The liberalization of Europe’s gambling markets is continuing at varying speeds with some countries embracing the European Commission’s commitment to open access across markets while others stubbornly cling to their state monopolies. Spain, famous for its massive lotteries, is the latest to shake up its legislation.

Gambling in Spain was worth around Ä30 billion in 2007, with 40 percent spent on machines of various kinds. The state lottery ONLAE and the traditional charity lottery ONCE accounted for another 40 percent or so, with the remainder split between bingo and casinos. The only sports betting allowed has been the lottery-based Quinella, which took in Ä500 million last year. Internet gambling is illegal, but the government does not block foreign Web sites, and it is estimated that Ä750 million was wagered online last year.

The fact that more was bet on the Internet than on the legal Quinella shows there is a demand for sports betting, and it is this area that has attracted the most interest from foreign operators and investors.

Legalization of commercial betting, the heart of the liberalization process under way in Spain, is taking place with deference to the country’s tradition of local autonomy. Each of the country’s 17 administrative regions is being left to formulate its own regulations. So far, only two have done so, Madrid and the Basque region, and Madrid has been the first to award licenses to foreign operators. The other regions are watching developments in Madrid closely to determine how they will regulate. Valencia is reported to be the next that will award licenses for betting shops.

With a population of nearly 6 million, Madrid is a huge market in its own right. A 2006 report by the Ministry of the Interior found that Madridellos wagered Ä4.5 billion in the previous year, mainly on lottery tickets. The region has only two casinos. These took in Ä93 million in 2006, most of it (83 percent) from table games, with about Ä15.6 million generated by slot machines.

The regional government invited applications for online and betting shop licenses late last year, and the first of these were awarded in April to two joint ventures: Sportium, a partnership between Spanish gaming giant Cirsa and Ladbrokes, and Victoria, an entity comprised of another Latin giant, Codere, and William Hill.

The presence of two of the “Big Three” UK bookmakers should come as no surprise. Competitive restrictions mean that neither can substantially increase the size of their retail operations in the UK, and both have been looking overseas for growth. Both companies applied for and were awarded licenses in Italy. Spain was an obvious next step.

“We look to expand anywhere where regulation allows,” said David Hood, director of corporate communications for William Hill. “We’ve gone into Italy, and are looking at Greece, but Spain appears to be where we are making the quickest progress.”

Indeed, Victoria and Sportium both opened their first shops in Madrid in May — Sportium’s on the same day Real Madrid played Barcelona at the Bernebau just a few hundred yards away.

The local heroes won, never an ideal outcome for the bookies.

“Although the result certainly cost us, we’re not too upset as it sent our customers home as happy winners,” said Ciaren O’Brien, head of public relations for Ladbrokes.

Morgan Stanley rates Spain as potentially more profitable for Ladbrokes and Hills, both publicly traded companies, than Italy. Analysts predict that retail betting in Spain will grow by 71 percent per annum to reach Ä4.5 billion by 2010. Morgan Stanley likes the fact that the regulatory burden is relatively light. They also point out that at 10 percent of gross win the tax rate is more favorable than in the UK.

On the negative side, the system of regional licensing means the companies will not be able to profit from the same economies of scale as they do in the UK. And there are other hurdles.

“Progress has been delayed by red tape,” said Hood. “It’s a very bureaucratic system. As well as the licensing, we even have to have every till inspected and passed by the Spanish equivalent of a trading standards inspector.”

But perhaps the biggest challenge is that Spain represents an entirely new market for retail betting, and customers have no experience with it, with the exception of the above-mentioned Quinella. This is important because the Quinella is a low stakes/high-prize product. It requires bettors to predict the outcome of 14 football matches with the promise of a massive jackpot. While it is obviously a lot easier to predict the outcome of one match than 14, the potential return is a lot less. Whether Spanish bettors can be persuaded to change their custom of wagering small amounts in hopes of big lottery-style wins to betting larger amounts with the more reasonable expectation of a smaller return is the No. 1 question for the likes of Ladbrokes and Hills.

One cultural difference that could benefit them is the Spanish familiarity with slot machines and video lottery terminals. “We expect to have lower staff costs than in the UK because we expect our Spanish customers to be a loss less resistant to self-service terminals than our UK customers have been,” O’Brien said.

There are also competitive concerns. Neither Sportium nor Victoria can expect to have Madrid all to themselves. Lottery giant Intralot along with Austria’s Admiral and online operator Bwin have license applications pending. Bwin last year signed a four-year, Ä60 million shirt sponsorship deal with Real Madrid, so Madridellos will have familiarity with the brand. The prospect of a liberalization of Spain’s online regulations also plays to the strength of Bwin’s core business.

The leading online betting operators have been offering Spanish-language versions of their sites for a few years, and some have actively targeted the country even though they have no express permission to do so, profitably exploiting a market that remains in something of a legal gray area. Dublin-based Paddy Power, for example, last year launched a Spanish-language site that offers betting on bull fighting. Paddy Power and others will apply for Web licenses when they become available.

There is political pressure for online gambling to be licensed at the national rather than the local level as it will be impossible to restrict the use of sites to people in regions where it is legal. Charity lottery ONCE has been particularly vociferous in calling for regulation as it claims it is suffering from unfair competition from online operators who do not face the same legal restrictions the lotteries do when it comes to advertising and the types of bets they can offer. Foreign operators also pay no tax in Spain, and with Ä1 billion expected to be wagered online in 2008, boosted by the Euro 2008 football championships, it is becoming a real issue for the Spanish exchequer.

There is also the issue of cannibalization. While the Spanish economy is certainly growing it is unknown whether an explosion in retail and online betting will work to the detriment of other forms of gambling. Lottery spending is expected to be fairly resilient as it is so ingrained in Spanish culture, dating back to the 18th century, and the ubiquity of gaming machines will always provide an outlet for spontaneous small-stakes gambling. Bingo, however, has been in decline for a number of years. There are currently 427 bingo halls in the country, 85 less than five years ago. The fact that many of the projected Victoria and Sportium betting shops are to be sited in former bingo halls reflects an existing process that could well be accelerated.

Said Hood, “We aim to have opened another 50 [betting shops] by the end of the year, plus ‘corners,’ which are terminals in existing leisure outlets. We are also planning to have 50 shops open in the Basque region by the end of the year.”

There are currently 39 land-based casinos in Spain, and that number is set to increase with plans to build two resort-scale casino complexes. El Reino de Don Quijote in Ciudad Real to the south of the capital, a massive Las Vegas-styled resort community backed by Harrah’s Entertainment, is scheduled to open in 2011. A London-based consortium called International Leisure Development wants to develop a Ä17 billion entertainment city comprising dozens of casinos and hotels along with theme parks, retail, entertainment, sports, condominiums and other attractions on 3,000 hectares in the Aragonian desert.

Although there has been an increase in the number of casinos in Spain, with nine opened in the last five years, total spend has remained flat, and some are questioning the viability of any massive expansion.

“The habits of Spaniards do not indicate that they will enjoy spending days in resorts,” said Cirsa Managing Director Joaquin Agut. “I’m not saying it can’t work. But in Spain gaming is very local. People like gaming near their homes, and they enjoy the social network of people who play those games.”

This should translate into success for non-Spanish betting operators. However, Spain is not likely to be an easy market to crack. Companies like Ladbrokes and Hills that have decided to partner with established local operators probably stand the best chance of making it work. igwb

Simon Banks is a freelance writer specializing in the sports and gambling industries. He is based in London.