By Paul Leyland, Founding Partner, Regulus Partners
“Thinking is the one thing no-one has ever been able to tax” Charles F. Kettering
2015 was always going to be a difficult year for gambling operators from a fiscal perspective:
- UK remote Point of Consumption taxes (15% revenue from December 2014)
- UK B2 Machine Games Duty increase (5ppt increase from March 2015 to 25% revenue)
- EU Point of Consumption changes to VAT (especially impacting Germany-facing operators
- Italian machine tax increases (VLTs from 5% to 9% of turnover; AWPs from 13% to 17%
- Austrian enforcement of its 40% casino tax on non-domestic licensed operators
- Ireland’s 1% turnover tax on remote betting likely (finally) to come into force in 2015
It would be wrong to suggest that this is a one-way street: for example the UK bingo industry had its duty halved to 10% last summer (after some effective socially-focussed lobbying). However, the tide across Europe is very much in the direction of tax increases – in many jurisdictions and across many products and channels. We probably haven’t seen the last of it this year either.
This is hardly news, and I have written before (Sin Tax Error, October 2014; below) that I see some (most) industry attempts to halt the encroachment of the tax man as likely to be counter-productive on many levels.
Tax is on my mind again now for two reasons:
First, governments are generally persuaded that increasing the taxes which obviously impact ‘ordinary’ people (sales and income) is deeply unpopular and can be economically damaging; conversely the trend in business taxes and treatment of the super-rich is, if anything, increasingly liberal. And yet growth is proving elusive and deficits remain stubbornly high. So the temptation is to look for ‘specialist’ taxes to levy, which cause minimal economic and political (popularity) collateral damage. The only thing that stops gambling from being the perfect victim of this trend is its small size and fiddly complexity. Nevertheless, we are likely to be hearing a lot more about gambling tax increases this year.
Second, all other things being equal, there tends to be a correlation between a low tax footprint and growth. This is unsurprising - high levels of tax and regulation tend to inhibit growth in all sectors, and gambling is no different. Whereas business has largely won the debate since the Reagan-Thatcher era, gambling is not always seen as the sort of business governments want to encourage, even when those governments are supposedly ‘pro-business’. Consequently, the principle ‘economic benefit’ of many forms of gambling is seen by government as tax yield and an ‘optimised’ tax rate is the one that provides the highest yield (rather than promotes growth). More tax and regulation can therefore be handed down lightly by our political masters if it gets them out of a political or fiscal hole, with the risk of hitting growth not really bothering them.
So, with fiscal pressure building and gambling likely to be further squeezed (NB, there is likely to be two Budgets in the UK this year), am I bearish on growth in gambling? Well actually no. Quite the opposite, in fact (and for those of you who remember me as an analyst, not being bearish now might come as a surprise).
I am very bullish on medium / long-term gambling sector growth precisely because of the developing fiscal squeeze. One of the biggest problems with the sector over the last decade has been the relative ease with which many operators generated comfortable double-digit operating margins (often due to low-to-nil tax footprints). This led to big marketing budgets, big dividends, and big senior pay packages. But did it encourage innovation? No. Did it drive an even defensive focus on the customer? Quite the opposite. Did it foster a strategic and responsible approach to stakeholders and suppliers? Again, painfully, belligerently and often counter-productively, emphatically not.
As with Tesco – once a doyen and now being dragged over the coals – success rarely breeds anything other than arrogance and complacency, which can lead to bad decisions and loss of control. Thanks to mounting fiscal and regulatory pressure, I believe this attitude is now leaving the sector - and its departure will leave it much stronger (when the humility stops – stop).
A leaner, more humble, gambling sector will have to fight to retain its customers, not just pay to obtain (and re-obtain) them. It will have to get every last ounce of innovation from its supply-chain, not just every last ounce of saving from a contract. And it will have to treat its key stakeholders with responsibility and respect in order to avoid further encroachments on its capacity to do business. All of this points to a more intelligent, more productive, more customer-focussed, and more strategic gambling sector. Each of those traits drives growth far more surely than big cash flow returns.
There are bound to be losers as well as winners because of this change – not all will manage it effectively (or even try). The process of change is also likely to be painful and difficult even for the winners. However, my prediction is that 2015 will mark the beginning of a new culture in gambling – a culture fit for driving growth which has been largely absent for nearly a decade. Existing ‘big’ businesses need to play by these new rules to adapt to a less forgiving environment – otherwise they will see themselves replaced by more dynamic newcomers though some (much needed) “creative destruction”.