GMB: So that readers of Games Magazine Brazil know more about it, what does GamblingCompliance represent as a global media for the gaming industry and what is your function within it?
James Kilsby: GamblingCompliance is the gaming industry’s leading provider of independent legal, regulatory and business intelligence. We specialize in helping our subscribers plan for new market opportunities and assess regulatory risks that will affect their businesses. In addition to publishing fresh analysis every day on the latest trends and developments, our website includes a database of legal information and market data covering over 180 jurisdictions, offering a unique research tool for operators, suppliers, advisors, investors and regulatory authorities, among others.
Since when do you follow closely the process of legalization of the gaming sector in Brazil? What do you think about it in general?
We have been following the process since 2007 but like many in the industry, we’ve been paying greater attention over the past three or four years as the debate over gambling legislation has really ramped up in Brasilia. Following the legalization of fixed-odds sports betting last December, we certainly anticipate Brazil being one of the markets we will be focusing on as a priority for the foreseeable future.
For the gaming industry, the Brazilian market has had the reputation of being somewhat of a ‘white whale’ – an elusive prize. But it is very exciting that we are now seeing truly significant changes, with the new sports-betting law to my mind the most important development since the ‘Zico’ law that allowed bingo halls.
With sports betting – and perhaps the Lotex instant-lotteries concession too – you are going to see much greater private-sector participation in the Brazilian gambling market, with the development of a regulatory infrastructure to accompany that. That might not lead to the legalization of other forms of gambling overnight, but in the long-term, it could be transformative.
From outside, what difficulties do you find that prevent Brazil from having a regulated gaming sector like most countries in the world?
This is not unique to Brazil, but politics seems to be the biggest hurdle. Passing gambling legislation – not only in Brazil – so often involves a delicate balancing act to align different stakeholders, and it’s a controversial subject for many politicians in the first place. A lack of alignment on exactly how Brazil should regulate – casinos-only versus a much broader liberalization, for example – certainly appears to be one factor that has stifled progress in the past few years, then you had the macro political challenges of the Rousseff and Temer administrations that made it very difficult to move forward anyway.
Politics aside, it also seems as though the experiment with legalized bingo in the 1990s has cast a long shadow. I think it’s fair to say that market was not exactly regulated to the highest standards that are applied to the gambling industry internationally, and some of the examples from that time continue to be brought up today by anti-gambling politicians who argue that Brazil lacks the institutional expertise to regulate the industry and mitigate risks of money laundering, etc.
That is why sports betting is so significant. It is an opportunity to show how gambling activities can be effectively regulated, to develop some institutional expertise, and then perhaps it will be easier to move to a new chapter in the discussions over casinos, bingo and other verticals.
In December, sports betting was legalized. What regulatory framework would be the ideal to implement?
Both the text of the law itself and comments from government officials indicate that we will be talking about a competitive market involving multiple operators, unlike national lottery games or instant lotteries where you have a monopoly provider.
So, the question is would it be better to have a limited number of licensees or concession-holders? Or to have an open market like the UK where an unlimited number of licenses are available? I think there are pros and cons to both approaches and either of them could work if structured correctly with the right conditions.
For instance, having an unlimited number of licenses might allow the government to move quicker with implementation as you do not have to develop a competitive bidding framework, hold an RFP process or auction, and there is a lower risk of litigation from participants who miss out on a concession. But an open licensing framework could also lead to a very crowded field with more operators than the market will ultimately be able to support. That could see an onslaught of advertising as the market is opened and operators compete to grab enough market share to survive.
Based on the trends we are observing now in Europe and in other more mature markets, among the important requirements of the regulatory framework will be establishing clear and fair limits on advertising right from the outset, plus requirements for responsible betting – those will help to put the Brazilian market on sure footing right from the start.
Other important issues to consider include what limits, if any, should be placed on the types of bets operators can offer, and whether sports organizations should have any input into those decisions. Jurisdictions such as France, Australia and Portugal take a different approach on this to the UK and Spain, for example.
Elsewhere, you have the integrity monitoring framework and how deep officials want to go in the licensing of suppliers – again you see differences here between the various European countries and US states.
Enforcement mechanisms will be important as well. No matter how open or competitive the regime is, regulated operators in Brazil will all have limits on their margins in accordance with the payout formula established by legislation and have to pay other taxes and fees, while offshore operators will not be subject to any such restrictions. In addition, those offshore providers can also offer online casino or bingo games, which will not be part of the regulated market in Brazil, at least initially. International regulators have deployed a range of enforcement tools in recent years, so I would imagine Brazilian officials will be studying them in addition to advertising, responsible betting, licensing models and fees, etc.
The Ministry of Economy expects to have regulations this year. Do you see it possible?
That depends on how much homework ministry officials have already done when it comes to sports betting. But yes, I believe it should be possible at least to meet the two-year window established by the law – so that regulations are adopted either in 2019 or 2020 – without needing the further two-year extension that the law also allows.
It is important to note that Brazil will not be stepping out into the unknown here. Sports betting is extensively regulated across Europe, and there are a lot of things that can be learned and borrowed from the regimes of those European countries plus Australian and US states. No doubt officials will be looking at those markets and consulting on what works well, and why. Recently, we have seen New Jersey and Sweden implement regulations for online sports betting within just a few months, but then there are examples of other markets where the process has taken a lot longer. So I would suggest that the two-year window established by the law was perfectly reasonable.
As I noted earlier, how quick the regulations are implemented and the market becomes operational might depend on what route the government goes down in terms of having a limited number of concessions versus open licensing.
It will probably also hinge on how much of a priority it is for the Ministry of Economy in general, given the various other initiatives it will be looking to accomplish. Then you have other factors like the Lotex concession that could certainly affect the timeline too.
Recently, at one of the ICE 2019 conferences, it was said that Brazil could have a bigger market size than New York ... do you agree with this forecast?
We do, yes. How big the market opportunity is in Brazil will depend on the licensing model adopted, enforcement, the scope of retail operations, among other things. But according to our very preliminary forecasting we certainly see the potential for a Brazilian market worth US$1bn or more in annual revenue – from both retail and online.
In comparison, we believe the US sports-betting market as a whole will reach somewhere in the region of US$3.5bn- US$6bn in annual revenue within the next four to five years. But that’s a market that will be spread across 20 to 30 or more states. Given you probably aren’t going to have a fully regulated sports betting market in California or Texas within the next few years, New York is likely to become the biggest market, in our view. We estimate New York to be worth around US$800- US$900m annually, so slightly smaller than the potential size of the Brazilian market.
Simply put, Brazil is a major market opportunity for sports betting on a global scale. The US as a whole will be bigger and is of course of enormous significance, but in Brazil operators will likely have the advantage of needing just one license or concession, rather than rolling out on a state-by-state basis. And presumably in Brazil you will not have to partner with a land-based gaming operator in order to access the market, as is probably going to be the case in most US states.
Another discussion that exists in Brazil is whether to legalize only casinos or open all the activity. What is your view on this?
I should point out that GamblingCompliance is entirely independent and we do not take a position on different legislation or regulatory models, either in Brazil or other markets. But as I mentioned, I do believe this is a fundamental discussion and the disagreement among stakeholders between a casino-only approach or a broader opening seems to be one factor that has stifled progress on legislation in Congress over the past two years or so.
I understand both sides of the argument here. For instance, it is probably true that starting out with a more limited number of resort-casinos would be easier to regulate than having several hundred gaming venues in a country where there is no legacy of regulatory expertise in the gambling sector. You could make the argument that it’s logical to start there, and then take the lessons learned and apply them to other gambling verticals down the road. In addition, if you legalize slot-route operations or other forms of convenience gaming, depending on how extensive those are, then you could see a somewhat lower level of investment by operators in building casino-resorts and the important ancillary offerings – new convention or entertainment facilities, for example – that go alongside them.
But on the flip side, it’s also probably true that there would still be a significant underground market for gaming machines and bingo – not to mention jogo do bicho – if you limit the legal market to a maximum of just one or two casino-resorts in each state. Essentially, you would likely end up with the same number of casino venues in Brazil as in Chile, for a country with more than ten times the population, and the proliferation of grey-market gaming machines is an issue in Chile anyway.
On top of that, I think advocates of bingo and other gaming verticals fear that if casinos are approved first, then casino operators would lobby to kill any future attempts to regulate other forms of gaming, so the prospect of a step-by-step rollout would never actually come to pass.
Perhaps there is a middle ground that can be arrived at in time, but it is certainly not easy to find the right solution when we are talking about such a geographically vast and diverse country as Brazil.
The LOTEX concession is also underway, the instant lottery in Brazil, which has already suffered several delays. How do you analyze that process and what do you think will happen? Do you consider that there will be many interested in the business?
The lottery sector is a little bit different to sports betting and even casinos in that there are only really a handful of companies internationally with the appropriate experience to take on something like the Lotex operation in Brazil.
There is no question that those companies are interested in the opportunity – but at the same time, it is a difficult risk analysis for potential bidders on the concession.
The Lotex operator will need to have confidence they will end up making a profit over the course of the 15-year concession term after paying the significant upfront fee and then committing to the necessary infrastructural investments to bring instant lottery products to market across a territory as large as Brazil’s.
Because Caixa Econômica Federal cannot be part of a consortium, an operator would also have to give up a meaningful portion of its sales percentage to Caixa and its lottery agents if it wants to leverage that pre-existing lottery infrastructure and have traditional lottery games and instant tickets sold at the same locations – which is standard practice in most global lottery markets, to my knowledge.
On top of that, you then have to try to handicap whether Lotex sales in the later stages of the concession period could be affected by a future expansion of other forms of gaming, such as casinos, videobingo or perhaps online gaming.
Those factors, to my mind, help explain why we haven’t see a large group of companies all rushing in to bid on the Lotex license so far, and why the process has taken longer than originally anticipated.
I won’t make a prediction as to how this will ultimately play out. I do suspect a consortium of interests is more likely to end up bidding on the Lotex concession than just one company going it alone, and a further delay in the process wouldn’t surprise me given how this has gone to date. But we will know more about this in late March, I guess.
How do you see this new government of Jair Bolsonaro facing in relation with the gaming sector in Brazil? Do you think the privatization wave will reach all the Caixa lotteries?
Privatization of traditional lottery games would appear to be a logical thing to consider, and there are certainly examples of international jurisdictions that have issued concessions for both their traditional and instant lottery games – or privatized those operations together. But I think we will first have to wait and see what happens with Lotex before we can start talking about this more seriously.
It does appear as though the Bolsonaro administration wants to invite private capital to invest in Loterias Caixa through an IPO, given the recent comments made by officials that have been very widely reported. But it’s not clear to me that this involves anything more than an equity stake; privatizing the lottery operations themselves hasn’t been discussed, at least not publicly. Again, one suspects there will need be more clarity on the Lotex concession before any plans for an IPO really take shape as the fate of Lotex will really determine the lottery landscape in Brazil for years to come.
According to the interviews you have conducted and the people you met at various fairs and events, do you think there is a lot of interest among international companies in the Brazilian gambling market?
Unquestionably there is tremendous international interest in the Brazilian gaming market. I can’t imagine there’s any ambitious sports-betting operator or supplier that isn’t focused on Brazil right now and won’t be watching the regulatory process as it unfolds over the next year or two.
Then you have a potential casino market that would be of interest to both large and medium-sized operators – depending on the criteria that will be attached to licenses through legislation. That’s a little different to Japan, for example, where you are talking about just three major casino-resorts that would need to be built on such a scale that only the very largest casino operators are ever going to be able to compete.
On top of that, Brazil is also probably the biggest potential opportunity on the horizon for the major international gaming machine manufacturers – especially if the rollout of gambling includes videobingo machines at bingo halls, in addition to slots at casinos.
I think the level of interest reflects how incredibly rare it is that you have a market with the potential of Brazil talking about regulating such a wide range of gambling activities.
* James Kilsby
James Kilsby is Managing Director - Americas for GamblingCompliance and has worked as an analyst and journalist covering the gaming industry for the past 12 years. Recently, his main areas of focus have included the regulation of sports betting and online gaming in North and Latin American markets, including Brazil. James has a masters degree in Latin American Studies from the University of London and previously studied at UFMG in Belo Horizonte.
Source: Exclusive GMB
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