If you were to have a conversation with an industry professional about emerging markets in the online gaming sector, it would not be long before attention turned towards eastern Europe. Everybody is talking about the huge opportunities in the region, but the tempting prospect of increasing business revenue through venturing into this new territory is often clouded by a myriad of questions. Will eastern Europe prove to be the next big cash crop for online firms? Or will the region's complex legislative environment prove to be more cumbersome and restrictive than is worth the time, effort and money to launch into?
Over recent years, with the spreading of the European Union, many countries in eastern Europe have sharply increased their economies. Accession has helped to improve the infrastructure of less developed areas, while increasing the quality of people’s lives and even promoting immigration. This, alongside the more general growth that has been occurring in many other eastern European countries, bodes well for online gaming firm: according to a report from global market intelligence company IDC, internet users in central and eastern Europe grew from 21 million in 2003 to more than 28 million in 2006.
As internet penetration is reaching saturation point in many of the more developed western and central European countries, it may seem a natural step for operators to turn their attention to the continent’s developing east. The situation, however, is most certainly not cut and dried, and operators need to be extremely careful when planning to expand into the region. It is all too easy for foreign investors to view eastern Europe as a monolithic entity. But it must be remembered that the area harbours a tremendous amount of cultural diversity and, when it comes to online gambling, contains many differing laws within an ever-shifting and volatile legal landscape.
The sheer diversity that occurs throughout online market will become immediately apparent when we turn our attention on the following countries: Russia, the largest and most powerful of all eastern Europe; Estonia and Lithuania, which are representative of the Baltic States; and Czech Republic and Poland, which are tied more closely to central Europe. Focusing specifically on these countries, we can begin to understand the maze of difference that lies within the eastern European online gaming industry.
Winston Churchill once said: “I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma.” Although the former British Prime Minister spoke those famous words in 1939, online operators may well find them relevant today, following Russian President Vladimir Putin’s decision to ban internet gambling under sweeping changes to the country’s gaming laws at the end of last year.
The first Russian language gambling sites appeared around five years ago, and there was only one electronic payment system accessible for Russian-speaking internet users, WebMoney.ru. “Nobody accepted sport bets via the internet then, but before the ban there were more than 20 Russian gaming sites,” said Sergey Vyazmin, chief executive of Moscow-based 3W Graphics. “And many of the world’s leading online gaming companies carry Russian language on their sites.”
Before the ban, Russia was indeed a potentially huge market. Udy Yosha, CEO of software developer CTXM, told iNTERGAMINGi: “Before the recent legislation in the Russian Duma, we had been observing continuous double, even triple, digit growth in the country.” Vyazmin also noted the huge growth potential of the Russian market prior to the ban. He said that around 80 per cent of Russian-speaking internet users know that it is possible to gamble on the internet for money, but before the ban less than one per cent had ever actually tried.
“We were very optimistic about future of online gaming in Russia before the new law was passed,” he said. “We had forecast that the number of internet users would increase from 20 million to 40 million; the percentage of online players would rise from one per cent up to five per cent; and that the average monthly expenditure per player would go from $30 to $60. The new law, however, has complicated the further development of online gaming in Russia. Because of this new law, we think that our market will develop at a much slower pace to our initial estimation.”
While the wings of the Russian web gambling market have been clipped, there is a glimmer of hope for operators wishing to enter this enigmatic market. Although domestic Russian operators cannot obtain an online licence, it is possible to run a web gaming business for Russian players if you are based outside the country, as there are no laws to prohibit the transfer of payments offshore.
To further complicate the situation, however, Vyazmin noted that: “it is legal to run your business without a licence, but most major online casinos have an offline Russian betting licence.” Operators do this for two main reasons: firstly, the licence acts as a guarantee to the player of the reliability and straight dealing of the company; and second, in the case of opening a settlement account, Russian banks insist that gambling businesses have a licence.
“In order to establish a presence and enter the online betting market in Russia, you first need to register a Russian company, then open a Russian bank account, before applying for a gaming licence,” Vyazmin said. “The main challenge to starting a gaming business in Russia is negative attitude of federal and local authorities to this business. We recommend that operators work in the Russian market from abroad, or, in order to receive the licence for a sporst booking company, conduct this business offline and promote your online projects through this company.”
Kristian Nygaard, founder and senior consultant of International Tourist Consultants, told iNTERGAMINGi: “For me the most interesting markets are the ‘northern’ countries in eastern Europe. This means the Baltic States and partly Russia. Mostly due to the fact that personal computer and subsequent access to the internet are growing at an extremely fast rate.”
Lithuania previously had the lowest rate of household internet access in eastern and central Europe, but the situation is now very different. Toby Stone from the UK’s Department of Trade and Industry and co-author of in-depth market report entitled The Games Industry in Eastern Europe, said: “Growth in online gaming has been strong, driven especially by increased access to the internet. In the Baltics, growth is led by Estonia; although still somewhat hindered by the cost of computers, web access is very strong now due to widespread Wi-Fi access and good telecoms providers of broadband.”
The Ministry of Finance is the responsible body for regulating and supervising gambling activity in Estonia. Due to the novelty of gaming legislation in the country, the ministry has been slow in adequately exercising its supervisory function. Gambling addiction in the country is among the highest in the world, partly due to the excessive amount of facilities available and the lack of an effective regulatory regime. Regardless, Estonia was granted accession to the European Union in 2004 and has undergone extensive legal and economic transition over the last decade. Legislative activism has been experienced in the form of new taxation and money laundering laws, ensuring that Estonia complies with EU harmonisation standards, and this bodes well for the future of online gambling in the country.
A member of the European Union since 2004, the Czech Republic is home to more than 10 million people in an area roughly the same size as neighbouring Austria. On the surface, the country has a great deal of potential for online betting - especially sports betting. Czechs are extremely interested in a variety of seasonal sports, including football, tennis and ice hockey. The country’s overall market for gambling and betting is E3bn a year - and this figure is growing.
Despite this, however, while the economy is seen as being very liberal and one of the most successful in central and eastern Europe, there remains a strong influence from the former regime in its politics. There are serious limitations and a great deal of confusion when it comes to the legality of online gaming in the country. Internet betting is not prohibited by EU law, but it is also not permitted by minister of finance, so there is still a lot of confusion.
The online betting market in the Czech Republic is a growing one, with revenues that reached CZK4bn (US$190m) last year. In a similar manner to Russia, however, local firms are currently shut out of the market. The Finance Ministry is currently in a tense stare down with Czech betting companies over their latest play to get around a national ban on online gambling services, which has indeed become a rich source of business for competing foreign firms.
After more than three years of futile appeals against state rules that bar Czech betting agencies from offering online gambling, companies appear to have had enough. Some, including Tipsport and Fortuna, are considering launching independent foreign outlets through which they could provide online wagering to Czech customers.
With an overseas licence, firms would be regarded as foreign and thus able to operate in the same way as other foreign gambling companies. Foreign firms offering their services to Czech internet bettors base their businesses on the European Court of Justice ruling that betting companies in European Union member states need only one licence to operate anywhere within the EU. As a result, foreign firms ignore the fact that online betting isn’t allowed by the Czech Republic’s Ministry of Finance.
Jan Volhejn, head of development for Czech sports betting firm Synot Tip, highlighted a further ironic twist to the maze of legislation, noting that although foreign companies are allowed to take bets from people in the Czech Republic, their sites cannot actually be advertised. Regardless, the above figures speak for themselves, and the fact that the Czech market has not yet developed fully should be taken as a positive sign for those wishing to invest in high-growth areas.
In March 2007, The Warsaw Voice had some good news for online gamblers in Poland, advising them that following the European Court of Justice in the Placanica case, the government is preparing to license online gambling. The court has upheld regulations liberalising online gambling by handing down a ruling favourable to British bookmakers who had been banned from operating in Italy. Consequently, the Polish government is planning to introduce regulations similar to those in Italy, the newspaper claims.
“National regulations that prohibit the acceptance of bets unless one has a licence issued by the relevant member state restrict the freedom of services,” said the court in substantiating its decision. The court ruled that an operator who holds a licence issued in one EU member state has the right to provide similar services throughout the European Union.
Distributed Denial of Service attacks have become the most costly form of cyber-crime businesses face today. They occur when a malicious hacker uses a virus to hijack numerous computers. On command, these ‘zombie’ computers flood the targeted website with useless data and requests for information. As a result, the target’s internet servers are overwhelmed by junk messages, slowing the website down, or even making it completely inaccessible for days. Fighting the attacks can be laborious and costly, and because they are distributed across the internet, it can extremely difficult to catch the extortionists.
Due to a number of high-profile DDoS attacks originating from the region over recent years, eastern Europe is unfortunately viewed by many to be a hive of online criminal activity. One particularly damaging example involved online betting site Blue Square. In 2004, the company was sent a blackmailing email from an internet address in Serbia, threatening to start an attack. After repelling the initial attack, a man with an eastern European accent called the company’s IT director and threatened to send out child pornography emails in the company’s name unless it paid €7,000 within two days.
However, according to Sandra Barton-Nicol, head of risk investigations for Betfair, this is a stereotypical and damaging assumption. “Card-not-present fraud has always been a significant issue for online merchants internationally, and it is not exclusive to any particular demographic. Irrespective of where an online gaming merchant may seek to operate, the propensity for card-not-present fraud will always be present and so it is imperative that rather than labelling particular countries as bad, online companies should take responsibility for managing their risk. This should be reflected in the adoption of card scheme initiatives, deployment of their internal tools and their own risk policies and procedures.”
Confirming this view, Vyazmin said: “Online criminals do not have citizenship or nationality. Crime is international, and, in my opinion, the fact that a huge number of suits have been filed against Russian-speaking online criminals demonstrates that it is actually easier to expose and catch criminals in eastern Europe. In the majority of cases, they are students of the technical universities who decided to try their knowledge in practice for self-affirmation. I do not consider eastern Europe to be a region with any raised danger of frauds. The majority of cases known to us could be prevented by simple observance of administrative rules of computer and financial safety.”
Yosha told iNTERGAMINGi that although eastern Europe is still not one of the major profit contributors to the global online gambling market, he still values it as a source for new business. “I believe that growth will continue at a higher rate than the more developed markets. One of the key enablers is the fact that online payment methods are improving constantly, and we see internet penetration in countries like Ukraine doubling, or even tripling, annually.”
In a similar manner to some Asian markets, many operators believe that the less developed areas in eastern Europe should looked upon positively. For example, Bulgaria is a pre-accession country and further behind Estonia and the Czech Republic in terms of institutional reform and economic development. This, however, simply offers different opportunities for foreign companies. The market is less developed, so there are greater opportunities to find partners early and develop valuable long-term relationships.
It is obvious is that the main dangers for firms wishing to expand their operations to eastern Europe lies on the legal floor. Russia stands out as a strong example of how volatile the market can be. It took Russian government only three months to pass the new law that has considerably complicated the life of Russian gaming business.
Nygaard concluded: “Gambling generally has not been a mainstay for these countries for many, many decades, so it is not the same part of everyday life and culture in the same way as in other countries, such as the US or Japan. But I think that gambling will catch on, in much of the same way as in western Europe, due to the fact that many eastern Europeans do very much have the gambling mentality.”