THE ITALIAN GAMING AFFILIATE MARKET

An overview of the Italian Gaming Affiliate Market

Over the last couple of years the Italian affiliate business has undergone major changes which coincided with the progressive opening up of the domestic gaming market in the wake of the sector liberalisation implemented by the local authorities in the summer 2006.

Notably the summer 2006 reform legalised for the first time ever in Italy such brand new games like remote skill games and betting exchange and paved the way for the introduction shortly thereafter of a restricted and lighter type of real money poker in the form of online poker (and indeed other card games) tournaments which were in fact granted regulatory status of skill-based games.

In addition to the introduction of new games a licence tender was called in October 2006 by the Italian regulatory body (“AAMS”) for the award of nearly 14.000 fresh betting outlet licences as well as an unlimited number of pure remote gaming licences covering sports and horserace betting, skill games and instant lotteries.

The licence tender was launched in October 2006. Two and a half years on, the Italian gaming market looks a very crowded arena where competition is fierce and all top names of the online gaming business with very few exceptions are now holding an Italian gaming licence. Following legalisation and regulation of online poker tournaments during the course of 2007 also some of the biggest poker rooms like Poker Stars and Party Gaming since got an AAMS licence and other important poker operators too are understood to be on the verge of applying for a licence in Italy.

The unprecedented legislative and regulatory changes that in such a short period of time so deeply affected and reshaped the domestic gaming market obviously had a dramatic impact also on the affiliate business. Indeed the introduction of new games and the legalisation of remote gaming altogether freed up a lot of new and lucrative business opportunities for offline and online media companies enabling them to offer their services, virtually with no restrictions. for purposes of advertising, marketing and promoting AAMS-licensed operators.

Particularly for those AAMS-licensed companies who are totally newcomers to the Italian market but also for some licensed operators whose names equally appear in the AAMS official blacklist of foreign-based, illegal ‘.com’ sites, building their brands, enhancing their visibility and promoting their ‘.it’ legal business is essential. Hence strategic affiliations with the right sector magazines, portals, testimonials, etc. are one of the keys to a successful and speedy market entry. Affiliates can in turn carry out their job in quite a safe and legally correct way provided few basic rules are strictly complied with which can be summarised as follows:

1. Promote and procure business only to those gaming companies that do hold an AAMS licence. Affiliates should in fact be aware that notwithstanding various rulings handed down over the past few years by the European Court of Justice (in re Gambelli, in re Placanica, etc) under the European law theory of the free offer of services across the border, the mere fact that a company might hold a gaming licence granted in another EU jurisdiction is not just enough to entitle it to carry on business in Italy without thereby running into trouble with the local law enforcement authorities

2. Even if the affiliating company is licensed in Italy, the gaming services it can actually offer are not unrestricted. Let alone the only four brick-and-mortar Italian off-licence casinos, elsewhere there still is in place a gambling ban which covers casino, roulette, Vegas-style slots, poker and other cash games (but not online poker tournaments which are eligible for skill game classification). In the case of a company holding an AAMS-granted remote gaming licence the games that can actually be promoted, advertised and marketed (whether directly and/or via its affiliate network) are sports and horserace betting, skill games and instant lotteries. When later this year new and more European-friendly remote gaming rules will be implemented, subject to payment of an extra €50.000 licence fee online bingo too will be added to said list

3. No matter the money at stake, do avoid acting in Italy as the official representative of a gaming company unlicensed yet equally soliciting ‘.com’ business locally. This might expose a local affiliate to the risk of being possibly prosecuted in Italy and because a foreign-based company is not supposed to have any physical presence nor official company representatives, its local affiliate guy could ultimately stand all liabilities in case something should go wrong

4. Make sure you know the actual rules of the game. It might look an easy slogan but it is quite not. By way of instance, since AAMS legalised and regulated online poker tournaments, many Italian poker clubs and other event promoters started organising live poker tournaments on the totally wrong assumption that even offline poker tournaments were affected by the liberalisation, which actually was not at all the case. Actually a regulation of live poker tournaments is in the Italian regulator’s pipeline however when it is enacted (hopefully later this year) offline poker will still be covered by a separate set of rules. Until then though live poker tournaments will remain in a grey regulatory limbo and an Italian affiliate of the poker company promoting it might well end up in trouble with the law enforcement authorities

5. Quick tip marketing/advertising-wise. Let alone the underage gambling ban and the quite standard responsible gambling caveats, there virtually are no advertising/marketing restrictions provided the affiliating company operates in Italy under the umbrella of an AAMS licence.

Quirino Mancini, partner
Sinisi Ceschini Mancini (qmancini@scm-partners.it)

Offline Poker Tournaments vs. Online Poker Tournaments

The future of offline poker torunaments in the wake of the legalisation of remote skillgaming in Italy and subsequent launch of the first online poker tournaments

A few nights ago, while taking an after-dinner stroll with a few friends in a little seaport town not too far from Rome, a car full of young students pulled by us asking if we could by any chance direct them to an apparently unnamed and unmarked “private club” where a big texas hold’em tournament was due to take place that very night. Regrettably none of us was able to assist the poker-lovers bunch yet two or three thoughts immediately crossed my mind: (i) poker is ever more popular even amongst the youngest generations of Italians, (ii) if the whereabouts of the venue where a big poker tournament was to be held were not easily nor openly available and instead seemed surrounded by a good deal of clandestineness, probably the tournament itself was not authorised or perhaps the type of poker game being offered in the private club was not fully legal, in any event (iii) the law enforcement authorities are unable to effectively cope with the poker-mania phenomenon which is causing an increasing number of poker clubs to spring up all over the Peninsula.

The fact of the matter is, that offline poker tournaments indirectly benefited from the big push the legalisation (July 2006) and subsequent two-phase regulation (September 2007-May 2008) of remote skill gaming gave to real money card tournaments leading many to wrongly believe that the rules explicitly applying to online poker tournaments implicitly covered land-based poker tournaments too, better known in Italy as “poker sportivo” or sporting poker with a good dose of terminological hypocrisy. Such a regulatory misunderstanding was spurred by a provision carried by article 1, paragraph 93 of Law 27 December 2006 (also known as the Finance Act 2007 or simply “FA07”) which stated that any card games organised in the form of a tournament and where the pool prize is based solely on the buy-in fee, are to be considered skill games.

The FA07 provision in comment was aimed at ensuring that once the Italian gaming regulator (AAMS) would eventually implement the remote skill gaming rules, online poker tournaments would be automatically classified as a skill-based game and as such they could be legally and legitimately offered to Italian players subject always to specific regulatory restrictions established by AAMS for game purposes being fully complied with. This is what in fact happened thereby paving the way to the launch of the first AAMS-licensed real money online poker tournament in September 2008 by an Italian operator (Gioco Digitale), followed shortly thereafter by a few others including BWin, Lottomatica, Snai, Sisal, Eurobet, etc.

However, the mere inclusion in the remote skill gaming category of any kind of card-based tournament complying with the FA07 requirements was not meant to legalise poker outright nor to apply to offline poker tournaments which therefore continue to be covered by a different legal and regulatory regime. Indeed the legalisation and regulation of remote skill gaming in Italy did not abolish nor otherwise affect the general gambling ban contemplated by articles 718 and following of the Criminal Code which still apply to all games of chance (including poker and other cash games) carried out in terrestrial premises other than the four fully-licensed Italian casinos, namely Venice, Campione, St. Vincent and Sanremo. This explains why at the moment a texas hold’em tournament legally hosted on any AAMS-licensed online gaming platform could instead well possibly take place in terrestrial premises if the local police authorities competent to authorise such an event had in fact included poker in the official list of games covered by the general gambling ban.

Notably the lack of any thorough and uniform guidelines from the central police department at the Ministry of Interiors as to which games should actually be listed nationwide as illegal gambling has over the years led to a disharmonised and at times also conflicting interpretation, application and enforcement at local police level of the Criminal Code gambling restrictions particularly with regard to live poker tournaments.

The quite unclear status for regulatory purposes of live poker tournaments triggered a number of court cases involving their actual legality under the current rules and resulted in November 2008 in a landmark ruling by the Council of State (the Italian supreme administrative court) which appropriately and timely cast some light over the grey area of offline poker tournaments.

The ruling issued by the Council of State is largely based on a well-articulated opinion submitted by the legislative office of the Ministry of Interiors (“MoI”) whose main points can be summarised as follows:

1. The MoI authorities confirm that the law provisions and subsequent regulations whereby remote skill games were introduced in Italy are not aimed at repealing the criminal code provisions in matters of gambling but only at legalising and strictly regulating real money remote skill games carried out pursuant to a state-granted licence. Hence offline poker does not fall under the scope of the remote skill gaming rules
2. Pursuant to the FA07 law provisions, card-based tournaments qualify for skill game classification provided (i) they are offered remotely (not live) and the pool prize is solely based on the buy-in fee. By contrast no mention whatsoever is made therein to offline poker tournaments which accordingly should be considered in principle as a game of chance thereby falling under the general gambling ban laid down in the Criminal Code
3. Section 721 of the Criminal Code is still fully in place and requires that illegal gambling has two features: (i) the service is offered for a profit and (ii) it entails a game of chance
4. Whenever a live poker tournament is conducted for a profit of its organisers or however the pool prize is not just token, the game cannot be considered a play-for-fun event and becomes a play-for-money instead
5. There is no standard criterion to establish whether the amount of the pool prize is such as to give rise to a profit for the organisers hence the actual nature and purpose of a live tournament has to be assessed from case to case having regard to: (i) whether it is to be carried out at local, regional or nationwide level, (ii) a buy-in fee is charged only in the final stage of the tournament as opposed to it being required also in the qualification and/or pre-final rounds (in which case it ought not to exceed €30 anyway). Even in those cases where the entry fee was very modest a live tournament could equally devise a play-for-money event if the aggregate amount of all buy-ins resulted in a not economically irrelevant amount
6. When multiple games are simultaneously played within the same live tournament, a player who entirely used up his fiches plafond must be ruled out of the context hence no re-buys are allowed
7. The promoter of a live tournament cannot be authorised by the police authorities to run more than one event on the same day and in the same venue

The MoI report is an important term of reference and going forward it should hopefully enable the police authorities to adopt also at local level a more consistent, uniform and well-coordinated policy when it comes to granting or denying an authorisation to the promoters of an offline poker tournament. In this regard there is very little doubt that clearer and more straightforward rules on poker will not just help the law enforcement authorities but also benefit the Italian market in terms of tournament promoters on the one hand, and players on the other by steering at long last poker sportivo out of the regulatory limbo it has featured so far.

Given the big success marked by the first online poker tournaments launched in Italy that at the end of 2008 and in only four months have already fetched nearly €240mln in total turnover, a bit more clarity regulation-wise in matters of online poker tournaments versus offline poker ones was not just appropriate but much needed too so as to enable the Italian authorities exploit and drive the poker-mania boom in a fair and balanced way.

Quirino Mancini, partner
Sinisi Ceschini Mancini
Qmancini@scm-partners.it

An outlook of the Italian gaming market at two years from its liberalisation

The paragraphs below try to summarise the most relevant regulatory and commercial developments that dramatically affected the Italian gaming business over the last biennium.

The paragraphs below try to summarise the most relevant regulatory and commercial developments that dramatically affected the Italian gaming business over the last biennium.

The 2006 year marked the beginning of a new era for the Italian gaming industry. In an effort to put an end to the thriving business of many foreign-based gambling sites that had long since been aggressively targeting and profitably servicing Italian players without holding an Italian licence, in early February the local authorities enacted the infamous and very controversial measures aimed at restricting Italian residents from accessing a large number of blacklisted ‘.com’ sites. Yet shortly thereafter (August) the Prodi-led cabinet suddenly opened up the domestic market by legalising remote skill games and launching a licence tender that resulted in some 14.000-plus fresh terrestrial licences and 33 pure remote gaming licences being awarded.

Notably the liberalisation pushed by the Italian authorities was much more driven by budgetary needs than by a genuine desire to free up the domestic gaming market after decades of unchallenged oligopoly by the three Italian sisters (SNAI, Lottomatica and SISAL). Whatever the reasons that may have actually spurred the government’s action, such regulatory breakthrough resulted in a wave of new operators being at long last able to legally and legitimately offer their gaming services to Italians.

The 2007 year was mainly a transition one during which the new licensees worked hard to set up their Italian online gaming platforms and organise the launch of their terrestrial networks of betting outlets (shops and corners) with very few of them, if indeed any, managing to launch operations in the first semester. In the meantime the gaming regulatory authority (AAMS) implemented the online bingo and the skill gaming rules and in particular legalised online poker tournaments by making them eligible for skill game classification. In December then Italy notified the European Commission with the proposed new remote gaming rules and relevant lighter licensing requirements which look more EU-friendly than those currently in place. Such move by the Italian authorities had been triggered by a combined effect of a landmark ruling issued by the European Court of Justice earlier that year in re Placanica where the Luxembourg magistrates had heavily criticised the regulatory regime currently in place in Italy, as well as by the need to defuse the enormous political pressure that Brussels had been placing on Rome over the past several months by opening up to seven different dossiers on charges that Italy was enforcing gaming laws and regulations not fully in compliance with EU law.

At the end of April 2008 the European Commission sent a letter of remarks and observations to the Italian government suggesting also a few amendments aimed at rendering the proposed new rules fully consistent with the recommendations of the EC as well as with the jurisprudence of the European Court of Justice. Further contacts and meetings took place since between the Rome and the Brussels authorities to fine-tune the draft new regulations which are now understood to be ready for issuance any time soon.

Even though the new rules are not yet in place it is interesting to outline below their most relevant aspects:

· Any gaming company licensed and operationally based in another EU jurisdiction may apply for an AAMS licence subject to proving a global gaming turnover of no less than €1,5mln over the last biennium
· Even a non-gaming operator will be able to apply for an AAMS remote gaming licence subject to: (i) proving that he holds all required logistic, technical and organisational infrastructure, (ii) releasing an €1,5mln bank guarantee in favour of AAMS, (iii) setting up a company in an EU jurisdiction and locating there the hardware and software infrastructure that will be running the games covered by the AAMS licence

Among the fresh licensing requirements set out above is worth noting in particular the server location rule which will make it possible for a foreign-based AAMS licensee to keep his gaming servers abroad provided (i) they are within the European Union space, and (ii) a 24/7 remote linkup with the AAMS centralised system is guaranteed for bets validation, compliance monitoring and tax purposes.

The 2008 year also coincided with the time when most (if all) of the 2006 tender licensees went actually live with the first online poker tournaments being launched by a couple of Italian operators (Gioco Digitale and Microgaming) as from September. Notably a few other AAMS-licensed major operators like Bwin and Lottomatica launched their online poker product since and two of the largest poker rooms worldwide (PokerStars and PartyGaming) also got licensed in Italy in the second semester and are now preparing to launch their own tournaments.

The first figures available on the impact of poker (tournaments) on the Italian gaming market are quite impressive as while we are still in the very early stages with just a few platforms already offering it, the monthly turnover is already at around €65mln despite the fact that for the time being AAMS allows tournaments open to local residents only (national pool liquidity as opposed to international pool liquidity). Given such a good response notwithstanding the game is only available at domestic level, it can be quite safely predicted that in 2009 the poker tournaments turnover will by far exceed the rosiest expectations of the Italian authorities that were initially forecasting for next year a total turnover in the region of €400mln.

Such key factors as (i) a relatively favourable regulatory framework and (ii) a very responsive domestic market, coupled with a much less online operator-friendly environment across most of the other first-tier continental Europe jurisdictions like France and particularly Germany, lead to believe that in 2009 Italy will be yet again at the forefront of the online gaming business in the EU. Actually the “stick-and-carrot” regulatory model adopted by AAMS (blacklist restrictions enforced flat out on the unlicensed foreign-based sites and full right to offer online gaming services to local residents only granted to those operators holding an Italian licence) is now being carefully analysed by other EU regulators with a view to assessing whether it could be usefully exported across the Alps too. Indeed in the past few months there was an intense traffic of delegations of regulators from France and from Northern European countries too that repeatedly met with AAMS to better understand the Italian model.

Italy’s chances to become a champion in Europe of a pragmatic and profitable regulatory model placed somewhere in between the Franco/German-style monopoly-driven approach and the pro-market, de-regulated UK regime, may prove even higher if once the new remote gaming rules are enacted AAMS should also adopt in due course a “whitelist policy” along the lines of what the UK Gambling Commission has already been doing for a while. In this respect it is understood that bilateral talks and meetings already took place earlier this year between Rome, Alderney and the Isle of Man competent authorities and the “whitelist policy” is on the AAMS’ 2009 agenda.

All in all 2009 is promisingly set to be another buoyant year for the Italian gaming business altogether given also the traditional attitude of Italians to spend even more money in betting and gambling under gloom economy times like the present ones. Other important market growth drivers will be the following:

· The implementation of the new remote gaming and relevant licensing rules
· The possibility as from 1 December 2008 for each AAMS licensee to propose to his own regulator new sporting and non-sporting events on which he would like to take fixed odds bets (AAMS publishes on a weekly basis the full list of all “bookable” events and up until now bookmakers were not allowed to accept bets on any unlisted events)
· The likely advent of other top online poker rooms not yet licensed in Italy
· The likely introduction by AAMS of the international pool liquidity rule
· The possible legalisation and subsequent regulation by AAMS of online poker and other cash games over a time period realistically ranging from 1 to 3 years

With specific regard to the latter aspect, it should also be said that legalising and regulating online poker and other cash games seems an almost inevitable outcome for the Italian authorities if they do aim at making the ‘.it’ gaming platforms fully competitive in commercial terms vis-à-vis the ‘.com’ ones. Hence the real question is not if poker and other cash games will be introduced in Italy, but when this will in fact happen. The only sensible answer one could presently give to such question is: time will tell.

Quirino Mancini, partner
Sinisi Ceschini Mancini
qmancini@scm-partners.it

EC Observations to Italian New Online Gaming Rules

First remarks on the proposed online gaming rules by Italy in the wake of the observations submitted by the European Commission

At the end of the scrutiny of the proposed draft featuring the new and quite more European-friendly online gaming rules Italy intends to adopt (“the New Rules”), the European Commission wrote on 14 April 2008 a letter to the Italian Minister of Foreign Affairs (“the EC Remarks”) to make certain recommendations and comments in relation thereto. What follows is a brief summary and comment of the most relevant aspects of the EC Remarks.

First and foremost it is interesting to note that there is no explicit statement in the EC remarks ruling out the concession regime currently implemented by the Italian gaming authority (“AAMS”). As a matter of fact, at point 2 of its note the Commission stresses the importance that said concession regime should remain open-ended, ie. no numerus clausus restrictions should be imposed by AAMS to thereby limit the number of foreign operators who may wish to access the local gaming market. So if on the one hand the EC reiterates its firm opposition to any attempt possibly made by AAMS (or any other national regulatory bodies throughout the EU) to cap the licences that can be awarded at local level, on the other hand it implicitly confirms the full validity of the state-granted concession regime altogether with respect to online gaming.

Turning its attention to the new AAMS requirement whereby a licence may be sought even by a non-gaming operator (whereas currently the applicant has to prove that it already holds an online gaming licence), the EC recommends AAMS to ensure that for purposes of assessing the actual eligibility of a non-gaming operator as well as licence applicant it apply fair, transparent, non-discriminatory and proportionate standards as also recently ruled by the European Court of Justice in re Europa 7 (C-380/05 of 31 January 2008).

Another request contained in the EC Remarks is aimed at amending any reference in the New Rules to operators based/licensed in the EU to cover instead operators based/licensed in the EEA – European Economic Area (which includes Liechtenstein, Norway and Iceland plus the whole European Union).

It is reasonable to believe that AAMS will have no problems in accepting the above suggestion. Actually to further encourage licence applications from throughout Europe it cannot even be ruled out that AAMS might possibly consider taking a “whitelist” approach similar to the one followed in January 2007 by the UK Department of Culture, Media and Sports with respect to non-EEA jurisdictions like the Isle of Man and Alderney, as a result of which all operators licensed there now can legally advertise their gaming services in the UK too.

Always with respect to the licensing requirements laid down in the New Rules, the Commission criticises the one-off AAMS licence fee (currently set at €300.000 yet scheduled to progressively go down year by year) which is generically justified as a “contribution towards expenses incurred by AAMS for the management and functioning of the licence-related infrastructure”. While conceding that in the New Rules the licence fee will be substantially slashed on an annual basis until the natural expiry date of the current licences (30 June 2016), the Commission requests AAMS to prove the alleged proportionality between the fee charged and the expenses the Italian regulator claims to incur

With respect to the requirement of the New Rules whereby an AAMS licensee may no longer have to (re)locate its gaming servers provided (i) they are still based in the EU/EEA and (ii) a safe 24/7 connection between the servers and the AAMS centralised system is guaranteed, the Commission urges AAMS to provide alternative operational solutions that should prove less burdensome and costly for the operators while equally and adequately allowing all checks and monitoring required by AAMS.

This remark reflects a largely popular concern across the online gaming industry, namely that AAMS is unduly forcing its licensees to fully link up their gaming platforms to its centralised system and database via the setting up of quite a complicated and expensive connection procedure which according to the claim of many concerned foreign operators results in unnecessary costs and much longer kickoff times.

Last but not least, the EC Remarks carry a very crucial query for the Italian authorities asking to know whether once the New Rules fall in place all EU operators that will then become licensees and which are currently included in the AAMS namelist of ”illegal” gaming sites, will be eventually struck off said list. This is undoubtedly not an easy answer to be provided by AAMS specially if one bears in mind that all its current licenses who do continue to operate a ‘.com’ site in parallel to the AAMS-licensed ‘.it’ one have not seen their names wiped off the AAMS blacklist, which seems to suggest that the Italian gaming regulator may not be so prepared to relax its grip over the unlicensed sites.

The Italian authorities and AAMS in particular are now expected to carefully review and digest the EC Remarks prior to deciding how to bring about the implementation of the New Rules, something which will hardly be a matter of just a few more weeks.

Yet all in all regulations-wise there do not appear to be any insurmountable problems nor irreconcilable positions between Brussels and Rome hence it is fair to say that if and when AAMS properly deals with and addresses all the issues raised by the EC, once the New Rules become effective all state-granted concession regimes still prospering across the EU will be strengthened and corroborated even further.

Quirino Mancini, partner

Sinisi Ceschini Mancini (qmancini@scm-partners.it)