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Scenarios of Future Growth in the EU Gambling Industry

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As part of the terms of reference of this Report, alternative scenarios for the future of the various sectors of the market for gambling services in the Member States of the EU are put forward. Based on the information gathered with respect to the various sectors, as well as the review of published peer reviewed economics literature discussed above, our economics research team has constructed three distinct scenarios based upon distinct assumptions as to the underlying economic conditions and particularly as to the regulatory environment.

In order to gain a relative sense of how the different scenarios would affect the level of GGRs among countries and among gambling services sectors – as well as each sector’s capabilities to contribute to tax revenues, contributions to designated beneficiaries (i.e. “good causes”), and earnings for shareholders – the team made reasonable estimates as to the level of profit margins by gambling services sector. These are then modified explicitly for the various sectors under each of the three scenarios.

Our “baseline scenario” assumes that not much will change in the near future regarding the legal status, ownership structure and general competitive nature of the gambling services sectors in the Member States of the EU. The one main exception within the Baseline Scenario is a relatively rapid growth of remote gambling offerings, which would likely occur primarily in the betting services sector, but would also be manifested to some extent in the lottery sector (sales of lottery products on-line) and in the casino sector (with internet offerings of table games, simulated gaming devices, and internet poker.) For simplicity, we assume in the Baseline Scenario that all extraordinary growth in remote gambling offerings would show up in the betting services sector.

The Baseline Scenario is intended to provide a basis for comparison of the economic and social impacts when varying degrees of relaxation of economic, ownership, and competitive constraints are imposed on the gambling services sectors of the EU. The nature of such impacts on the level of gaming and wagering activity and on GGRs, as well as the expected approximate magnitude of those impacts, are derived in our Report from a detailed review of the relevant scientific economic literature. Generally speaking, relaxation of such constraints has the effect of reducing Economic Rents while, at the same time, enhancing value that accrues to consumers in general, so-called Consumer Surplus. (Consumer Surplus is defined as the difference between what a consumer is willing and able to pay for a commodity and what he has to pay, aggregated over all consumers. Thus, a price reduction (or improvement in the quality or availability of the product) has the effect of increasing Consumer Surplus.) Based on experience in other parts of the world, such relaxations will also expand the aggregate amount of spending on gambling services and increase the ratio of GGRs to GDP in the affected countries.

Two alternative scenarios to the Baseline Scenario have been developed by our economics research team. It has constructed these scenarios to try to provide some flavour of how contingencies that might emerge in the EU would affect the size, market shares, profitability, and Economic Rent generating capabilities of Member States. The findings of the team concerning the theoretical economic consequences that would a priori be expected to result from such changes are explained in detail. The Report then uses the scenarios to indicate possible variations in a number of economic measures, tied to the underlying assumptions used.

The First Alternative Scenario is considered the more moderate of the two, involving changes that would emphasize the principles of “free and fair trade” and “proportionality” in allowing enterprises the opportunity to gain access to EU Member State gambling services sectors, but without relaxing restrictions and constraints on those sectors that are presently in place.

The Second Alternative Scenario is more extreme and assumes that a combination of legal, technological, competitive, and policy decisions will substantially open up the gambling services sectors to intra-EU competition.

The authors of this Report believe that the assumptions underlying the three scenarios are generally reasonable illustrations of situations that might emerge in reality. Stakeholders and other readers of this Report may or may not agree that they are reasonable. Nonetheless, the real purpose of our presentation of alternative scenarios is not to make concrete forecasts of the future, but much more to demonstrate the probable interactions among the various sectors of the European gambling market resulting from alternative possible developments.

Baseline Scenario

Our baseline scenario reflects the view that the five main gambling services sectors – lottery, casinos, gaming machines, betting services, and bingo – will grow, but only in proportion to gross domestic product (GDP) within each of the 25 Member States. Exceptions to this occur with respect to remote gambling offerings and with respect to all types of gambling services in the UK, which will be affected by the implementation of the Gaming Act 2005 and the growth of so-called Fixed-Odds Betting Terminals (“FOBTs”).

The baseline assumptions regarding market sector growth generate a forecast for gambling services revenues of €63,900 million for 2010. This is a 24% increase over GGRs generated in 2003.

Our baseline model suggests the betting services sector will increase its market share from 17.2% to 20.8% of all EU GGRs between 2003 and 2010. The relative growth in the betting services sector is due to the assumptions made regarding the expansion of remote gaming services throughout the European Union, though some of these revenues would actually be accruing to national lotteries that had the authorization within their respective jurisdictions to offer remote gambling services to their customers, as well as to internet casinos and internet poker services.

If we use the same set of assumptions for profit margins in the Baseline Scenario and apply them to estimated 2003 GGRs, the total amount of Economic Rents (Economic Rents are defined as earnings for an enterprise over and above a normal return on invested capital, caused by the scarcity of supply of the resources used to generate revenues for the enterprise. In these examples, Economic Rents accrue because of constraints on supply of gambling services. In competitive markets without supply constraints, Economic Rents would get bid away via competition typically by lower prices.) available for taxes, distributions to designated beneficiaries, or as above-normal profits for gaming operations, will be something like €37,600 million, about 73% of GGRs. In light of the high tax rates imposed on many privatized forms of gambling within the EU, as well as the major contributions that are made to either government general fund revenues or earmarked “good causes,” as discussed in the various country reports, these seem to be reasonable estimates in the absence of a detailed accounting of the specific breakdown of Economic Rents among stakeholders.

Applying the same margins to the forecasts for the year 2010 implies an aggregate of Economic Rents available for taxation, distribution to designated entities (so-called “good causes”) and for distribution to shareholders and retained earnings, of around €45,300 million on GGRs of €63,900 million, or about 71% of GGRs. Our report sets out individual estimates of Economic Rents available by country and by sector for the forecast to 2010.

Under the Baseline Scenario, it would not be expected that EU employment in gambling services would change any more than the rate of growth of GGRs, and perhaps less due to continuing efforts at operational efficiency. Exceptions to this would occur within the casino industry in the UK and in the remote gambling segment of the various gambling services sectors. With regard to remote gaming services, our Report shows that this is not a very labor intensive segment of the market. Even with the forecast growth in GGRs for this segment, total employment within the entire EU would likely only grow from about 5,000 in 2004 to between 10,000 and 15,000 individuals by 2010.

First Alternative Scenario

The first of our alternative scenarios is intended to reflect a hypothetical situation where courts or legislative bodies are generally sympathetic to the argument that state monopolies and other constraints on free and fair trade in the gambling services sector cannot be justified because of the principles of free and fair trade and proportionality. Furthermore, remote gaming services providers would be able to enter into presently protected gambling markets of Member States in the offering of their services, though they would have to abide by the constraints dictated by the gambling laws of national governments. Nonetheless, we assume that there would be no significant relaxation of the constraints on how games or wagering opportunities can be offered (except with regard to access provided to remote gambling services).

The major effects of this First Alternative Scenario would be to shift the composition of Economic Rents from government (i.e. because of the loss of monopoly status for some gambling services providers, especially in the casino gaming, gambling machines and betting services sectors) to new service providers (i.e. those who were successful in the tendering process.) Furthermore, the greater access of remote gambling service providers to markets within the EU would increase competition in the betting services sector and perhaps in the casino and gambling machine markets as well. This would likely result in price competition in these areas. Because of substitution effects, we could expect relative reduction in sales for land-based casino and gambling machine products. Furthermore, we could expect substitution away from bingo because it is a relatively less convenient product in comparison to the remote gambling offerings. However, besides remote gambling, there would only be limited effects on the extent of competition among and within the other gambling services sectors.

For the First Alternative Scenario, we assume that the growth rate of the remote gambling services sector is 20 % per annum through 2010. The growth rates of casino gaming and gaming machines are reduced (in comparison to the Baseline Scenario) by 0.5% per annum from 2006 onward, reflecting the substitution effect from remote gambling services. Bingo’s growth rate is reduced by 1.0% from 2006 onward in comparison to the Baseline Scenario, and lottery GGR growth remains the same as under the Baseline Scenario.

The increased level of competition underlying our First Alternative Scenario will certainly affect the presumed profit margins of operators in the various sectors. Economic Rents will obviously decline as a result, but not dramatically. A reduction in Economic Rents occurs because of the presumed lower profit margins in various sectors, and is in the magnitude of 6% in comparison to the Baseline Alternative. Detailed results are set out in our Report on a sector by sector and country by country basis.

Second Alternative Scenario

The second of our alternative scenarios is intended to reflect a hypothetical situation where events within the EU, whether driven by court decisions, legislative changes, or new technologies (or some combination of the three), lead to a considerably more open marketplace for gambling services sectors in the EU. This can be considered an “extreme case” of opening gambling services markets in a manner that would allow for extensive cross-border competition, emergence of destination resort-style casinos, relatively unconstrained remote gambling offerings and competition among lotteries regardless of their Member State affiliations. In this alternative, we build upon the assumptions from the First Alternative, and further assume that there would be significant relaxations in the present constraints on how games or wagering opportunities can be offered, increased competition among sectors manifesting itself in reduced prices of gambling services to consumers, subsequent greater penetration by remote gambling offerings, and a break-down in implicit agreements not to compete among the existing national lotteries in the EU.

In general, if this were to transpire, it would lead to a substantial reduction in Economic Rents, an even more substantial increase in Consumer Surplus ( It should be noted that the primary source of Economic Rent is Consumer Surplus, ie. because of constraints on supply, suppliers are able to charge higher prices than market conditions would dictate. As prices are lowered and markets become more competitive, consumers gain from reduced Economic Rent and there are further gains due to reduction in “deadweight losses,” being inefficiencies associated with supply-constrained situations.) and a notable increase in aggregate spending on gambling services in the Member States of the EU. Based on the experience in other countries, such as the United States, Canada, New Zealand, and Australia, the ratio of GGR/GDP could be expected to increase dramatically, perhaps ultimately to double.

Based upon our assumptions, the Second Alternative Scenario produces an estimated 53% increase in total GGRs in 2010 over GGRs in 2003. This is much greater than growth rates of 24% and 25% relative to GGRs in 2003 under the Baseline and First Alternative Scenarios, respectively. Total handle actually grows considerably more than this, but is negated to a large extent by the significant price reductions which we had assumed. Certainly more significant is what our hypothetical model suggests with respect to particular gambling services sectors. Comparing GGRs under the Second Alternative Scenario to GGRs under the Baseline Scenario, there is a considerable redistribution of GGRs among the five main gambling services sectors, with the greatest growth occurring in the casino, gambling machine, and betting service sectors, more moderate growth in the lottery sector, and a moderate decline in the Bingo sector. (The changes in the casino and machine gambling sectors are consistent with recent experience in the United States and in other countries that have more extensive casinos and/or gambling machine sectors than are presently found in the EU.) Detailed estimates of market shares of GGRs, broken down by gambling services sector for the Second Alternative Scenario, are set out in our Report.

The extent of Economic Rent change under the Second Alternative will depend on how much they have been eroded by deregulation and increased competition. Our report lists the presumed profit margins and resulting Economic Rents for the various sectors of the gambling services market under this scenario. The model suggests that overall Economic Rents would fall from about €45,000 million to about €38,500 million, a decline against the Baseline Alternative of about 17%. How the Economic Rents would be divided among tax revenues, contributions to designated beneficiaries, and returns to operators and owners would depend upon tax policies and contractual obligations.

Socio-Economic Consequences

In distilling the formal effects of each scenario, for the sake of clarity, our Report at first intentionally avoids paying attention to unintended and undesirable effects that may be produced by different degrees of expansion of gambling markets. However, such effects, to the extent that they are actually manifested, are certainly of economic, as well as social and political importance and are therefore given separate consideration in our Report.

One could make a fairly strong case that the extent of unintended adverse consequences, such as social costs associated with increases in problem and pathological gambling, increases in crime associated with gambling, changes in bankruptcies, suicides, etc, would be quite similar under the Baseline Scenario and the First Alternative Scenario. This would be the case if the alternative institutional relationships between governments and service providers still delivered the same level and efficiency of consumer protections and other safeguards. Since the prices of gambling services and the level of constraints placed on the gambling services sectors remain more or less the same under these alternatives, there should not be much difference between them in terms of unintended adverse consequences.

However, under the Second Alternative Scenario, there may very well be an increase in various unintended adverse consequences associated with gambling. As our review of the scientific literature reveals, there are several studies which show no statistically significant linkage between expanded gambling offerings and bankruptcies while several others show a statistically significant but relatively small linkage between expanded gambling offerings and bankruptcies. Results of the peer reviewed research on the relationship of expanded gambling to crime have produced mixed results, with instances of increases, no change, and decreases relative to the availability of casino gaming. As a result, the scientific evidence on direction and magnitude of expanded gambling offerings and crime is not conclusive one way or the other. There is no clear scientific research that links increases in the availability of gambling services to increases in the rates of problem and pathological gambling, even though there is considerable evidence that suggests this might be the case. Nonetheless, under this Scenario, there very well may be increased attention paid to these possibilities, and a subsequent political backlash because of the perception (if not the reality) of the consequences of such expansion.

Among other findings, it is clear from the results of this analysis that Member States of the European Union need to sponsor or encourage additional scientific research to address many of these important social impact questions. In the interim, policy will have to be made based upon the limited research that is available, much of which was generated in other countries, with perhaps important social, political and cultural differences.

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