where there is a large amount of gambling on offer via the internet and mobile that doesn’t show up in official gambling figures. Restricting the physical supply of games can only shift customers to the digital offerings of other operators.

It is often thought that in a monopoly system, state control is much stricter than in other systems. However, this is not self-evident. The regulator has just as good, or even better, opportunities to control gambling activities in the license model as well. An important factor is the channeling ability of the gambling system. The more the system makes gambling a legal activity in the country, the better the state control will work. At least after the change of the system, the channeling capacity of the Danish and Swedish gambling systems rose to a significantly high level and thus the operating restrictions worked better than before, with a large part of the gambling going to unregulated offshore operators.

So what should Finland learn from the experiences of the other Nordic countries? Before you can answer this, you need to know what Finland is really aiming for in the area of gambling. According to the EU, a gambling monopoly system is possible if it can improve the protection of players and prevent criminal activities related to gambling. A particularly important justification for the monopoly system has been better prevention of gambling problems. It should be borne in mind that gambling revenues are not an acceptable basis for a monopoly system.

The prevention of gambling problems has gained more weight in the Finnish gambling policy and its practical implementation in recent years. The merger of gambling operators and the centralization of gambling operations in one company, Veikkaus, from the beginning of 2017 has given the regulator better tools to control the company’s operations. Veikkaus’ operations are supervised and regulated more than the three previously monopolies were supervised. This has been reflected in lower revenues from gambling operations. Unfortunately, and somewhat surprisingly, gambling problems have not diminished. The number of problems has been at the same level for long time. About 3% of Finnish adults suffer from gambling problems. Studies show that the number of people with serious problems is growing, which is a matter of real concern.

The operations of the monopoly company Veikkaus are thus controlled more and more, which reduces gambling through the company and thereby the state’s profit. According to research, a large part, almost all, of Veikkaus’ declining gambling is directed at other gambling companies. This way, overall gambling and gambling problems are not reduced. The regulator currently has little possibility to take action against offshore gambling companies. So something needs to be done and soon. Otherwise, the pace of development will only continue, and Finland will soon end up in the same situation as Denmark and Sweden years ago.

If the prevention and reduction of gambling problems is the primary goal, then Finland must be able to tighten control over all gambling activities, not just Veikkaus. This can happen in both a monopoly system and license-based models. The goal is to bring gambling under regulation in one way or another and then impose strict restrictions on gambling. According to results from Norway, it is not sure that monopoly would be automatically better from gambling problem point of view than license-based system.

If the goal of gambling activities is also to continue to generate revenue for the state but at the same time prevent gambling problems, the alternatives are more difficult to implement. Continuing in a completely monopoly system in this case is legally difficult to implement, at least in the way where customers would be satisfied. It seems to be obvious that license-based system would generate more money for the state than monopoly system.

I think it is particularly important that Finland now carefully considers the future of its gambling system and makes a comprehensive and neutral analysis of the matter before making a final decision! In our own report, we have described and calculated the effects of different gambling systems on gambling problems, government revenue levels, and customer experiences. We are happy to help you get a good and safe gambling system in Finland that is also good from customer point of view!

ARE LOTTERIES DIFFERENT THAN OTHER GAMBLING COMPANIES?

What is the definition of lottery? Wikipedia tells that lottery is a form of gambling that involves the drawing of numbers at random for a prize. Lotteries are outlawed by some governments, while others endorse it to the extent of organizing a national or state lottery. Is there anything which makes lottery totally different compared to other gambling and gambling operators. Lotteries think that yes of course but I’m not sure about that at all.

When I joined in Veikkaus, the Finnish national lottery operator, over 25 years ago the lottery and gambling world was quite different than it is now. Gambling was among those words which we weren’t allowed to use when we were talking about our own business. Gambling was something bad and lottery was good. Some lotteries had pool-based sports games like Football Pools and the word we used for whole business was gaming. Nowadays gaming means rather casual and social games not lottery or other gambling verticals. Lotteries weren’t willing to be part of gambling business and believed that their reputation and operation were much better than for example casino companies had. I know that some lotteries are still thinking that way.

Many lotteries are established by the states and have been owned by those states too. In practice all of them have had monopoly situation in lottery business in their own jurisdictions. All lotteries have had lotto games and most of them have also sold scratch cards and some have had those pool-based sports games. Lotteries have had strong position in retail business and important role in the societies thanks to profit/money they have given to the state and/or to their direct beneficiaries.

The gambling world began to change when internet appeared in 1990’s. At the same time some forerunner lotteries decided to introduce fixed odds sports betting. It was huge change when we jumped from traditional retail lottery business to digital sports betting business in mid-1990’s. Internet, and later mobile, has changed our business totally but it has influenced on the legal situation too. There is still monopoly in basic lottery business in all countries but in practice that is not the case anymore. There are nowadays secondary lottery products and sports betting about lottery results which customers could play instead of the original lotteries.

European Union has also caused lots of changes here in Finland and probably in many other EU-member countries too. Monopolies are against the basic principle of EU where we believe on free movement of products and services. The European Court of Justice has accepted the monopoly in lottery business if it is necessary to prevent gambling related problems. Those problems could be gambling problems or crime which is linked to gambling business. I would like to hear how much gambling problems are coming from lottery products and how much crime is linked to those products… There is no monopoly in casino business where gambling problems and criminal actions are much more common than they are in lottery products.

There are still many lotteries where state is the owner of the company, but there are more and more lotteries which are public companies with private owners and in some cases state could be among those owners. If I analyze the World Lottery Association (WLA) and its’ members I would say that it is not homogenous group at all. If I think about how lotteries are trying to target their business goals, I could notice extremely big difference between the most active and the most passive ones. There are lotteries which are acting like real business companies and there are also lotteries which are like state offices – which they actually are. Then there are lots of lotteries between those two groups.

Some lotteries have divided their businesses to two or even more separate companies where the other company is operating in the monopoly environment and the other one is in serious competition (license market). Danske Spil and Svenska Spel are good examples of that kind of structure. There are also companies like IGT, SISAL, FDJ, SAZKA etc. among WLA members and they are like normal publicly listed business companies.

Few other important features where attitude and action among lotteries vary a lot are responsible gaming and profit of the company. Lotteries have taken responsible gaming issues seriously and they still are, but are they really doing things better than the private gambling operators? Some lotteries are but not all of them. There are also some private gambling operators who are doing excellent work in that responsible gaming area. The profit from lotteries is going to the state or/and to good causes. That’s still the case in monopoly part of the business, but in licensed based business that’s not the case.

I don’t believe that it will be possible to keep monopoly and act like normal business company although lots of lotteries are moving towards that kind of action. I think that there are two totally different options available. The first one is to act like monopoly company should do – concentrate mainly on prevention of gambling problems and not be too active with marketing, sale, and development. Then it’s up to the state how well it could protect that monopoly from the competition. The roles of state and lottery company should be separate and clear enough. There are tools for that protection like internet and payment blockings. The other option is to concentrate on real business and offer as good and wide gambling products to customers as possible and trust on own strengths. Thanks to their backgrounds and history, lotteries have some competitive edges compared to private companies and they should try to utilize them and make good business. In that world monopoly won’t be possible, but it doesn’t matter if lotteries would develop their businesses.

In many countries lotteries can’t make that kind of decision by themselves. The final decision maker is the state, but lotteries could influence on that decision. I think that it would be possible to further develop business also in monopoly situation but there the tools are totally different compared to real business world. In both worlds keywords are customer satisfaction, good products and services and digitalization. If lotteries are willing to move towards real competition, they should digitalize their business, introduce customer-oriented systems, and add more gambling verticals to their portfolio. In the monopoly world responsible gaming is the most important issue and it should be clear that it has important role also in business world but not so big than in monopoly.

THE CHINESE GAMBLING MARKET

It’s well known fact that Macau and Hong Kong are the leading areas when we are talking about physical casino business (Macau) or horse betting business (Hong Kong). But how much we know about the Chinese gambling market? I have now visited some times in Beijing and tried to understand more what is situated in there and what might happen in next few years.

It’s obvious that when the country has about 1,4 billion inhabitants, there is huge business possibilities in all business areas and that’ the case of course in gambling business. But the State of China has prohibited gambling actions and is also controlling that quite closely. Anyhow it has said that the illegal market in sports betting and casino business is huge in Asia but it’s that the case also in China? According to estimates the illegal interactive gambling business in China is just about 1,5 B€ (GGR) which is not so much compared to the size of the country.

There is a general level prohibition on gambling activities in China, but there are few exceptions to that. There are two state-owned lotteries which have licenses to operate lottery games and limited numbers of VLT machines (video lottery terminals). They are only allowed to run lottery business in retail channel, so digital online business is not allowed – at least yet. As I already said, the Chinese state is actively fighting against illegal gambling activities and especially against cross-border operations. There are quite heavy punishments in they legislation for illegal gambling and I’m sure that they will use those tools if they manage to catch illegal operators.

Ministry of Finance has approved two licenses for lottery operations – the other one is for China Sports Lottery (CSL) and the other one for China Welfare Lottery (CWL). In fact, there seems to be a little bit strange duopoly situation in that market. As far as I know, those two licenses are almost the same. If the other lottery would get permission to introduce something new, the other one would probably get the same kind of permission. The only difference is now in sports games area where Sports Lottery has license to have some lottery style sports games.

It’s not big surprise that CSL and CWL are the two biggest lotteries in the world. Now CSL is slightly bigger than CWL but they are about the same size. The sale of both lotteries seems to be at the level of 30 billion euros a year – the total sale is about 60 B €/year. The development of sales in last ten years has been huge but now both lotteries have faced big challenges. Their businesses have suffered a lot this year and decrease has been so big that the Chinese state should consider some changes to help that business.

What kind of big changes there might be? I’m 100 % sure that China will continue with monopoly (duopoly) based system, so there won’t be any other licenses although the local governments have had and still have quite big role to decide practical level issues. Based on my knowledge the role of local governments won’t become bigger in gambling area but rather will decrease. I believe that the Chinese state will try to control even more the gambling business than they have done until now. It might mean two changes – either huge merger of CSL and CWL or tighter integration of those two companies and their local organizations. I don’t believe that this huge merger will happen very soon. That’s why I think that both CSL and CWL will have new organizational structure where central company will have bigger and more important role than they have at the moment.

The other big change which I expect to see soon is online lottery business. Online purchase of some lottery products was allowed for a while in 2015 but lotteries had to close that operation quite soon. The Chinese state released online lottery directive already in 2016 when they suggested that online lottery sales would be allowed, but nothing has happened in practical level after that. I guess that now when both lotteries have faced problems in their businesses, the government will give them license to have limited offering in online channel. I believe that the legislation will change next year and CSL and CWL could start online business in 2021. Chinese people are using mobile payment more than I have seen anywhere else and that’s why I believe that mobile lottery might be big success in China.

The third potential big change might be sports betting. CSL is running some football and basketball sports games but there is no real official sports betting in China. There would be huge business potential available in sports betting, but the Chinese politicians might consider sports betting as “too heavy gambling” and that’s why I don’t believe that fixed odds sports betting would be allowed very soon. CSL and CWL might have chance to get more wider license for lottery style sports games (pool-based games) in next few years.

As a short summary I would say that there will be some big changes in the Chinese gambling market, but it won’t open big business opportunities for foreign companies at least in short term. The State of China will keep tight control on that and will help their own companies to develop their businesses. Some good gambling technology suppliers might have business possibilities if they managed to establish joint venture companies together with Chinese operators.

WHAT IS GOING ON IN SWEDEN?

Finland has always been some kind of “little brother or sister” of Sweden. We have so called “hate & love” relationship towards Swedish. We try to do things better than they do but unfortunately often we finally decide to copy what they have done. That’s why I’m keen on seeing what results Sweden will get from their new gambling legislation. EU-states could decide about their own gambling legislation as long as they follow EU’s main principles. Countries are observing what is happening in other countries and Finland is used to follow Sweden very closely. So, the Swedish experiences will somehow have impact on the Finnish gambling environment for sure.

Sweden has had monopoly-based gambling system until the end of last year. That was the case in principle level, but real situation has been totally different. Monopoly companies Svenska Spel (lottery, sports betting, casino) and ATG (horse betting) have been the biggest companies, but offshore operators have gained bigger and bigger market share in Sweden. The Swedish gambling regulator, Lotteriinspektionen, hadn’t enough tools and maybe brave to react against those operators. EU Court of Justice was following the Swedish legislation very closely and probably regulator wasn’t sure what they can do. That development caused challenges to ATG and Svenska Spel when they weren’t allowed to compete against offshore operators with same tools. ATG started to talk against monopoly and threatened to move to Malta. Finally also Svenska Spel decided that it would be better to have license-based legislation. Then it was quite easy solution for politicians to decide about new gambling law.

I give some numbers from 2017 which describe the market situation before the new system. The net gaming revenue of whole Swedish gambling business was 22,6 billion SEK (2,2 B€) from which regulated companies had 17,1 B and offshore companies 5,5 B. That meant that offshore companies had 25 % market share and they didn’t have license to operate in Sweden. Svenska Spel had 40 %, ATG 18 % and other regulated companies 17 % market shares. Those offshore companies didn’t have any retail business in Sweden, so all competition was in internet and mobile channels and over 50 % of total gambling happened there. In that online channel regulated companies didn’t manage very well. They had together just 45 % market share which means that offshore operators had already 55 % of that market. In practice there hadn’t been any monopoly in the Swedish gambling market in long time! Gambling companies spent 7,4 B SEK for marketing in Sweden in 2019 and regulated companies had over ¾ of that.

Sweden decided to move to license system in all gambling sectors except in lottery (Lotto, Keno and Instant tickets). There are now about 70 gambling companies which have official license to operate games in Sweden. There are quite many tight rules about what operators can do in Sweden. The former offshore operators are used to use for example bonuses much more than it’s possible to do in Sweden now. The Swedish State has set a goal to raise regulated gambling to 90 % level of total gambling. That sounds to be high level when the Swedish new regulator, Spelinspektionen, is not using blocking tools. I understand when some companies have already announced that it would be better to make business without license. I still believe that regulator will tighten their control to prevent that grey/black market. The Swedish tax level, 18 % of GGR, is lower than they have for example in Denmark and that level should be ok from operators’ point of view although they are complaining about that – they will do that whatever the tax level would be…

There seem to be lots of discussion about enormously increased gambling marketing. Companies are trying to raise their brand and get new customers. They are used to give bonuses to new customers but now they are not allowed to do that and a little bit old fashioned mass media marketing has replaced bonuses. Heavy marketing has already affected negatively on the reputation of gambling business and something must be done soon to prevent that development. It’s too early to analyze financial results and I should do that later – maybe after the H1/2019 results have been published. Anyhow I could analyze the change based on the numbers after two first months. Although there are about 70 license holders the big companies have managed even better than I expected. The net sales in January and February was totally about 3,3 B SEK (320 M€) and ten biggest companies had 85 % market share from that. The winners have been former monopoly companies Svenska Spel and ATG and that should be big disappointment for former offshore operators. Svenska Spel has still monopoly in lottery business and now their three companies have totally 44 % of total gambling business. The monopoly part was in the first two months a little bit over 900 M SEK and that was 28 % of total market. If I drop that monopoly part away and just analyze license market Svenska Spel still has 22 % market share of that area and that is surprisingly high. ATG has lost its’ monopoly in principle but in practice it still has it in horse betting (over 95 % market share?). ATG has managed very well – it has 20 % market share of total gambling business and 28 % share of license market. So totally those two former monopoly companies have almost 2/3 of whole gambling business and from license market they have 42 %. The Swedish based Kindred Group has been the best one among former offshore operators.

It would be important to make analyze from the state point of view, but I don’t have enough information to do it yet. There should be financial results (taxes and profit from monopoly business) but also information from responsible gaming side. The analyze how well the new system is working should be based on those two sides. If financial results have improved but there are more gambling problems then there are still something wrong in that system and probably vice versa too.

Monopoly?

To be honest I have always been against monopolies but I have worked last 27 years in monopoly companies. How that could be possible and what I really think about monopoly in gambling business?

I was quite active in politics during college and university times. My ideology is politically from the “right side” and I believe on business rules but also the “Nordic welfare state model” where the State has big role in the society. I have studied economics at the University where my professor Matti Virén taught us among other things how the optimal economy should work and that’s quite far away from monopoly model… Monopoly is only good for the company which has managed to get that kind of position!

But nowadays I understand that there might be reason to have monopoly in some business areas which shouldn’t act based on free business rules. Those exceptions should be possible in businesses which might cause serious problems to customers and where the State would like to have tight control of business. Gambling is good example of that kind of business. It’s a fact that gambling might cause problems to some customers and that’s why the State should control that business. The State could do that in many different ways but gambling shouldn’t be organized without any control of the society as a free trade!

My home country Finland is the member state of European Union and we should follow the laws set by EU. It might be surprise to some of you that there is no common legislation about gambling issues in EU? There have been many court cases in the European Court of Justice (ECJ) where they have decided gambling related issues. Based on those cases EU has required some member states to change their gambling legislation and rules. Finland has been in that kind of process too but some years ago EU decided that the Finnish gambling system is acceptable from their point of view. EU also accepted the new model where we now have all possible gambling business in one monopoly company. EU has let the member state to decide who they are organizing gambling businesses in their own country.

The models are varying very much from country to country. The important thing is that legislation should follow the main principles of free movement of goods, services, capital and persons inside EU. You might think that monopoly is preventing free movement of services and it’s doing that but it’s ok according to ECJ if there reasons to limit that kind of business. ECJ has decided to member states could limit gambling business if the purpose is to prevent problem gambling or other social problems or prevent criminal actions like money laundering or match fixing. ECJ has also decided that also monopoly companies should have opportunity to further develop their products and services and channel the demand of gambling products to their offering. The profit from gambling business to the State can’t be the reason to have monopoly but that profit is not negative feature and there seem to discussion in EU should it be even more.

So it’s possible to organize gambling business with monopoly model as Finland has decided to do. In most of EU countries the lottery business is in model monopoly and other gambling businesses have moved to license model. I’ll tell you more about those other models in next blogs.

I believe that monopoly model as such will prevent problem gambling compared to model where we would have several licenses. There should be correlation between the size of gambling business and the number of problem gamblers – the more customers are playing the more problems there will be. The size of business will increase when business will move from monopoly to free competition in all possible businesses. If monopoly company has possibility and capability to develop its’ products and services and it won’t do too much marketing action it’s the best and most secure gambling system from the customer point of view! Whatever model we have it should work properly otherwise we should make changes to that.