More exits likely after Danish tax hike

The stated aim to the Danish government in raising online gambling taxes is to level the playing field with land-based gambling taxes and raise extra tax revenue. However the move is also likely to cause a fall-off in gambling advertising as smaller and medium-term operators exit the market, according to market participants and commentators.

This is an exclusive extract from the upcoming iGaming Business Market Monitor, to be released in the coming weeks.

The ruling Social Democrats surprised the Danish gambling sector in early December by announcing the hike in online gaming tax from 20% to 28%. It said the move was in part an effort to close the gap with land-based gambling taxes which range from between 41% and 75%.

The government said the tax raise would bring in an extra DKK150m (€20m) annually once it was introduced in mid-2021.

But Morten Ronde, chief executive of the Danish Online Gambling Association (DOGA), said the government had announced the move without paying enough attention to the effect of the 40% hike on the market.

“I think the government will learn that the tax increase will not be sustainable for the market operators and that the market will drop so much that the negative effects will zero the potential increased profit from the tax increase,” he said.

Ronde warned the increase will force many small and medium-sized operators to re-assess the viability of their business in a market where many will be “left with no profits.”

“This will surely lead to a shrinkage of the market and the exit of several gaming companies,” he added. “If the market shrinks, naturally the marketing activities will shrink too. A 28% gaming tax leaves very little money for advertising.”

Despite the tax increase being over a year way, Betsson has already closed one of its Danish-facing sites, Betsafe.dk, transferring accounts to its other Danish-facing sites Casino.dk and Nordicbet.dk. A spokesperson for the company confirmed the move was due in part to the tax increase.

Still, Ronde hopes the long lead-in time for the new tax rate might leave room for a government rethink. “I know that the civil servants in the tax ministry and the ministry of finance will have to put together a draft law which includes an analysis of the effects of the tax increase,” he said.

“I hope that during this process it will become apparent that the increase is too high and that the market will be very negatively impacted by the increase. Hopefully, this may lead to the conclusion that the tax increase should be rolled back – in whole or partly.”

A market on the up
Since the Danish online market was first regulated, revenues have progressed steadily. As of the third quarter 2019, the market for online sports-betting, casino, poker and bingo was worth DKK989.6m for the three months to September and just over DKK3bn for the nine months. In 2018 the total online market was worth DKK3.83bn.

Chart: Denmark online GGR total (DKKm) Q317-Q319
 

Jesper Søgaard, chief executive at Copenhagen-based affiliate marketer Better Collective, said that Denmark’s “stable growth and high competition” has led directly to a better user experience and increased channelisation.

The government has previously estimated the rate of channelisation at round 95%, a percentage that might be under threat once the new tax rate is introduced.

Kim Olesen, general manager for Kindred Denmark, said Denmark’s current tax rate was already “at the higher end” of the taxation scale from a channelisation point of view. “That they raised the tax with 40 percent is very concerning,” he added.

Alongside the tougher marketing environment introduced in July last year, Oleson said the tax hike will mean “fewer options for the customers and no doubt also lead to a decrease in channelisation, since many customers will look to the unlicensed operators, meaning that this will have the exact opposite effect of the intended.”

Søgaard agrees with Ronde that “with high competition, and the new tax increase, it will become even harder for operators to operate with a margin.” “The reactions we have seen from operators in the market might indicate fewer operators will be active in the market – some have already indicated they will leave,” he added.

However, Oleson at Kindred said his company – which operates three brands in Denmark including HighRoller, MariaCasino and Unibet – would be unlikely to follow Betsson’s example and downsize its brand footprint.

“We have a good brand mix in Denmark and continue to focus on gaining market share,” he said. “We would not be surprised if we see other brands exit the market though, which would lead to less competition in the market and ultimately be bad for customers.”

Break from advertising
The rising GGR total has been accompanied by a surge in gambling advertising which has been the cause of some public concern but a recent initiative on the part of the operators to voluntarily cut down the amount of TV ads ran into trouble with the Danish competition authorities.

Oleson suggested that ahead of the tax increase, Kindred had already significantly pared back its own marketing efforts.

“We have recently announced a 30 percent reduction in our TV advertising for 2020, a step taken to meet the current negative perception around gambling marketing and the regulators threat of a marketing ban,” he said.

An analysis of the effect of the new tax rate on the Danish online space will feature in iGaming Business Market Monitor to be released in the coming weeks.