ITALIAN GAMING MACHINES MARKET: REGULATION MODEL AND HIS EFFECTS

September 2010

Emmanuele M. Cangianelli

MAG CONSULENTI ASSOCIATI

Why we are here

To synthesize the Italian Electronic Gaming Machines regulatory model as the first and the major realization of the Italian approach to gambling regulation

To explain an experience in changing figures from a dramatic grey market to a regulated, monitored and profitable market within a social, economic and competitive sustainable business environment

To shape next market developments and regulatory targets To consider this experience in shaping new jurisdictions ‘s

gam(bl)ing regulatory and business models (i.e. Greece, Poland…)

2September 2010

3

Shaping the market

September 2010

How change figures from a dramatic grey market to a regulated, monitored and profitable market? In 2002 – 2003, after some uninspired attempts to regulate the

gaming machines market, Italian Parliament approved for the first time electronic gaming machines (AWP) regulation guidelines

AAMS (State monopolies and gambling authority) drafted operative regulation; in the meanwhile grey machines were legitimized to have a first significant tax income and to evaluate market dimensions

Therefore, was published the first new AWP regulation and launched the tender for concessions allowing the right of operating gaming machines in the Italian market by controlling all administrative and operational data

The AWP regulation in 2004 was the first result of the AAMS approach to reach a social, economic and competitive sustainable business environment in Italian gambling markets

4September 2010

Social, economic and competitive sustainable business environment

Shift State monopoly approach (maintaining and managing gambling tax revenues as a policy tool):

from direct management or ban

to concession and progressive opening to all gambling markets (2006: betting and online skill games \ poker; 2010: online casino games)

Introduce (lotteries exception) multi-operators markets

Develop online managing \ auditing systems for any gambling activity

Enhance distribution chain responsibilities, confirming revenues levels

5September 2010

Gaming machines allowed

6

AWP2Multiplayer

AWP2(roulette-like, black jack-like)

VLT

Server monitored Server based

September 2010

CentralControl Systems

AAMS

Venue \AWP games point of sale

EGM ManagementMoney collection

Venue Management

Concessionaire (fully integrated)

Concessionaire (integrated)

AWP owner \commercial

operator

Venue \AWP games point of sale

Concessionaire(system provider)

7

10%

15%

75%

A competitive market with:• 10 concessionaires• more than 100 licensed

manufacturers• more than 1.500

commercial operators• more than 110.000 AWP

venues

Networked AWPs systems allows to constantly monitor how many machines are operating and how much turnover and GGR is generatedThe model permits a significant role to operators different

than “game owners” concessionaires (near 70% of NGR)

Competitive, economic and sustainable business environment

System certification

(SOGEI)

AWP certification (laboratories)

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Results

September 2010

Present Italian (legal) gambling markets turnover

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€ mln – Market turnover.For Casinos* , estimated handle. Casinos EGM are different than AWPs

Source: AAMS, ANIT, MAG Analysis

Lotteries; 18.874;

32%Betting;

6.151; 10%

Gaming machines;

25.200; 43%

4 Historical Casinos*

4.5558%

Bingo; 1.512; 3%

Online Card and

skill games;

2.348; 4%

2009

Lotteries; 8.850; 27%

Betting; 3.384; 11%

Gaming machines;

15.137; 47%

4 Historical Casinos; 2.230;

7%

Bingo; 948; 3%

Online Card and skill

games; 1.654; 5%

H1 2010

Presently, nearly half of the italian gambling market turnover is generated by EGM

September 2010

AWP1 machines

Gaming machines market evolution

10

AWP2 machines

120.000

179.000 226.000

275.000

348.000 340.000

2.451

10.705

15.227

18.608

21.466

25.200

2751.199 1.705 2.346 2.715 3.079

0

5.000

10.000

15.000

20.000

25.000

30.000

-

50.000

100.000

150.000

200.000

250.000

300.000

350.000

400.000

2004 2005 2006 2007 2008 2009

operating AWP Turnover (€ mln) NGR (€ mln)€ mln EGM

Source: AAMS, MAG Analysis September 2010

Gaming machines market evolution

11Operating EGM, € mln turnover

Source: AAMS, MAG Analysis - * 4 historical casinos EGM not considered

17.551

20.705

23.72725.350

26.449

29.011

2.451

10.705

15.227

18.608

21.466

25.200

0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

2004 2005 2006 2007 2008 2009

EGM turnover in Italy* Legal turnover

0

50.000

100.000

150.000

200.000

250.000

300.000

350.000

400.000

450.000

500.000

2004 2005 2006 2007 2008 2009

Operating EGM in Italy* Legal EGM

Operating EGM in Italy (including grey and black machines)

EGM turnover in Italy (including grey and black machines)

September 2010

Social sustainable business environment

Dampen illegal \ grey market to around 15% of the whole market

Ensure games rules and payouts to players

Expel illegal organizations from one of their core markets

More effects in fighting grey market will come in 2010 (AWP market entirely works with AWP2 machines, operating with encrypted data \ smart cards on motherboard)

(some) responsible gaming tools on AWPs (self setting of time \wagers limits)

limits to machines operating by venue typology (since 2003)

(some) communication programs to distribution chain

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Next targets

September 2010

Present business scenario

Italian gaming market started the new Video Lottery Terminals era VLTs are server-based gaming machines connected to central control

systems, managed by concessionaires and audited by AAMS

approach taken to this new regulation - in development since 2006 and finalized within the funding program caused by the Abruzzo earthquake (2009) - is based much more on the general Italian approach to online/networked gaming regulation than AWPs

VLTs payouts (RNG determined, including jackpot systems) starts from 85% (rather than fixed 75% in AWPs)

terminals may be installed only in dedicated gambling venues and may works with cashless systems

VLTs segment aims to: cover the last mile to the total public control of the EGM market, fighting

illegal offer with an even more competitive offer

push players more to dedicated gambling venues than from the presently predominant street venues (coffe bars)

14September 2010

Expected EGM market turnover by business model

15% turnover (handled wagers) – Casinos EGM are different than AWPs and VLTs

Source: MAG Analysis

Dedicated venues

15%

Street offer69%

4 Historical Casinos

16%

2009

Dedicated venues

52%

Street offer40%

4 Historical Casinos

8%

2012

Around 2012, gross gaming revenues of EGM dedicated venues should go over 40% of the whole market

September 2010

Reality of gaming machines and casino environment worldwide

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Italian EGM market positioning evolution

World of entertainment

Tourist targetLocal target

Gambling

Italy 2010

Italy 2005

Italy 2012

Italy 20xx

Source: MAG elaboration on a E. Bidault layout

Next regulatory challenges

What we expect: More skill-based gaming (with introduction of poker tournaments in

dedicated venues)

More cashless operation, with higher security and opportunity (for marketing and RG objectives) for player tracking and consumer behavior analysis

Higher commitment from gaming companies (rather than to street operators) to prove their socially responsible approach

Enhance responsible gambling programs

Effective under age gambling control in dedicated venues

Dedicated venues to become a strength in harm minimization

All those targets needs: maintaining low taxes and a stable regulatory environment

national policies targeted to local and\or social destination of gaming taxes

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In this paper

MAGis a strategy and business advisory firm.

MAG assisted Italian gaming and betting authorities in shaping and starting up the Italian gambling regulated market in 2002-2007.

Presently, MAG advises some of the major companies involved in Italian and European gambling markets.

For further informationemcangianelli@mag-ca.itinfo@mag-ca.it

Shaping the market

• How change figures from a dramatic grey market to a regulated, monitored and profitable market?

• Social, economic and competitive sustainable business environment

• Gaming machines allowed

• Competitive, economic and sustainable business environment

Results

• Present Italian (legal) gambling markets turnover

• Gaming machines market evolution

• Social sustainable business environment

Next targets

• Present business scenario

• Expected EGM market turnover by business model

• Italian EGM market positioning evolution

• Next regulatory challenges