Window of opportunity: Could a new licensing round make Spain 2018’s hottest market?

Spain’s regulated online gambling market is unanimously agreed to have fallen far short of initial expectations since its launch in 2012. Its somewhat tarnished reputation developed in spite of a sizeable number of pan-European gaming brands opting to establish a presence in the eastern part of the Iberian Peninsula and the market reporting consistent revenue growth.

But this growth was nowhere near sufficient enough to win over its detractors. The market’s perceived lacklustre performance has been attributed to a myriad of problems – some of which are unique to Spain and some of which are not. Per capita spend, for example, has remained stubbornly sub-par in the five-year period, coming in at shy of €7, while the level of taxation operators are subjected to has hampered the profitability of many Spain-facing businesses.

However, half a decade on it seems like the Spanish market is now finally beginning to find its feet and is ready to shrug off its “must do better” tag once and for all. Indeed, revenue growth over the course of the last 12 months has been particularly strong. As a result, the 21.3% year-on-year rise in revenues reported in H1 helped make the Spanish market one of the fastest growing in Europe and, more importantly, one that is still ripe for additional growth going forward.

The major turning point clearly came in Q2 2015 when the Spanish regulator, La Dirección General de Ordenación del Juego (DGOJ), opened up the market for live casino and online slots. Since then, online casino, and slots particularly, has been a major driving force behind much of this growth despite revenues from sports betting also increasing double-digit in recent quarters.

Yet more important developments are arguably now just around the corner. The DGOJ is preparing to open a new licensing window for the first time since 2014 ahead of a plethora of regulatory changes including shared poker liquidity, the launch of new game variants and a potentially lower taxation regime. All of which could well see an onslaught of renewed interest in Spain and entice a raft of new entrants to a market many had written off as a damp squib only a few years ago.

Window of opportunity

Spain’s licensing regime has a somewhat unique makeup in comparison to most other egaming jurisdictions. The country’s ‘double licence’ system, for example, means that in addition to obtaining general licences, operators also require singular licences corresponding to the products they want to offer, such as sports betting, roulette, slots and poker. Singular licences can be applied for anytime as long as the operator has the associated general licence, but the latter have only been available in two previous windows back in late 2011 and 2014.

Unsurprisingly, rumours of a new Spanish licensing window had been rumbling on for a while. And such speculation was confirmed over the summer when the director general of the DGOJ, Juan Espinosa García, revealed he had been pushing for a new round of licences, while also indicating to advisors it should be rubber stamped via a Ministerial Order before the end of the year.

And pending official approval from the country’s minister of finance, the opening of the licensing window almost seems a certainty now. “This is what we’ve set out to do before the end of year and we think in the next few weeks we will formally open a third window so new entrants can make their way into the market,” García tells EGR Intel.

“The proposals will be ready on the minister’s desk in mid-December and then it’s his decision whether or not to approve it,” he continues. “We’ve not had any indication it won’t be passed by the minister, but you can obviously never know for sure. Over the course of the coming weeks, the opening of the window will become a reality because as soon as the minister approves the proposals, the window is officially open immediately. The aim is also for Spain to be open for applications throughout the whole of 2018 more or less.”

This planned one-year window means the Spanish market will be open to new licensees for much longer than in 2014, when around 10 new operators were introduced within a one-month timeframe. The DGOJ will then have a maximum of six months to grant licences once applications have been made, meaning new operators are expected to be live from June 2018 onwards. And while there will be a few new names added to the list, it is widely expected most applications will be from companies that didn’t make the deadline during the previous window.

Luckily, few major modifications have been made to the list requirements necessitated by the regulator for prospective licensees at the time the first window opened. Minimum share capital for applicant companies is still €60,000, for example, while operators must present guarantees of €2m for general betting and other games licences or €500,000 if operators are asking for contests licences.

Growth spurt

But momentum is building in Spain regardless of whether new operators do in fact emerge on the scene in 2018. In its still comparatively young five-year lifetime, the Spanish market grew to €430m in gross gaming revenue last year and, according to recent estimations, that figure will increase to nearly €500m in 2017 and €700m in 2020.

“Spain is certainly a competitive market, but I believe there is still space for newcomers with clearly defined strategies, willing to invest in the country and understanding the particularities of the market,” Mauro De Fabritiis, partner at MAG Consulenti Associati, claims. “Looking at the European regulated countries, Spain in terms of attractiveness is the third market after Italy and the UK, as many other countries are too small in terms of market size, limited in the offer, such as France, or still not regulated like Germany.

“The good health and the potential of the Spanish market is also demonstrated in terms of active players,” De Fabritiis adds. “The trend is positive and, during the last months, the number of active players per month has grown up to around 700,000 players, almost double than three years ago. New gaming accounts have stabilised in the range of 220,000 new accounts per month – a good figure that represents a +60% growth versus 2014.”

A H1 2017 comparison between Spain and other sizeable European markets backs up De Fabritiis’ claims. With revenues of €244m, Spain is the clear number three regulated market and its growth is outpacing that of many rival European jurisdictions. The Italian online gambling market (€591.9m), for example, reported a 19.4% year-on-year revenue rise, although this was skewed slightly by the addition of the SKS365 group to the regulated market in April, while estimates from Eilers & Krejcik Gaming put UK (€3.15bn) growth at only 7.5%.

And the most recent figures released by the DGOJ for Q3 show Spain’s momentum continued into Q3 and shows no sign of slowing down anytime soon. The regulator reported a 37% rise in revenues to €140.5m during the quarter, despite a 3% decline in advertising spend, with sports betting accounting for 54.8% of GGR after rising 37% to almost €77m. Casino was the second largest vertical with 31.2% of the overall market, with revenue amounting to €43.9m after an increase of more than 54% – driven by a 61.7% growth in slots. Finally, Spain’s poker market made up 10.5%, having grown modestly by 6.8% to €14.7m with the remaining shares made up by bingo (2%) and prize competitions (1.5%).

As mentioned previously, the legalisation of slots and live casino was clearly a watershed moment. “The lack of regulation for slots until mid-2015 was limiting the potential of casino in Spain, but since the regulation, it has shown a remarkable growth with €80m GGR expected for 2017, meaning 50% of the total casino market,” De Fabritiis says.

“The other big trend is the growth and leadership of betting, that currently drives the market and means more than 50% of total GGR. It is remarkable how good the performance of live roulette is as its growth surpassed standard roulettes during 2016 and currently accounts for 25% of total casino GGR. It is expected to keep growing due to the high attractiveness of the product and the good opinion and extra reliability that offers playing in a real roulette versus a pure digital RNG.”

Leaders of the pack

On paper, this should all make the Spanish market an open and shut case for any operator looking to enter new territories for future growth. Indeed, the regulator says it has been buoyed by the high level of interest it has already seen from those companies not currently holding a Spanish licence, while De Fabritiis believes around 10 operators will enter in the short term. But as the current set of licensees will attest to, new market entrants hoping for an easy ride could get a big shock to the system.

“The challenge is that the market is quite mature and very competitive, with over 30 operators active but no more than half dozen able to see viable numbers,” Eduardo Morales Hermo, senior gambling and betting consultant at Ficom Leisure, claims. “The rest are pumping money to keep afloat, and it will be difficult for any new entrant to acquire a sufficient market share to reach black numbers. There is still an opportunity for Spanish national land-based gaming groups, with a large number of points of sale in the betting, gaming halls and single site retail, to capitalise on an omni-channel strategy which can allow them to compete in the lower range of the market.”

The Spanish market was already hugely competitive even before regulation came into force in 2012. In the lead up to regulation, a number of operators had made huge marketing investments and were able to build respectable brands – many of which continue to be successful today. But who are the current market leaders in Spain and how difficult will it be to break the current status quo?

Racing ahead: bet365 is the current market leader in the Spanish online gambling market. Credit: David Thorpe/Racing Photos via Getty Images.

With more than 50% of the sports betting segment, bet365 is clearly number one in a market dominated by just a handful of operators. Indeed, as little as five companies are estimated to control approximately three-quarters of the total regulated online market, with the likes of William Hill (formerly Miapuesta) and bwin formidable in the sports betting vertical. Indigenous brands like Sportium and Luckia are also believed to be performing strongly.

Casino, on the other hand, is a slightly more fragmented market with half a dozen operators controlling around 80% of a segment in which leading betting operators have a high market share due to effective cross-selling activities. But there is arguably still more room here for other small operators with respectable numbers than in sports betting. Meanwhile, in poker, PokerStars and 888 boast an even more impressive market share at 90% combined.

Taxing issues

But the competitive nature of the Spanish market is just the tip of the iceberg for prospective operators. The biggest criticism levelled against its regulatory framework since it went live is the high rate of taxation online gaming licensees are subjected to – a system which has had the unfortunate consequence of hindering the profit-making ability of many businesses.

A 25% gross gaming revenue levy on fixed-odds sports betting, casino, poker and bingo, although not as restrictive as Portugal and France, is well above that of Spain’s most comparable jurisdictions. UK-facing operators, for example, are still only subject to a 15% Point of Consumption for the time being, while in Denmark that figure is 20% and in Italy the rate is between 20%-22%. Spain also has a much maligned 22% turnover tax on some variations of pool betting.

Unsurprisingly, operators have been vocal in their criticism of such a restrictive levy system and have long called for reform to boost their fortunes. And it seems their prayers may now finally have been heard. The head of the DGOJ, who took up the position less than a year ago, recently confirmed the regulator is open to modifying Spain’s taxation rate to bring it in line with those markets which are far more mature yet have a lower overall tax burden.

García is clearly optimistic that a tax reduction is more than achievable. But unlike the relative ease of opening a new licensing window, such an overhaul would have to clear far more political hurdles before it became a reality.

“Operators interested in the Spanish market ask how we are going to go about this in the future, and I can confirm that we are definitely working on it,” the director general says.

“However, we can’t be positive it will change because taxation issues are complicated. We can only make suggestions and then the taxation department itself makes the actual proposals. So we would have to make the case to them and as most people know, it can sometimes be difficult to make such a case for lowering tax on anything.”

And Beatriz Cuevas Almoguera, principal associate at Garrigues law firm, echoes Garcia’s cautious message to operators. “They are willing to reduce the tax rates, but it is one thing what the regulator wants and another thing is what they are actually able to do. The Spanish government and parliament has to approve such a change and the government in Spain is a minority, so they have to reach an agreement with other parties and it isn’t that easy.”

An attractive proposition?

What appears much further down the line is work to breathe life back into Spain’s online poker market. Over the summer, regulators from Spain, Italy, France and Portugal finally signed a long-awaited agreement to share online poker liquidity pools between the four markets – a move which could be a major turning point for the stuttering vertical. And while the other regulators may not yet be in a position to do so, the DGOJ insists all arrangements are in place to offer this before the end of the year.

There are, however, other changes to Spain’s online gambling framework that are far more under the regulator’s control – many of which could have a far wider and immediate impact. For example, the DGOJ is now also about to embark on assembling new proposals to expand the range of permitted variants of online betting and gaming. These include virtual betting, more live casino games – which is currently limited to roulette – and daily fantasy sports.

“It’s hard to anticipate what will happen at this point, but the internal work has started and is reasonably well underway,” Garcia explains. “In Q1 2018, we will publish draft legislation where all these changes might be accounted for and from that point on you can probably expect it to be another three or four months. This is a very ambitious timetable, but who knows, in mid-2018 we might well have this all in place.”

Operators with at least one eye on the Spanish market will no doubt be keeping their fingers crossed these changes occur sooner rather than later. But regardless of the specific timetable, it all points towards an increasingly proactive regulator and a market which, although far from perfect, is at least now pointing in the right direction.

The above article was written prior to Friday’s confirmation that the licensing window would open.