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Long-lasting challengesThe regulatory and licensing process in Germany has been riddled with complications since 2006, when the state of Schleswig-Holstein first declined to join an interstate treaty. Seven years on little progress has been made towards the opening of a dot.de market. Only Schleswig-Holstein’s online gambling legislation has gained approval from operators as well as the European Commission (EC), in May 2011, while the Glücksspielstaatsvertrag (Interstate Gambling Treaty) signed by the other 15 Länder in December that same year has been heavily criticised by both.

But potential revenues underline the importance of the German market. According to data provided by H2 Gambling Capital, gross gaming yield (GGY) from online grew from €771m to €838.2m between 2010 and 2012, a compound annual growth rate of 4.3%.

With the right legislation, the potential is huge – a gross win of €1.87bn could have been generated between July 2012 and December 2015 if the market had opened for all product verticals last year.

But to reach these rewards, several problems which have existed for years must first be overcome. Several issues surrounding lotteries remain unresolved.

The Monopolkommission (Monopolies Commission) said last year the Interstate Gambling Treaty amounted to an “attempted monopolisation”, effectively making it all but impossible for private operators to complete with the recently-formed national lottery, Gemeinsamen Klassenlotterie der Länder. With numerous unresolved issues still circulating, eGaming Review outlines the key conclusions to be drawn from events so far.

Support for liberalised legislation While Schleswig-Holstein’s decision to break away from the Treaty may have ultimately failed, it has at least given operators a chance to establish a foothold in the German market. When the revised Treaty was published in December 2006, the northern state initially refused to sign, with then-Prime Minister Peter Harry Carstensen of the CDU party arguing that Germany should make changes to ensure the legislation was compliant with European law, after the EU issued strong opinions against the proposals.

But even after Carstensen reluctantly signed, the CDU

eGaming Review looks at the obstacles and battlegrounds on Germany’s journey to regulating its online gambling industry, drawing out the key conclusions of events to dateBy Robin Harrison and Richard Weston

DEMYSTIFYING GERMANY

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continued to push for changes to the Treaty, proposing a series of changes to create a “dual system”, according to lawyer Martin Arendts. The proposal, Arendts told eGR, would maintain the state lottery monopoly but would open up the market for sports betting and casino licences to be awarded to private operators, adding that German sports confederations and football leagues had made “very similar” proposals in 2011.

After this was rejected by the 15 other German states, Schleswig-Holstein pushed ahead with its own leglisation which allowed for an unlimited number of six-year licences and all products – except roulette, blackjack and baccarat – to be awarded. Operators were to be taxed on 20% of gross profits.

This liberal form of regulation appealed to operators and the first three sports betting licences were awarded to Betfair, mybet and Die NordwestLotto Schleswig-Holstein on 3 May last year. However the CDU-Freie Demokratische Partei (FDP) coalition lost a state election soon after, with a new coalition formed by the Socialdemokratisches Partei (SDP) and Greens taking charge. The newly elected government quickly moved to return to the State Treaty, though Henrik Armah of Olswang says that “the legal basis for the licences would remain in place until officially abolished”.

It should also be noted that while the actions of the CDU in Schleswig-Holstein were arguably an isolated incident, the party could be viewed as being more amenable to a liberalised form of regulation.

Legal complications stall shutdownA total of three bills have so far been published with the aim of abolishing Schleswig-Holstein’s online gambling legislation. Yet Armah explains that such measures are open to legal challenges from licensees.

“In order to render existing licences null and void, a new government could adopt a bill stating that all previously granted licences are no longer valid, abolish the existing act, or give the authorities a legal basis to formally revoke these licences,” he says.

“The two latter options would, however, likely only work under German administrative law if the respective operator

has by then not made any use of its licence.”“Another, more balanced option for a new government

could be a reduction of the existing licences from six to fewer years – which might potentially mitigate the risk of being liable for compensation payments,” Armah adds.

Considering making all licences invalid would be such a long and potentially costly process, the SDP Minister for the Interior Andreas Breitner has hinted that the six-year term will be allowed to run its course, suggesting that cancelling licences is “not realistic”.

It appears all licensees will be allowed to continue to operate under the current framework in the state at least until 2018 when the first wave of licences will expire. However with a number of companies certified this year, it will not be until 2019 that the liberalised market is finally closed.

State treaty “incompatible”?From the moment 15 of Germany’s 16 member states signed the revised Interstate Gambling Treaty, there has been strong opposition from the European Union, which has repeatedly stated that its terms are “incompatible” with

“THE LEGAL BASIS FOR THE LICENCES IN SCHLESWIG-HOLSTEIN WOULD REMAIN IN PLACE UNTIL OFFICIALLY ABOLISHED”

HENRIK ARMAH, OLSWANG

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EU law. Perhaps the most damning opinion came in March 2012, with the European Commission issuing a detailed response that rejected the terms of the Treaty and accused the member states of failing to justify the terms of legislation.

The response explained there was a lack of data or new research to show exactly how the strict terms of legislation would satisfy the objectives of the Treaty and no justification for the ban on all products aside from sports betting. In addition, it continued, if the law showed any signs of restricting fair competition and freedom to provide services, it would consider bringing legal action against the states involved.

Consequently, a number of leading operators withdrew from the market. William Hill and 188Bet, which pulled their whole German-facing offerings, as well as Betfair, which withdrew its exchange offering, were among the highest-profile.

Despite this and with the future of the Interstate Treaty in its current form dependent on the Court of Justice of the European Union's (CJEU) opinion, a number of operators have pursued licence applications. Even bwin.party, which saw 16% of its share price wiped out when the original revised terms were published, announced its intention to apply despite admitting the 5% turnover tax would knock up to €10m off its full-year EBITDA for 2012. Yet despite this, the operator maintained that the Treaty “fails to meet the requirements of EU law”.

There have since been a number of applications for one of

the country’s 20 sports betting licences, and while this may suggest a grudging acceptance of the framework, operators look to be working on the basis that the incompatibility of the treaty may force changes to legislation rather than genuinely embracing it.

Starting over againDespite the likes of bwin.party complaining bitterly about the regulatory framework in Germany, few were deterred from applying for a licence, with lawyer Martin Arendts of Arendts-Anwälte estimating that almost 150 companies had moved to secure approval. Despite two extensions to the second stage of the application procedure, for operators to supply the Ministry of the Interior and Sport of Hesse (HMDIS) – the state body responsible for the licensing procedure – with pages and pages of documentation, the Ministry invited just 14 applicants to progress to the next stage of the process.

With no clear reasons for the majority of operators seemingly having their applications rejected, BetVictor became the first to file a legal complaint with the state’s Administrative Court in Wiesbaden. The court ruled in BetVictor’s favour, stating that “neither the reference to a Memorandum nor the documentation meets the requirements of a transparent process”.

“The applicants are not able to assess the application costs and their actual chances before beginning the application process,” the ruling read.

CJEU rules interstate online gambling treaty is incompatible with EU law

S E P T E M B E R A P R I L M A Y J U L Y S E P T E M B E R O C T O B E R D E C E M B E R M A R C H

M A Y J U L Y A U G U S T N O V E M B E R D E C E M B E R D E C E M B E R M A R C H M A Y

German government issues proposals for a new state treaty

EC rules Schleswig-Holstein’s draft gambling legislation is compliant with EU law

Commission criticises German proposals in its detailed opinion

Schleswig-Holstein passes gambling legislation

German government proposes an amended treaty

15 of the 16 Länder signs treaty but will only implement it if the Commission gives them the green light

EC sends Länder a letter criticising new German proposals that fail to address its main concerns

Schleswig-Holstein issues first online sports betting licences

State Treaty comes into effect

Schleswig-Holstein joins State Treaty after SPD defeats CDU in state election

Hesse extends the application deadline for sports betting licences to 21 January

EC issues damning opinion on Schleswig-Holstein’s decision to return to the State Treaty

Schleswig-Holstein issues first online casino and poker licences to 12 operators

Hesse carries out consultations with only 14 operators despite nearly 150 applications

Hesse appeals for legal firms to handle 80 cases to be brought by private operators excluded from the consultations

START TIMELINE

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It also highlighted the fact that as BetVictor had been awarded a Schleswig-Holstein licence and queried why this certification was being disregarded in the licensing process.

This idea that an operator securing approval in one state should act as a seal of approval will certainly lead to further challenges from operators, forcing the HMDIS to submit a request for expressions of interest from a law firm to handle “up to 80” challenges. One of BetVictor’s legal representatives, who preferred not to be named, explained that “ultimately all operators licensed in Schleswig-Holstein that have also applied for a federal licence should have been invited to the hearings”.

“The issue now is whether a second round of consultations is opened, or whether the whole process should be restarted,” the source said. Arendts added that the Ministry has effectively been forced to accept further applicants into the second stage which “suggests the awarding of licences is postponed indefinitely”.

A sporting chanceThe Glücksspielstaatsvertrag has been criticised for being too heavily weighted in favour of the existing state lottery bodies. However, closer reading reveals that the terms of legislation arguably make the proposed state-owned sports betting operator ODS Oddset Deutschland Sportwetten GmbH ineligible for a licence.

Section 21, paragraph three of the Treaty states: “There must be no organisational, legal, economic or staff connection between the organisation and arrangement of sports betting, and the organisation of sporting events, and management of facilities where sporting events take place.”

But as Arendts explains, a number of the 16 state operators “do not fulfill this requirement – at least four are partly owned by sporting associations". He says that the most blatant example of this is Lotto Rheinland-Pfalz, which is 49% owned by three sporting bodies, the biggest being Sportbund Pfalz – the owner of 1. FC Kaiserslautern, one of Germany’s most popular football teams.

“From my point of view does not fulfill the requirement of separation and should have been excluded from the licensing procedure for this reason,” Arendts says.

Mission impossible?While the Schleswig-Holstein market has a finite lifespan, it throws a potentially devastating spanner in the works for the future of the Glücksspielstaatsvertrag. Until 2019 two

distinct licensing regimes are in place across Germany, and considering commercial legislation established by the East German Communist state the German Democratic Republic is counted as a valid form of licensing in Saxony, it can be argued that three conflicting regimes exist.

Germany’s highest civil court, focusing on the Schleswig-Holstein and Interstate Treaty, ruled that the two regimes cannot exist in parallel, suspending the licensing process and referring the case to the CJEU. The civil court also aired concerns at plans to prohibit online casino and poker, with this view supported by mybet chief executive Mathias Dahms. At the time Dahms said that the ruling proved “a need for comprehensive regulation of online casino and poker games in Germany”.

“A ban – as is envisaged in the State Treaty on gaming of the 15 federal states – will not work,” Dahms explains.

The CJEU’s opinion is yet to be issued, but ultimately paves the way for Schleswig-Holstein licensees to continue to offer their services to German customers. At worst it will simply delay enforcement of the State Treaty, but at best it could prompt a total rethink of the terms of legislation.

Delays, but still hopeThe events to date suggest operators will still have some time to wait until full German licences are finally awarded. As a result of the legal complaints, eGR sources suggest the market will not open until 2014.

A delayed German market opening would still prove to be lucrative however, according to H2, which estimates onshore online gambling GGY to reach €751.1m in 2015. This figure assumes a 1 January 2014 go-live date and is dependent on Schleswig-Holstein’s regime continuing to exist by then. Finally, the data assumes most leading offshore operators choose to apply for a sports betting licence and that the other 15 Länder remain a part of the Glücksspielstaatsvertrag until at least the end of 2015.

Much hinges on the CJEU’s opinion on the licensing process to determine how this complicated scenario will play out over the rest of the year. In the meantime, it appears likely that licences for operators in Schleswig-Holstein will remain intact for six years, while BetVictor’s legal action demonstrates that operators are prepared to take decisive measures while they await further rulings from the EU. “The situation is a total mess,” Arendts says.

“THE SITUATION IS A TOTAL MESS”

MARTIN ARENDTS