Coming up trumps online

 

Ireland is well positioned to take advantage of the wave of legal online gambling about to sweep through Europe and the US. Will we grasp the opportunity, asks FIONA REDDAN

LIBERALISATION OF the potentially lucrative US online gambling market is now firmly on the agenda. In Europe, too, there is a rush to legalise online gambling in order to help governments pay down their deficits. If Ireland plays its cards right, could its “smart economy” strategy benefit from these twin developments?

Globally, online gambling, which includes sports betting, poker, bingo and casino games, is already big business, with H2 Gambling Capital, a supplier of data and market intelligence on the global gambling industry, predicting the market will hit about $30 billion (around €23.3 billion) this year. However, considering some of the biggest markets – such as the US, China and Japan – still prohibit many forms of online gambling, the potential for growth is massive.

Moves made in recent months suggest the US might be ready to relax its ban. According to Ed Birkin, an analyst with Barclays Capital in London, “ [Liberalisation is] definitely going to happen at some point”, with next year or 2012 seen as the most likely time.

In 2006, the US authorities banned internet gambling, “completely out of the blue”, Birkin says, attaching it to an anti-terrorism bill which had to be passed.

Since then however, political power in the US has changed hands, and the democratic party appears committed to legalising the activity – drawn no doubt by the potential taxation revenue streams it could create. While the 2006 ban technically made online gambling illegal, it never stopped the industry entirely. But it did mean the US treasury could not make any money from it. Legalising the industry would mean a charge could be levied on all trades, giving tax receipts a much-needed boost.

In July, the House Financial Services Committee voted to overturn the existing legislation, paving the way for online poker and other forms of gambling to be legalised and regulated.

It is unlikely that all types of online gambling will be legalised straight away, as professional sports bodies are strongly opposed to online sports gambling.

“It might be diluted down to poker only,” says Birkin. “Sports is quite some way off being regulated.”

Also, even if legislation is passed legalising online poker, it won’t necessarily be effective across the 50 US states, as there will probably be an opt-out clause.

Nonetheless, it’s going to be a lucrative market. According to H2 Capital, if all forms of internet gambling are legalised (including sports betting), in the 12 largest potential US state markets, some $65 billion (around €50.5 billion) would be generated in gross expenditure in the nation’s economy over the first five years. This would in turn generate some $26.6 billion (€20.65 billion) in taxation. So it seems very much a win-win situation.

Unsurprisingly, therefore, European-based gaming operators are already preparing an attack on the US market, ready to launch once legislation is in place.

In July, the UK’s PartyGaming and Austria’s Bwin announced their intention to merge to create the world’s biggest listed online gaming company, valued at $3.3 billion (€2.56 billion). This would position the group to profit from any deregulation of the US market.

And the US is not the only country looking to boost its tax revenues by legalising – and taxing – the activity. In Europe, the major markets are the UK and Italy, but in June, France made online sports betting legal – just in time for the World Cup. Other countries, such as Denmark and Belgium are set to follow suit shortly.

Indeed Germany’s ban ends at the end of next year. Considering that the country is already the third largest market for online gambling in Europe – despite the fact that it is technically illegal there – opportunities for growth in Europe are considerable.

But where does Ireland come into this?

One company that may be hoping to steal a slice of these new markets is Irish betting firm Paddy Power. The company has seen its online business expand dramatically over the past number of years. As of the second half of 2009, it accounted for 85 per cent of operating profits, following its acquisition of an online business in Australia.

Paddy Power has already entered the French market, through a business-to-business arrangement for online sports betting with PMU, the largest betting organisation in Europe, last May.

Similarly, Cryptologic, a Dublin-based supplier of software, support and payment processing services to the gambling industry, could stand to benefit from the expansion of the marketplace.

Far more significant, however, is the opportunity that exists to use Ireland’s attractiveness as a centre for software development to encourage companies servicing these markets – such as PartyGaming, Gtech and International Game Technology – to set up operations here.

Adrian Crawford, a tax partner with KPMG, strongly believes that Ireland could establish itself as a hub in the sector. He points to its attractiveness for companies like Facebook, Google and Microsoft, combined with intangible benefits such as the Irish familiarity with sports betting, through horse and greyhound racing. Ireland could be a player in this emerging market, he says.

“Ireland should be able to leverage the skill sets here. Stapled on to that is the culture of familiarity with sports betting,” he says. “We have government-sponsored agencies looking after those industries.”

On top of that, of course, are the big incentives, such as Ireland’s low-tax regime, research and development tax credits, plus the grants which exist for setting up in areas such as the border, midlands, west (BMW) region.

Encouraging these companies to run their software development, back-office “and even front-office trading activities” out of Ireland, would tie in with the Government’s smart economy strategy, Crawford says, as online gambling requires quite sophisticated technology. Moreover, it would have “material employment potential”.

However, whether there is a real appetite to entice big-name players in what is sometimes viewed as an unsavoury activity remains to be seen.