Winning Post: Assuming Brazil will be an attractive growth market for many operators is questionable

Congress now has 120 days to approve, reject or seek to amend the Bill, so the show still isn’t over. Nevertheless, it seems increasingly likely that 2024 will see some level of regulated gambling activity in Brazil.

However, as the ‘tweaks’, or more importantly what has not been addressed demonstrates, the assumption that Brazil will be an attractive growth market for many operators is a questionable one at best, in our view.

As we have written about in more detail before, we have three major concerns with Brazil’s current legislative proposals:

• Online gaming is not explicitly mentioned in the legislation, but it has been suggested before that licensees will not be able to offer gaming to meet as-yet undecided or undisclosed regulatory criteria for betting licensing; this would wipe out nearly half the existing US$2.4bn market as a TAM (presumably excluding poker, which is recognized as a game of skill in Brazil).
   
• The 2ppt increase in headline Federal GGR taxes to 18% might not look like much, but GGR taxes are to be combined with a withheld 30% winnings tax on bets with prizes over US$400, which we believe will roughly double the headline tax rate in theory, although in practice it would encourage high value customers to shift to the black market (especially if they are already gaming customers).
   
• Attempts to appease key stakeholders within a narrow federal framework (an uncertain overlay of provincial taxation; 1.63% of GGR to sports clubs and individuals for naming and branding rights only – ie, not data or AV rights) are not likely to go anywhere near far enough, adding an extra layer of complexity to how the market will operate in practice – the Bill’s wording that 82% of GGR ‘no maximo’ will go to the licensee may well prove a prescient warning – the real tax rate could be well over 50% once winnings tax and provincial taxes are factored in (although black market leakage will likely reduce the optical problem to a more ‘workable’ 30-40%).

The last point may become especially complex if Brazil’s provinces want licensing control as well as tax, given that several have already started on that path.

Despite these concerns, the Federal government’s expected tax yield of c. US$400m in 2024 implies a market size of US$1.5 – US$2bn, depending upon how successful winnings tax channelling is. Given the opportunity to open mass market land-based betting, we do not believe that this target is unachievable (we would expect that land-based bets will also be largely high volume, high margin, low ticket, and overwhelmingly fall below the US$400 prize threshold).

However, the problem is that the vast majority of current Brazil-facing operators do not have a clear pathway to mass-market omni-channel success. We therefore continue to warn that while the Brazilian market is likely to produce some strong winners, they are likely to be ‘Local Heroes’ (or at least localized heroes), rather than the obvious major online brands and groups, which tend to be gaming-led, high-value customer led, or both.

In the longer term, Brazil still needs to decide what to do about gaming (the likelihood of a decision within the next 120 days is slim to nil, in our view). The regulatory status of gaming in Brazil is not just a question of the US$1bn digital grey market and the potential for new land-based supply. We guesstimate that the agent-led jogo do bicho market, a (mostly) illegal lotto-style game, generates net revenue of US$10bn across Brazil.

It ought to be the government’s priority to channel this into legal, taxed gambling supply, especially given that all previous attempts to stamp out the game have fallen foul of inertia, corruption, and the underlying popularity of gambling regardless of government fiat.

A growing omni-channel betting market may have some success at channelling jogo do bicho revenue, but only a clearly regulated gaming product is likely to cut deeply into this local black market. In the meantime, the extent to which the illegal but entrenched jogo do bicho network mixes with the newly regulated betting market could be a significant compliance minefield – one dangerously reminiscent of Southern Italy.

Paul Leyland
Analyst of gambling advisory business Regulus Partners