Europe Unleashes Online Gambling to Fill Coffers

PARIS — Across Europe, cash-strapped governments looking for ways to reduce yawning budget gaps are embracing online gambling, a source of revenue they once viewed with wary skepticism.

While U.S. opposition to Internet betting has centered on concerns about gambling addiction, European politicians previously objected for a different reason: liberalizing the practice, they feared, would undermine state-sponsored lottery monopolies and gambling operators.

But more and more gamblers are spurning land-based casinos anyway, and logging on to Internet poker and sports betting sites — many of them based in places that are out of reach of tax collectors. As public finances worsen, governments are trying to bring this once-shadowy business into the mainstream of Europe’s digital economy, where it can be regulated and taxed.

“What’s happened is a realization that you can’t uninvent the Internet,” said David Trunkfield, a consultant at PricewaterhouseCoopers. “People are gaming online. You either try to regulate and tax it, or people are going to go to the offshore operators, where you don’t get any revenue.”

France, which only four years ago jailed the top executives of an Austrian Internet gambling company, Bwin, when they visited France, last month permitted private companies like Bwin to start taking bets online, in competition with publicly owned gambling sites. Denmark approved legislation in June authorizing a similar shift. Greece plans within weeks to introduce a bill legalizing online gambling, which is currently banned.

Others considering liberalization include Switzerland, Spain and Germany. They are all following Britain, which in 2005 became the first big country in Europe to confer respectability on the business, and Italy, which has been phasing in legalized Internet betting over the past three years.

Europe has grown into the biggest online gambling market in the world, accounting for an estimated $12.5 billion of the industry’s $29.3 billion total revenue this year, according to H2 Gambling Capital, a consulting firm. If all of that activity were taxed, it could potentially raise billions every year, though the exact amount is hard to predict, given uncertainty over the tax rates that might be applied.

The growth online contrasts with the state of the old-fashioned casino business in many European countries. In France, for instance, land-based casinos have suffered double-digit revenue declines in recent years. In Britain, plans for a giant, Las Vegas-style casino in Manchester were scrapped two years ago, and even the country’s ubiquitous betting shops have started to suffer.

In other big gambling markets like the United States and China, online betting is also widely practiced, though officially banned. A U.S. law banning financial transactions related to online gambling, which was passed in 2006, took full effect this year.

Representative Barney Frank, a Democrat from Massachusetts, has proposed legislation to effectively overturn that law and legalize online gambling; the House of Representatives Financial Services Committee has been debating the bill over the past week, but previous efforts to overturn the 2006 law have faltered.

Meanwhile, lawmakers in several U.S. states, including New Jersey, California and Florida, have independently floated proposals for legalizing some kinds of online gambling, taking advantage of what supporters call a loophole in the 2006 federal law, potentially permitting such activity as long as it does not cross state borders. So far, however, no U.S. states have actually gone as far as British Columbia, in Canada, which has legalized some kinds of online gambling.

Rather than highlighting the potential revenue-generating benefits, European lawmakers generally cite two main arguments for bringing the activity aboveboard. One is a desire to protect problem gamblers by regulating the sites; the other is pressure from the European Union, which claims that some members have been using restrictions on online sites as a way to protect state-controlled casino operators from competition.

Less often mentioned is money. But analysts say it is no coincidence that the new push for legalization has come at a time when governments are under growing strain.

“I think the penny has dropped,” said Simon Holliday, an analyst at H2 Gambling Capital. “They deregulate a little bit, like what happens and deregulate more. The governments get more addicted to the tax than the players to the games.”

France, which started allowing private companies to offer online sports betting just in time for the World Cup soccer tournament, said that in the first month gamblers opened more than 1.2 million new accounts, betting €83 million, or $108 million, on licensed sites. That was nearly twice as much as the amount legally wagered online in the comparable period a year earlier, when state-run betting sites were the only option. As of this month, those numbers should rise further, analysts say, with the start of legal online poker, which was previously banned.

The French government has not said how much tax revenue it has generated from the change in the law. But Italy says it collected about €150 million in taxes last year as a result of a partial liberalization of the business.

Now Italy, which previously legalized Internet sports betting and low-stakes online poker, is moving to open up further; it recently authorized higher-stakes poker, as well as Internet casinos offering games like roulette. Analysts say tax receipts could surge. The Italian government has been more forthcoming than others about its intention to raise revenue from online gambling, linking the latest legislation to a fund-raising package for the Abruzzo region, which was struck by an earthquake last year.

Liberalizing the rules on online gambling has not always created a boon for governments. Britain, for example, has found tax revenue elusive, despite being an early mover.

The problem is that while Britain has legalized Internet betting, it has not required operators to obtain a license and pay taxes in Britain. Many sites, therefore, have continued to serve British gamblers from tax havens like Gibraltar. Two big British betting companies, Ladbrokes and William Hill, moved their online operations to Gibraltar last year to take advantage of lower taxes.

Companies that want to operate legally in France, by contrast, must secure a local license, abide by French regulations and agree to pay French taxes. Unlicensed sites continue to operate in France, too, though regulators have already sent out warnings to a number of operators, threatening prosecution if they do not shut down.

Some companies that operated in France’s gray market before the online betting legislation came into force have chosen to withdraw rather than meet what they say are onerous restrictions. One of these sites is Betfair, a London-based sports betting “exchange,” which lets people to bet on odds set by other gamblers, rather than a bookmaker.

Tim Phillips, director of European public affairs at Betfair, said the French legislation was unfair to betting exchanges because it taxed every single transaction conducted by a gambler, rather than the overall winnings. Users of betting exchanges sometimes employ multiple, offsetting bets on a single game; some of these they might win, while losing others, but under the French system they are taxed on all of them.

“Our view is that the French are trying to turn back the clock and say, ‘We don’t want you to bet like this,’ in order to protect the offline business,” which is still state-controlled, Mr. Phillips said.

For online gambling companies that have lobbied European governments to open up to Internet betting, “it looks like a case of be careful what you wish for,” he added.

Betfair is among a number of companies that are lobbying the European Commission to set common standards for online gambling across the Union. That way, operators based in one E.U. country could serve gamblers in the other 26 member states, as companies in other lines of business are often already able to do.

Michel Barnier, the E.U. internal market commissioner, plans to publish proposals on the issue by the end of the year, according to a spokeswoman, Carmel Dunne.

So far, the commission has let member states go their own ways, pursuing enforcement actions against individual countries that are deemed to have violated E.U. rules against protectionism.

Mr. Phillips at Betfair said greater harmonization could bolster the European economy by helping Europe-based online gambling operators maintain the competitive edge they now enjoy over betting companies in other regions, where the practice remains illegal.

“The gambling business is one of Europe’s real success stories online,” Mr. Phillips said. “This is a business in which Europe leads the world.”

Eric Pfanner, New York Times - 2010-07-27 17:42:41

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