With varying estimates over the size of the illegal market in Brazil, H2 Gambling Capital Managing Director Ed Birkin believes inaccurate assessments could backfire and encourage tougher restrictions on licensed operators.
Since the Brazil online market regulated on 1 January, many industry stakeholders have shared concerns over the prevalence of the illegal market.
Just this week, Genius Sports’ head of integrity for Latin America, Tiago Barbosa, told a government committee that 70%-80% of bets placed in Brazil are illegal.
Birkin believes the size of the illegal market in Brazil is “hugely overblown”, with H2 estimating it’s more likely to be around 30% of the total market.
He warns that overstating the size of Brazil’s illegal gambling market could mislead policymakers into viewing the sector as overly harmful, which may result in stricter regulations on the legal industry.
In his view, operators are looking to deflect from their own shortfalls.
“I think actually, the narrative is being led by a number of operators who are underperforming and it makes it easier to say that the illegal market is bigger rather than they’re just not competing as well in the legal market,” Birkin tells iGB.
Birkin explains the first concerns of the illegal market share standing at 60%-70% were raised in January, when licensed companies were still struggling with onboarding players due to the new KYC restrictions.
According to H2 estimates, the Brazilian market’s January revenue was BRL2.2 billion. By April, the market almost doubled, generating BRL4 billion in monthly revenue.
However, with some still perpetuating the narrative of illegal operators accounting for 60%-70% of the market, Birkin says this doesn’t make sense.
“People are still talking about 60%-70% being illegal,” Birkin declares. “You’ve doubled the size of the legal market, so the illegal market has therefore doubled since January as well?
“It’s just not true or possible. And that would put the total market size at $20 billion, which again is just not true.”
The threat of new restrictions in Brazil
Less than eight months have passed since regulation started, yet already the sector is facing additional regulatory pressure.
A preliminary tax rise on operators’ GGR from 12% to 18% is awaiting a Congressional vote on whether it will be made permanent. Meanwhile new ad restrictions such as watersheds are also seemingly on the way.
While some in the industry have fought those new measures by arguing they will only serve to boost the illegal market, Birkin believes that this point is falling on deaf ears with the government.
“In Brazil, the government doesn’t really care about the legal or illegal market or the split, they just see gambling as a huge social problem,” Birkin explains. “They just sit and go, ‘People are spending too much, we need to crack down on it’.
“Someone told me when the data came out the legal market had hit BRL3 billion in a month, there was a lot of people saying in the news, ‘Wow, that’s a big number that’s just got out of control’.
“It then goes to BRL4 billion in April, and then at that point you say 60% of the market’s illegal. Guess what? You’re saying that’s a BRL10 billion market size in April.
“Now you think the right narrative to protect you and not have them clamp down on your advertising and what people can play is to claim that it’s BRL10 billion? That is just stupid, especially when there is zero evidence.”
Cautionary tale in the Netherlands
Birkin argues the exaggeration of the illegal gambling market in Brazil could backfire, misleading policymakers into thinking the overall sector is far larger than it is and therefore more harmful to the Brazilian population.
This ultimately could lead to more, rather than fewer, restrictions being imposed on the regulated industry.
Birkin observed a similar situation in the Netherlands, where heavy advertising after the legal online market launched in October 2021 quickly grew the market, but also concerns over gambling harms.
In response to those rising fears, the Netherlands has taken a hardline stance, curbing advertising and introducing higher taxes and deposit limits for players.
H2 now estimates illegal operators account for around 50% of the Dutch market.
“The same thing happened in the Netherlands,” Birkin adds. “There’s a new market, everyone just advertised too much, the market grew, people thought it was too much advertising and they shut it down and put spend limits in. And yeah, the market’s screwed.
“I think the same thing is going to happen in Brazil, and it’s not as if this story hasn’t happened over and over again elsewhere.”
Birkin: Brazil licensed industry must take responsibility
Birkin concludes by claiming if the new regulatory measures are implemented in Brazil, licensed operators will be partly at fault.
The top-heavy nature of the Brazil market means if you take the top 19 brands out of the equation, H2 estimates the remaining sites hold an average market share of approximately 0.1% each.
“I think people need to stop blaming the illegal market when it’s because they’re not performing themselves in the legal market,” Birkin says. “They’re not seeing the revenues that they were wanting.
“As an industry, if you get behind this falsehood talk of the illegal market is bigger than the legal market, then it’s just going to lead to more restrictions on the legal market.
“And actually, I think the industry, they won’t like it, but they will have to take some responsibility for that.”
Overstating the illegal market will only pressure the government into implementing new restrictions, H2 Gambling Capital’s Ed Birkin argues.