Fifty shades of grey: A look at the German online gaming market

Germany’s online gambling market will remain a grey area for the foreseeable future after two states, Schleswig-Holstein and North Rhine-Westphalia, rejected the latest amendments to the interstate treaty on gambling. The treaty was conjured up in 2012 and proposed the legalisation and regulation of online sports betting in Germany, including a controversial limit that meant only 20 online sports betting licences would be granted.

Amendments were made to the treaty in March this year as lawmakers tried to appease EU authorities by upping the cap on operators to 40, with the aim of introducing a full regulatory framework by 2018. The new law would only be introduced if all 16 German states were in agreement, but the lack of regulatory clarity is set to continue after Schleswig-Holstein rejected the proposals.

The northern state’s officials are in favour of introducing their own state gambling law that would oversee the legalisation of online casino games as well as sports betting. It is also keen to implement stricter controls on responsible gambling than the ones put forward in the interstate treaty.

The refusal of the treaty will come as welcome news to operators, as they are essentially free to continue in a relatively uninhibited market until at least 2019, according to the predictions of lawyer Martin Arendts. “The government needs Schleswig-Holstein to give in but that is not very likely,” he tells EGR. “To make any progress they’ll need to offer them an opt-out licence which probably won’t happen before 2019,” says the founder and owner of law firm Arendts Anwälte.

The news will come as a relief for operators, since online gambling in Germany currently attracts a 5% turnover tax on betting while gaming has a 19% VAT. According to Paul Leyland at Regulus Partners, the revenues are increasingly seen as ‘regulated’, and presented as relatively safe. By contrast, had the interstate treaty gone through, it would have prevented the offering of casino games, in-play betting would have been restricted, while a clampdown would also have been placed on the current free-for-all in terms of betting advertisements. There was also a €1,000 pcm customer stake limit.

The level of disruption would therefore have been “immense” according to Leyland, especially to the heavy-user, in-play and gaming-led (or cross-sell) models currently dominating the market. “German revenue may be domestically taxed, but domestically regulated it is not – and if the German treaty is ratified as it stands (or anywhere close), the market will become practically untenable for the vast majority of operators, in our view,” he says.

With those restrictions seemingly in the rear-view mirror, Germany could be primed for an assault from egaming’s heavyweights. Elsewhere in Europe, the triennial review looms over the UK, Italy is becoming an increasingly crowded market, while Spain is still quite small and highly taxed. By contrast, Germany is the second largest single market in Europe, per Eilers & Krejcik, with projected revenues of €1.23bn in 2017, almost 10% of the continent’s addressable market.

Betting battleground

“All of the big operators willing to live with a grey market could make an impact,” says Arendts. “Some will only operate under 100% legal certainty, but that won’t happen in Germany any time soon.”

GVC Holdings, for instance, put growth in Germany at the top of its agenda for 2017, revealing plans to ramp-up marketing investment to return the bwin brand to the head of the market. CEO Kenny Alexander said Germany had been the group’s best performing territory in 2016, and that bwin had been able to recoup some of the ground it had lost in the market last year. Germany contributed around 23% of total GVC revenues for 2016, more than any other market, with the year-on-year uptick estimated at around 11%.

The bulk of this growth was said to be the result of increased gaming revenues via the bwin brand, although Alexander said improvements to sportsbook product and risk management also returned notable contributions. And GVC’s renewed attention is symptomatic of a growing focus on the market from major operators, with Eilers & Krejcik reporting “a concerted ramping up of marketing in the region”.

This includes bwin, which signed a four-year deal with Bundesliga football club Borussia Dortmund (BVB), while rival Tipico extended its partnership with Bayern Munich and Interwetten signed a four-year deal with TSG Hoffenheim.

LeoVegas typified the changing approach to the market when signing a multi-year deal to have its branding appear across the German Handball League’s courts and advertising hoardings. “Germany is a crucial growth market for us and we needed to evaluate how we are spending our marketing and activation budget,” the firm said.

Christoph Engelmann, a lawyer at DLA Piper, remarks: “There are lots of advertising and sponsorship deals, especially in the Bundesliga with football clubs. Sky and all the big players advertising freely in Germany now and I notice even more advertising for secondary lotteries and online casinos”.

Lofty ambitions

Indeed it is Sky’s designs on Germany that crystallise the changing perception of the market. For so long only willing to stick to fully regulated markets, SB&G has made Germany a key growth region.

The Leeds-based firm kicked off a major recruitment drive in April for its Germany-facing business after confirming it was expecting to launch in the market later this year. Richard Flint, SB&G chief executive, had told EGR the operator was “excited” by the prospect of an upcoming soft launch in the German market.

Flint had previously spoken about the German market with caution: “The regulatory situation is complex and we are keeping a close eye on that, but the received wisdom is that we can launch an online sportsbook and pay tax without encountering too many issues. Exactly how we do that, and what else we might do, is a bit unknown and is one of the first things our new MD is tasked with.”

The new MD responsible for SB&G’s German venture is erstwhile Deutsche Telekom VP of gambling and lotteries, Jochen Weiner. He will be faced by a market becoming more competitive than perhaps many would have predicted, but a country with a population of 83 million offers material upside. Indeed, the country’s egaming revenues are only one fifth of the size of the UK’s, while Eilers and Krejcik predicts a compound annual growth rate of 13% with the market growing to €2bn by 2020.

Will the status quo stick around for that long? The government is yet to revisit the interstate treaty following the rejection of Schleswig-Holstein but the prime minister was due to attend a parliamentary conference on gambling regulation during a two-day stretch between 18-20 October.

If a new regulatory framework is put forward, or the revised interstate treaty moves ahead, there is still plenty of time for a spanner to be jammed into the works. The one remaining certainty is that operators will be keeping a close eye on the situation.