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Online Gaming
A Gamble or a Sure Bet?
KPMG INTERNATIONAL
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Foreword
For thousands of years, people have been playing games of chance or wagering on the outcomes of various games and events. Today, that activity often takes place at casinos, game parlors, bookmakers andincreasinglyonline. The online gaming market represents one of the fastest growing segments of the gambling industry. H2 Gambling Capital, a leading supplier of data and market intelligence on the global gambling industry, puts the size of the global online gaming market at about US$21 billion, hitting US$30 billion by 2012. But that may be just a drop in the ocean, considering that some of the biggest potential marketssuch as the U.S., China, Japan, and South Koreastill prohibit many forms of gambling over the Internet. Market prospects could abound in the coming years. While it is difficult to predict political and legislative action, many markets that now ban online gaming could easily change their laws as a means of authorizing what is now an underground economy and increasing tax revenuessomething that the current recession may be making more urgent. Another key opportunity may lie in the regions where online gaming is now legal. For example, KPMG firms are now starting to see a shift in online gaming regulations in Europe; state monopolies may now be giving way to privately owned websites, as we see beginning to occur in France, Italy, and Denmark. Other important trends include: Industry consolidation: As is the case in many maturing markets, some KPMG firms are seeing an increase in M&A activity related to online gaming. Business-to-business expansion: Established gaming sites are looking to license their software and services platforms to establish new revenue streams and gain market presence. Entrance of land-based casino operators: Looking for incremental revenue, companies like U.K.-based Rank have already moved into the online space to complement their traditional casino and bingo services, while casino giant Harrahs and gaming technology leader IGT are also taking steps in this direction. Emerging platforms: Gaming is moving to the same mobile and social platforms that are exploding for casual games. We are pleased to present this overview of the state of the global online gaming sector and some of its major players. This is a dynamic and rapidly changing business, facing unquestionable consumer demand. Many operators, media, software and technology companies, payment solution providers, regulators, attorneys, and investors alike are all keenly watching how this industry will develop. Sincerely,
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
42%
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2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
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Key Trends
Potential of the U.S. market
Online gaming growth continues worldwide as the potentially richest marketplace remains largely unrealized. Many companies abandoned the American market in 2006 with the passage of the Unlawful Internet Gambling Enforcement Act (UIGEA) that year. But the issue of Internet gambling hasnt ended there. Bills to end the online gaming restrictions have since been introduced3, although few expect any bill to sail through the legislative process.4 Separately, the U.S. Treasury Department and Federal Reserve Board announced in November 2009 that they were delaying enforcement of the UIGEA for six months.5 Taken together, these activities suggest a public policy debate that could still evolve and in so doing regulate and tax online gaming. U.S. land-based casinos and global online gaming enterprises are actively preparing6 for and betting on that very outcome.
Frank Introduces Internet Gambling Regulation and Enforcement Act of 2007 , Press Release, April 26, 2007 . Retrieved from http://www.house.gov/apps/list/press/financialsvcs_dem/press042607 .shtml, http://www.forbes.com/2009/05/06/ gambling-barney-frank-markets-equities-online.html Online Gambling Moves Need Traditional Backing, Financial Times, November 8, 2009 Retrieved from http://www.federalreserve.gov/generalinfo/Foia/Reg%20GG-UIGEA-Comments.pdf, http://www.pokernewsdaily.com/uigea-regulations-officially-delayed-six-\;months-6701/ Harrahs Hire Ex-Party Boss for Online Push , GamblingCompliance Ltd., April 14, 2009. Retrieved from http://www.gamblingcompliance.com/node/36950. Market Data Focus: Italy, eGaming Review, October 2009
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2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Joseph M. Kelly
Industry consolidation
Online gaming growth rates have also helped to drive market consolidation, as larger players in the gaming sector have looked to fill out their capabilities or reach into new markets. For example, IGT, the leading maker of gaming machines, in 2008 purchased Million-2-1, a developer of mobile/cell phone gaming technology. Million-2-1 also has a consumer-facing Internet games portal called Kerching that offers online casino, poker, bingo, SMS games and cell phone java slots games in legal territories.10 In September 2009, bwin purchased one of Italys largest online poker sites, Gioco Digitale.11 We predict new rounds of merger and acquisition activity, both among traditional gaming companies reaching into virtual markets and existing virtual leaders taking over smaller niche competitors.
Harrahs Interactive Signs Development Deal with 888 Holdings, Poker News Daily, September 12, 2009 Interview with Forbes Insights, November 2009 10 IGT website, https://www.igt.com/content/base.asp?pid=58 11 bwin to Buy Italian Gamer for Up to 115 Mln Eur, Reuters, September 14, 2009
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2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
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In France, legislators have been discussing a bill that would end the state monopoly on online gaming, allowing privately owned websites to offer wagers on horse racing, soccer and poker.
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Emerging markets
While online gaming has taken off in Europe and holds potential for the U.S. should legal issues be resolved, other global markets also hold tremendous promise. A solid infrastructure of broadband Internet connectivity, easy access to mobile applications, and safe and secure payments through a native banking system are three of the key factors that could support this growth. Emerging regions such as India and Latin America are likely to be the next major markets to come into view for the industry.
12 13 14
A New Dimension, eGaming Review Bingo Report 09 Bingo in the Digital Age: Global Market Assessment and Forecasts, Screen Digest, March 2009 Bingo in the Digital Age: Global Market Assessment and Forecasts, Screen Digest, March 2009
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
O N L I N E G A M I N G : A G A M B L E O R A S U R E B E T ? 7
Risks
It would be remiss to discuss the online gaming industry without taking a look at a few of the possible risksor challengesthat could have an impact on companies that are targeting this marketplace.
Legislation
While much global legislative action focuses on liberalizing online gaming regulations, in many cases these efforts move slowly, and it may take many years for markets to actually open up to licensed competitors even after laws pass. In addition, there is still potential for legislation that is intended to reduce or eliminate online gambling. A movement in this area could suddenly decimate some players. For example, when the U.S. passed the UIGEA in 2006, many online gaming companies that had been hoping for the best were quickly crippled or forced out of business.
Payment crackdowns
Also in the U.S. market, credit card companies have recently tightened restrictions on the use of credit cards for e-gaming transactions. Both Visa and Mastercard have toughened their stance on allowing e-gaming transactions to be coded as other kinds of online commerce, keeping U.S. customers from using their cards to gamble online.15 These restrictions were put in place in anticipation of UIGEA law going into effect in June, 2010.
15
Visa declining U.S. egaming payments too, eGaming Review, Feburary 5, 2010
User experience
In addition to reputation and security concerns, online gamers must be assured that they have a fair chance to win, and that operators are conducting themselves properly. Unlike land-based casinos, where players can physically see the way the games operate or cards are dealt, online and digital forms of these games require greater faith. Aware of these concerns, groups such e-Commerce Online Gambling Regulation and Assurance (eCOGRA), an independent standards authority for the online gaming industry, have emerged. eCOGRA oversees fair gaming, player protection and responsible operator conduct, acting essentially as a player advocate where online gaming is lawful.
Geographic Sectors
Europe
According to a recent study by Arthur D. Little, the online gaming market is opening throughout Europe, with annual revenue forecast to reach 8 billion euro by 2012.16 Following the examples of the U.K. and Italy, and under pressure from the European Commission, many other countries are currently preparing for a control-led opening of their markets. One of the biggest challenges in Europe may be the allowance of cross-border online gaming. Currently, many countries have focused gaming reform activity within their own borders,17 which may have the consequence of creating a balkanized environment of multiple regulations. With an online gaming market estimated at GB1.48 billion, the U.K. has one of the most established online gaming industries, including sports betting, poker, bingo, lottery and online casinos. The online gaming sector has also seen a steadily increasing share of the total U.K. gambling market, growing from 3.7 percent in 2004 to an estimated 12.1 percent in 2009.18 One area of concern that leading international gaming consultants GBGC (Global Betting & Gaming Consultants) has for the Internet gaming sector is that of credit cards. The charge-off rate on bad debts by credit card firms jumped significantly in Q3 2009. The firms have been raising fees and interest rates in response to bad debts from customers in the recent recession. The credit card is the oxygen of Internet gamblingif customers cannot transfer funds, the business model can fall down. If access to personal credit cards becomes more difficult in the U.K. in 2010, there could still be pain ahead for its online sector.19
Online Gambling: All In? Arthur D. Little, 2009 Market Barriers: A European Online Gambling Study, Gambling Compliance, 2009 18 GBGC Interactive Gambling Report, September, 2009. 19 GBGC Analysis report prepared for KPMG, February, 2010
16 17
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
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Italy represents a huge gaming market, and the countrys industry is expected to generate just under 18.7 billion in 2009. Still, its online gaming market is relatively small; online gaming losses are expected to make up just 5 percent of total gaming losses in Italy this year, compared to a rate of around 18 to 20 percent in the U.K., and 25 percent in countries such as Sweden.20 Italy has been liberalizing its onshore Internet poker and gaming regulations, allowing more providers to be licensed, although there is an onshore requirement. PokerStars recently established an onshore presence in Italy, and bwin Interactive Entertainments acquisition of a leading Italian poker site, Gioco Digitale, demonstrates the draw that the regulated market has. The gaming markets in France and Spain, meanwhile, are expected to open up in 2010.21 In France (which like Italy has an onshore requirement), PartyGaming is reported to be entering the market in 2010 through a business-to-business partnership,22 and Paddy Power signed a five-year deal with French operator Pari Mutuel Urbain (PMU), one of the countrys two state-backed gaming and betting providers.23
North America
The United States may have the most potential as a lucrative market for online gaming, but it is also the market with some of the greatest challenges. Currently, online gaming is outlawed in the U.S. under the UIGEA, which prohibits U.S. banks and credit card companies from processing charges to and from online casinos. But should online gaming be legalized, the U.S. market for online casinos and poker could be worth as much as US$12 billion, according to Goldman Sachs.24 The consequence of the gaming ban in the U.S. has been to create a 21st Century equivalent of Prohibition. Legalizations proponents say todays similar dynamic lots of enthusiastic bettors, no home-grown legal financial infrastructureopens the way to money-laundering and brings disreputable money handlers into the mix. Should winnings actually flow through a U.S. financial institution, the consequences could be unpleasant for all concerned. In June, 2009, for instance, U.S. federal authorities froze bank accounts worth US$34 million representing 27,000 online poker players. The accounts were managed by two service companies, Allied Systems Inc. and Account Services, and were held at Wells Fargo, Citibank and other U.S. banks.25
billion.
The U.S. market for online casinos and poker could be worth as much as
US$12
Market Data Focus: Italy, eGaming Review, October 2009 Online Gambling: All In? Arthur D. Little, 2009 22 PartyGaming to Enter French Market with B2B Deal, eGaming Review, August 28, 2009 23 New Paddy Power B2B Arm Signs Landmark Deal with Frances PMU, eGaming Review, November 12, 2009 24 Goldman Sachs: PartyGaming, 888, Playtech, bwin to Surve on Legal U.S. eGaming, eGaming Review, June 30, 2009 25 U.S. Deals Blow to Online Poker Players, The Wall Street Journal, June 10, 2009
20 21
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Legislators in Florida were presented with a study from a lobbying group showing that legalizing online poker could raise
There have been proposals in Congress to legalize forms of online gaming. One bill, introduced by Financial Services Committee Chairman Barney Frank, has 66 co-sponsors as of March 2010 and would license and regulate all Internet gaming, except for sports betting. A Senate bill from Senator Robert Menendez would license only non-banking interactive poker and other skill games, as well as legalize interactive horse racing.26 Neither bill progressed in 2009 or in early 2010, however. Some individual states also have been considering legislation separately; others have been presented with studies suggesting how online gaming could boost tax revenue. California, for example, was considering a bill enabling intrastate online poker, although the bill has since run into delays.27 Legislators in Florida were presented with a study from a lobbying group showing that legalizing online poker could raise US$90 million annually in taxes.28 Canada, with an online gaming market estimated at CDN$1 billion29, has been looking to liberalize its own online gaming laws. All gaming in Canada must be conducted and managed by a provincial government or agency. In early 2010, Loto-Quebec received cabinet approval to enter the online gaming business. Loto-Quebec will work with B.C. Lottery Corp. and Atlantic Lottery Corp.both of which already offer limited online gamingto develop a common electronic platform across their jurisdictions, as well as to achieve the volume of players that will be required to make online poker viable. These provincial agencies are expected to offer online gaming by the end of the year30, while other provinces such as Ontario, are expected to follow suit.31
US$90
Internet Gaming Comeback? Global Gaming Business, November 12, 2009 California Legal Online Poker Bill to Be Delayed, Senator Warns, eGaming Review, August 21, 2009 28 Legal Online Poker Could Raise $90M a Year, Florida Told, eGaming Review, November 16 2009 29 Canadian Gaming Business magazine, October, 2009, p. 6. 30 Loto-Quebec to Get Into Online Gambling Business, CTV.ca, February 3, 2010 31 Ontario may follow other provinces and allow online gambling: McGuinty , The Canadian Press, February 23, 2010
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O N L I N E G A M I N G : A G A M B L E O R A S U R E B E T ? 1 1
Asia
The two largest prospective markets in China and South Korea, both remain closed to online gaming.
Unlocking the World of Chinese Gambling, Global Gaming Business, September 2009 Online Gambling Sites Mushrooming, Korea Times, June 9, 2008 34 Habitual Online Item Buyers Face Sanctions, Korea Times, June 25, 2008 35 White Paper on Leisure Industry 2009, Japan Productivity Center 36 Japan, a Potential Gold Mine for Online Gambling, eCommerce Journal, February 13, 2009
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2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
In late 2009, foreign operators were submitting bids for the first online gaming licenses in India; it is estimated that countrys betting market is worth about US$60 billion. Bidders were said to include William Hill, Betfair and bwin, as well as local Indian operators, with at least three licenses to be granted in the Himalayan state of Sikkim. Reports said the goal was to have the betting services running in time for the football (soccer) World Cup in April 2010.37 Online gaming may soon take place in Australia as well. In October 2009, the governments independent advisory body on gaming policy recommended lifting the 2001 Interactive Gambling Act, which currently bans online gaming. The Productivity Commission endorsed the idea of allowing operators to offer online poker and casino products to Australian residents, subject to a strict regime of consumer protection.38 Australians spent an estimated AU$790 million on offshore gambling sites in 2008.39
billion.
In late 2009, foreign operators were submitting bids for the first online gaming licenses in India; it is estimated that countrys betting market is worth about
US$60
37 38 39
Betfair and William Hill Target India, The Independent, October 27 , 2009 Lifting of Oz eGaming Ban Set to Spur Further Growth, eGaming Review, October 26, 2009 Lifting of Oz eGaming Ban Set to Spur Further Growth, eGaming Review, October 26, 2009
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
O N L I N E G A M I N G : A G A M B L E O R A S U R E B E T ? 1 3
Latin America
Brazil, with 192 million people, is the most highly populated country in Latin America, and may have one of the strongest foundations for online gaming: a solid base of regular Internet users and a cultural history of gambling. Brazil currently operates different types of lotteries, all controlled by the federal government. Bingo games are also popular, as is sports betting, especially on football (soccer).40 Brazil has the potential on the surface to become a huge online gaming market, however it is currently prohibited and no online betting legislation exists. Argentina, meanwhile, may be the sleeping giant for online gaming of Latin America. In Argentina, gambling and betting licenses are provincial, not national. bwin, for example, operates through a license from the Provincia de Misiones, while 888 has a partnership with Tower Torneos. Companies are currently trying to push the envelope in terms of gaining a national presence through advertising and sponsorships. bwin recently started advertising with a large national publisher, and has a shirt-sponsorship deal with Buenos Aires-based football team Boca Juniors.41 Another potentially lucrative market is Mexico. Mexicos 1947 Federal Gaming and Raffles Law regulated gambling, and 2004 legislation allowed online gaming, with about 200 permits awarded in 2006, most of them to Apuestas Internacionales, a subsidiary of the TV giant Televisa.42 It is estimated that the Mexican gaming market may be worth some US$4.6 billion.43 Until now the gaming business has been dominated by the government-run National Lottery. Online gaming is expected to become one of the most lucrative niches of the business. Through Mexican sites (ending in .mx) of the online casinos, it is possible to access international sites of companies such as bwin, Intercontinental Global and others.
Brazils Gambling Potential, eGaming Review, October 2008 Sleeping Giant, eGaming Review, February 4, 2008 42 Online Gambling in Mexico: A Safe Bet, www.yogonet.com, September 2007 43 Online Gambling in Mexico: A Safe Bet, www.yogonet.com, September 2007
40 41
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
888 Holdings
Gibraltar
Betfair bwin
Cryptologic
Dublin, Ireland
Gala-Coral
Essex, U.K.
Privately held
GigaMedia
Taipei, Taiwan
US$183.6M (2008)
Middlesex, U.K.
PartyGaming
Gibraltar
Playtech
Isle of Man
44 45
Source: All information from company websites and annual reports, unless otherwise noted Gala Coral Lenders Said to Eye Cash Infusion, New York Times, February 16, 2010
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
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Name PokerStars
Notes Said to be the worlds largest online poker room Sponsors a wide range of online and offline poker tournaments, including the World Championship of Online Poker Some 20,000 players are said be playing real money ring games daily. Operates bingo services and casinos in the U.K., with complementary online gaming services Has direct operations in U.K., Spain and Belgium. Online sportsbook and casino operator Has operations in Asia (licensed by First Cagayan Leisure & Resort Corp. in the Philippines) and Europe (licensed by the Isla of Man) Uses video streaming technology to offer live dealer games online. Manufacturer of pachinko and pachislot machines Amusement machines, including network-enabled trading card games Amusement centre operations and arcade machines Home video game software business, including content for mobile phones, PCs and toys. Betting site that operates in the U.K, Spain, Germany, Greece, Turkey, and Australia Operates Paradise Poker brand online poker site 64 percent of revenues come from sports, 24 percent from casino and games, and 12 percent from poker. Major chain of betting shops that operates primarily in the U.K. and Ireland Online effortsWilliam Hill Onlineare through venture with software developer Playtech.
Sega Sammy
Tokyo, Japan
Sportingbet
London, U.K.
William Hill
London, U.K.
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Conclusion
As the popularity of both gambling and online entertainment continues to grow, the online gaming market is without a doubt an attractive area of expansion for software developers, casinos and other land-based gambling operators, related suppliers, and industry newcomers and investors alike. Even despite the unpredictable political and legislative hurdles and roadblocks in many countries, online gaming seems to have taken a strong enough foothold in some markets such as Europe that investment into this sector may have less risk than it appears. Coupled with the enormous potential of the industryin the event that major markets such as the U.S. or Asia-Pacific allow online gambling and supporting activitiesit is not surprising to see that the online segment of the gambling industry is by far one of its fastest growing divisions and piquing the interest of the industrys largest players.
KPMG
An experienced team, a global network. KPMGs global network of Information, Communications & Entertainment (ICE) professionals work with our firms clients in the online gaming and related sectors throughout the Americas, Europe, Middle East, Africa and Asia-Pacific. Companies and investors in this industry face many financial, information and security risks and issues. In addition to helping our firms clients with these concerns, KPMG professionals can also advise on reducing costs, improving controls, protecting intellectual property, and meeting the myriad of challenges of the digital economy.
Contacts
Global Contacts
Gary Matuszak Partner, Global Chair Information, Communications, and Entertainment KPMG in the U.S. +1 650 404 4858 gmatuszak@kpmg.com Maureen Migliazzo Global Executive Information, Communications, and Entertainment KPMG in the U.S. +1 650 404 4425 mmigliazzo@kpmg.com
European region
Mark Summerfield KPMG in the U.K. +44 20 7311 3055 mark.summerfield@kpmg.co.uk Neil Duggan KPMG in Gibraltar +350 200 48600 nduggan@kpmg.gi Russell Kelly KPMG in Isle of Man +44 1624 681013 russellkelly@kpmg.co.im
Americas region
Wade Loo KPMG in the U.S. +1 650 404 5240 wloo@kpmg.com Silvia Montefiore KPMG in Canada +1 416 228 7211 smontefiore@kpmg.ca
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Contributors
We would like to acknowledge the contribution of Archie Watt, Elaine Pratt, Forbes Insights (www.forbes.com/forbesinsights) and Global Betting & Gaming Consultants (www.gbgc.com) who assisted in the development of this report.
2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
kpmg.com
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2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms of the KPMG network of independent rms are afliated with KPMG International. KPMG International provides no client services. No member rm has any authority to obligate or bind KPMG International or any other member firm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (KPMG International), a Swiss entity. Designed by Evalueserve. Publication name: Online Gaming Publication number: 1001505 Publication date: March 2010 Printed on recycled material