Costa packet: Why there is more pain than gain in Spain

A decade is a long time in gambling. Fast forward 10 years after the UK Gambling Act 2005 came into law in 2007 and the legislation designed in the pre-smartphone era has become antiquated and ineffective. A further 10 years from now could see the cannibalisation of the market by major players or unthinkable tech changing the way consumers engage with the industry.

A decade has also passed since Spain legalised its online gambling market which, after initial years of success, the recent regulatory headwinds have turned the Iberian idyll into an egregious España, with operators shying away from entering the space and gross gambling revenue (GGR) plummeting among existing operators in the market.

The catalyst of this, of course, was the implementation of the Royal Decree on Advertising of Gambling Activities by the Spanish government, spearheaded by Minister of Consumer Affairs Alberto Garzón. The decree saw the banning of gambling sponsorship in sport, a curfew on TV and radio advertising as well as restrictions on bonuses, leaving the market reeling.

I hereby Decree  

“We are concerned about the future of the business in Spain,” Jorge Hinojosa, GM of industry trade body Jdigital, tells EGR Intel. “The reality is that the Spanish market is becoming less attractive for the arrival of new operators. The online gambling ecosystem is unstable.”

Hinojosa joined Jdigital last September, having no previous industry experience, arriving at a tumultuous time in the market’s history. Yet the candidness with which he speaks may reflect his former lack of involvement with the industry, a reluctance to sugarcoat matters to drive home the reality of the situation.

The Royal Decree, approved in November 2020 and fully enforced in Q3 2021, makes the term headwinds sound somewhat playful. A tornado might be a more appropriate terminology. The shirt sponsorship ban, which saw the likes of Betway, bwin and Betfred all denied premium advertising real estate, was coupled with the introduction of a horario de madrugada advertising window between 1am to 5am across television, radio and online.

“The reality is that the sector, since 1 September 2021, is experiencing a stagnation and a recession that casts doubt on the continuity of many operators in our country.” Jorge Hinojosa, Jdigital

This has resulted in a year-on-year (YoY) decrease of 27.7% in marketing spend by licensed companies in Q1 2022 to €107.9m, with investment in sponsorship limited to €630,000 – 93.25% less than in Q1 2021. Hinojosa continues: “It is still very early for us to analyse how the marketing strategies of online gambling operators are evolving in Spain. The truth is that the Royal Decree is extremely restrictive, and operators need to change and adapt their commercial activities.”

Spanish gaming consultant Eduardo Morales Hermo says that the true impact of the Royal Decree may not well be fully understood for several more months as the market continues to shift to adhere to new conditions. He goes on to draw comparisons with Italy, another market that introduced a blanket gambling advertising ban.

Morales Hermo says: “Naturally this will impact more medium and new-entrant operators because the consolidated brands already have a stable market share. The evidence shows it will impact the industry. One can say that we need at least another two quarters of 2022 to establish how much of an impact it has had. It will have an effect but if we take Italy, with an even stricter ban on advertising altogether, it has not had that major an impact.”

Eduardo Morales-Hermo

Damage done

Despite Morales Hermo’s optimism, there is evidence that there has been a significant knock-on effect since the Royal Decree’s implementation, especially if looking at the Spanish market’s returns for Q1 2022.

GGR for the first three months of the year fell 14.8% YoY to €204.4m, with sports betting, poker, bingo and contests all tumbling annually in terms of revenue. A surging online casino vertical has done little to appease general apprehensions, despite the impressive 11.5% YoY rise in GGR.

Active players and new accounts during the quarter also fell, with an 8.9% dip in active accounts and a major 55.9% decrease in new accounts being opened compared to Q1 2021. Elsewhere, sports clubs also received 16.8% less monies from the gambling industry in 2021 compared to 2020, falling to €121.3m.

Hinojosa says: “The reality is that the sector, since 1 September 2021, is experiencing a stagnation and a recession that casts doubt on the continuity of many operators in our country. It is not a question of sensations or opinions but rather the figures support our position. The latest results show a decline in online gambling, which, unfortunately, has been going on for a long time. This situation means an increase in the losses of operators, who can no longer advertise their products as it used to be done. Consequently, operators who are not located in Spain do not see any incentive to develop their activity in our country.”

Pain or gain?

On paper, the future doesn’t look too bright for the Spanish market. GGR is down 14.8% YoY, the number of new accounts has more than halved and the lack of new entrants to the market points to a potential stagnation, followed by a period of downturn. But the Royal Decree hasn’t been the silver bullet to kill the market. Spain is still one of the largest markets in Europe, boasting 78 licensed operators, while quarterly GGR for the market tops €200m. The fear is the bullet may be stuck, gently bleeding out in a slow and painful demise.

The impact of the Royal Decree, while evident, should in theory not have as monumental an effect as is seemingly showing. Spain has one of the lower tax rates in Europe at 20% on GGR, having been reduced from 25% in 2018, making it an attractive proposition for new entrants and existing firms.

Hinojosa says there is an element of “instability and uncertainty” in the market, primarily driven by the Royal Decree, before touching on the wider impacts in the black market. He adds: “Operators also point out that users can be losing protection and security, since advertising is an essential tool to channel users to legal gambling and this situation is generating a proliferation of illegal portals in our country.

“The decrease in the business not only harms the companies that operate with a licence in the country but will also see a parallel of the illegal market growing and issues for the state itself, which in 2021 collected €7m less through the tax rates applied to the gambling activity.”

These black-market fears are echoed by Morales Hermo, who adds that in his conversations with operators, this is one of the key issues being raised. However, he is far more optimistic than his compatriot Hinojosa, arguing growth will return to Spain, just at that classic Spanish pace: mañana.

He says: “The general attitude and feeling among operators is negative, and their experience is evidently worse after the restrictions bill, but they have to cope with it and express their concern that this might drive demand towards the offshore offer, which is negative for industry revenue and government tax income as a whole.

“Probably the growth will not be as much as it has been until 2019, pre-pandemic, but we will gain back the growth in 2022-2023 and beyond, not different to other markets in the EU,” he added.

This optimism from Morales Hermo, while admirable, is not necessarily shared by operators in the market, especially the smaller firms.

Speaking to EGR Intel, Interwetten’s speaker of the board, Stefan Sulzbacher, was dismissive when it came to the importance of the Spanish market for the German bookmaker. He argues the company’s size in Spain compared to its competitors leaves little chance for major success.

He says: “We are there because we have a licence, but we do nothing there. So, with the regulation, it’s difficult for a small competitor to be competitive.” The lack of ability to drive brand recognition from traditional advertising methods will continue to hamper smaller firms looking to make a mark in the country, along with regulation introduced in July 2021 that meant new licences could only be obtained by acquiring operators with an existing licence.

Elsewhere, EGR Intel understands that despite Malta-based operator PressEnter Group appointing ex-Betsson head David Plumi as its regional managing director for Latam and Spain, the firm has no plans to enter the Spanish market for now. A running theme appears where smaller entities have little to no appetite in trying to tackle a market which, on the surface, appears reluctant to bend to support operators in gaining a foothold.

Even larger firms such as Betway, which had a strong presence in terms of shirt sponsorship in La Liga after having sponsored the likes of Alaves, Espanyol, Leganes and Levante in recent seasons, has seen revenue in Europe decrease. While the Super Group-owned operator didn’t disclose specific Spain-derived revenue in its latest financial report, it showed a decrease in European revenue from €37.8m in 2020 to €30.2m in 2021.

In the accompanying statements in its full-year 2021 report, Betway said: “Revenue increased 7% to €334.5m for first quarter 2022 from €311.8m in the same period from the prior year, driven by growth in African and Asia-Pacific markets, partially offset by adverse impacts from tightening regulation and, in some cases, ceasing in some EU markets.”

This decline and lack of appetite for entering Spain can be looked at through the lens of sports margins, which in Spain have always been relatively low. From 2017 to 2019 the figure stood at 5.45% on average, compared to relevant comparisons of 10% to 15%. These low margins are partly driven by the dominance of bet365, but also the lack of a local hero, examples of which include Tipico in Germany or Snaitech in Italy, which Regulus Partners argues is a key factor in the downturn of fortunes.

Hope or nope

Despite the desolate outlook of the Spanish market, there could yet be an olive branch extended to embattled operators. The Spanish Supreme Court has called for evidence into whether the advertising ban is potentially unconstitutional, with a potential three-year case set to unfold in the Constitutional Court.

Any potential legal challenge would be a drop of blood in the ocean, with the great white sharks of the industry ready to swarm. Lawyer Santiago Asensi, managing partner at Asensi Abogados, believes the call for evidence shows there are some doubts around Garzón’s draconian diktat. He says: “The fact that the Supreme Court has decided to ask parties what their views on this subject [are] is a clear sign that, at least, this matter is generating a legal doubt to them.”

Hinojosa voices concerns over future regulation, including changes to consumer protection laws which could “complicate operations” and are set to be “very challenging to implement” while not necessarily improving customer protection measures, along with further advertising restrictions on the horizon.

Elsewhere, it remains incredibly difficult for operators to close or restrict betting accounts, leaving them wide open to sharp money. Regulus Partners recently highlighted the scale of the impact of this so-called ‘right to bet’ which the firm said wiped out about €80m of run-rate betting revenue in Q4 2021.

For Morales Hermo, the worst in terms of regulatory headwinds has already been reached, with intervention from government now on a plateau. In fact, he suggests political change in the country over the coming years could represent a bonus for the industry, with either a shift in policy or alternative outlook on gambling’s relationship with the state.

He says: “There are some responsible gaming and other aspects the regulator is implementing but nothing is especially relevant that would impact the performance of the operators. The actual government will be in place until the end of 2023 and might not even last as long but, considering this period as maximum under the existing circumstances, a new government will never be worse, and if anything could be better.”

It could be better. It is hard to imagine it could be much worse. The industry is fond of catastrophising but the market conditions on the Iberian Peninsula are some of the most difficult in Europe. Silver linings do exist. From Q4 2021 to Q1 2022, GGR rose 16.25% despite the yearly downturn. Total deposits in Q1 2022 grew 4.3% YoY while marketing spend also rose compared to the last three months of 2021.

It is perhaps too early to judge the Spanish gambling market, despite a decade of existence. It may well be a case of reserving those thoughts for mañana, with potential regulatory and political upheaval dragging the market into this next decade. Que será, será.