Second one. This one really is best viewed directly, it's really long and has a lot of graphs and charts illustrating various things. I emailed the reporter my thoughts on poker as relates to the OLG & GCG, and she took them under advisement.
The inside story of how the OLG lost control of Ontario’s online gambling market
By Christine DobbyBusiness Reporter
Thu., Sept. 30, 2021timer13 min. read
It’s no surprise that over the past two decades, online gambling has grown into a massive global market. With billions in revenue going to websites run by overseas operators, it was only a matter of time before Canada’s biggest province set its sights on making a killing for itself — by recouping a good chunk of that money in taxes.
At the moment, of the close to $1 billion that the provincial government says Ontarians spend gambling online every year, about 70 per cent goes to sites that are unregulated here, big-name players like Bet365, PokerStars and Betway.
In other words, it’s the Wild West. Offshore betting in Ontario is a grey area and since it’s unregulated, the province can do little to keep minors away from betting, help gamblers with addiction issues and combat money laundering.
Now, Ontario is poised to follow the lead of European countries such as Denmark and the United Kingdom and U.S. states like New Jersey. As of December, the plan is for it to become the first province in Canada to allow private companies — including websites licensed outside Canada — to legally offer online gambling to its residents.
“There’s a paradigm shift from criminalizing online gambling to decriminalizing online gambling, primarily because of the player protection aspect,” said Yaniv Spielberg, co-founder and chief strategy officer at Bragg Gaming Group, a Toronto-based gaming technology provider.
Shares of Canadian stocks tied to betting have been on the rise in the past year, which has seen multibillion-dollar takeover deals of domestic firms Great Canadian Gaming Corp. and Score Media by U.S. heavyweights.
Traditional sports media players such as Sportsnet owner Rogers Communications are also circling the sector, and Torstar Corp., which owns the Toronto Star, has said it plans to launch an online casino and will include sports betting in its new venture.
So who, exactly, will manage this massive and soon-to-be-perfectly-legal field?
The natural candidate would be the Ontario Lottery and Gaming Corp. (OLG), the crown corporation that has long managed gambling in the province — including the lottery, a couple dozen casinos and thousands of slot machines — and launched its own internet betting platform in 2015. (Gambling is technically illegal in Canada but under federal law, provinces can “conduct and manage” betting.)
That’s why it was surprising when it was announced last year that, in fact, the OLG would not be in charge.
Nor will it control Ontario’s online market for betting on single sporting events, set to launch at the same time. (Single-sport betting only recently became possible because of a change in federal law; sports betting was previously limited to wagering on multiple events at once, known as parlay bets.)
Instead, when the igaming market launches in December, a new division within the Alcohol and Gaming Commission of Ontario (AGCO) will be calling the shots. The OLG will be just another competitor vying for dominance — competing head-to-head with a range of new players, including sophisticated international gambling giants.
“The OLG certainly has a diminished role in this new regime — you no longer have to go to them,” said Cameron MacDonald, a partner and co-chair of the sports and gaming law group at national law firm BLG.
Some say, this could even be the beginning of the end for the provincial gambling corporation.
To get a picture of why the OLG was passed over to manage igaming, the Star spoke with more than a dozen sources close to the gambling sector, the government and the OLG. Most spoke on the condition of anonymity, concerned about future job prospects and relationships with regulators and government.
From these conversations, the Star has learned that the OLG was largely cut out of control of the new market early in the province’s consultations on igaming, which began in 2019.
The reasons for this can be traced back to a privatization plan that didn’t go exactly as planned, falling short of big promises of more tax dollars for the province, and previously unreported clashes between the OLG and Ontario’s gambling regulator and private casino operators.
The OLG did not agree to an interview for this story, but spokesman Tony Bitonti provided a detailed email response to the Star. He said the OLG has a new strategic plan that aims to “re-establish financial performance and accelerate growth across its business lines even as the market in Ontario is being opened to external competition and global innovation.”
“Under our plan, OLG is the driving force behind a vibrant and sustainable gaming marketplace which generates returns for Ontario, creates jobs and develops local economies.”
While the OLG will not manage the new online market, it has not given up on trying to influence the future of igaming and, sources say, is trying to hold on to what power it does have over traditional gambling in the province.
“The minute the online gaming regime launches and is successful, no one needs the OLG any longer,” said one source. “So, it’s existential for them.”
***
The OLG has been around in some form for almost 50 years, but for the last decade, it’s been faced with the strange task of presiding over its own dismantling.
Following a directive from the province to drum up new revenue from gambling, the OLG, under then-board chair Paul Godfrey (chair of Postmedia) and CEO Rod Phillips (now the provincial minister of long-term care), unveiled a “modernization” plan in 2012.
The idea was to transition to a slimmed-down operation, with fewer employees and operational expenses. It would transfer more responsibility for day-to-day operations to the private sector and give them the chance to build new casinos and invest in existing properties to make them more profitable, all while paying sizable fees to the OLG.
But modernization didn’t go as promised. And little did anyone know at the time, but it would set in motion a series of events that led to the OLG losing power over the online market.
There were numerous other stumbles, and the centrepiece of modernization — privatizing casinos — took years longer than the OLG originally forecast.
By 2016, the auditor general said the OLG had cut its initial projections of how much more profit modernization would bring into the province in six years by more than 65 per cent.
The OLG eventually reached eight agreements with a total of four private casino companies — Great Canadian (now owned by Apollo), Gateway Casinos, Hard Rock, and Mohegan Gaming and Entertainment — assigning them long-term rights tied to certain geographical areas. (Caesars Entertainment continues to operate the casino in Windsor under an earlier agreement.)
But the contracts included detailed requirements on business operations and tensions over these unwieldy agreements would eventually factor into the sidelining of the OLG on igaming.
A woman breezes past the Ontario Lottery and Gaming Association prize headquarters on Dundas St. W. on Sept. 29, 2021. The provincial government recently said Ontarians spend close to $1 billion gambling online every year, and about 70 per cent of that is on sites that are unregulated here.
It seemed to many like the opposite of private-sector efficiency to generate more tax revenue. And it duplicated the efforts of the province’s actual gaming regulator, the AGCO.
Around the time of modernization, the AGCO introduced a more hands-off approach to regulation. Instead of spelling out exactly how to run things, the AGCO focused on outcomes it wanted to achieve, such as keeping minors off casino floors, and largely left it up to operators to accomplish those ends.
But where the AGCO backed off, the OLG stepped in. For example, the AGCO eliminated a requirement that operators seek approval to move gaming equipment, such as a slot machine, but the OLG reintroduced that requirement.
Stephen Rigby, former national security adviser to then-prime minister Stephen Harper, was CEO for most of the OLG’s casino privatization process. Sources said under his tenure the organization became increasingly focused on compliance, and relations with its casino partners grew adversarial.
And outright hostility soon developed between the OLG and AGCO, a situation multiple sources described as unprecedented and surprising.
The Star has learned that the conflict between the OLG and AGCO grew so bad that by 2019, the provincial government asked Tom Marinelli, a former long-time OLG executive who acted as interim CEO on two occasions, to investigate.
“There are hundreds of pages of controls, mandatory operating procedures and protocols that have been layered on top of the contracts that prescribe daily operations,” the Canadian Gaming Association, a lobby group for the gambling industry, wrote in a confidential letter to Marinelli in 2019.
“This has created unnecessary conflict and oversight burden between OLG, the AGCO and casino operators.”
The CGA told Marinelli that the OLG’s approach was not in line with the original intent of the modernization plan, had impeded revenue growth and had “discouraged the creation of new, incremental jobs and investment in Ontario.”
Bitonti said the contracts are comprehensive because they cover multi-year terms and are meant to protect the public interest, adding, “OLG’s casino operators are sophisticated commercial partners … which consented to the terms of the contracts.”
Against the backdrop of this swirling conflict, the province announced in the spring of 2019 that it planned to legalize online betting.
After early meetings to gather industry feedback, the writing was soon on the wall for the OLG and its role in the new market.
During one pivotal meeting in late June 2019, a range of gaming industry stakeholders gathered in a conference room in the Frost building, which houses the Ministry of Finance, across the street from Queen’s Park and the legislative buildings in downtown Toronto.
Bureaucrats from both the departments of finance and the attorney general were in attendance and just before the meeting began, Attorney General Doug Downey himself arrived.
David Pridmore, a senior vice-president at the OLG, was also on hand, and private casino operators, offshore online gaming companies and gambling technology providers were also represented either in the room or on the conference call line.
One of the first questions raised was about who should conduct and manage the new market. It seemed innocuous enough, a point of almost arcane procedure necessary to ensure compliance with the federal law.
But according to multiple sources involved in the meeting, the answers were polite — it was awkward with Pridmore in the room, one source said — but consistent: not the OLG.
For one, with its own online betting platform, the OLG would be a competitor in the new market, and no one wanted to hand over customer or business information to a rival.
But sources said stakeholders at the meeting were also deeply concerned about the OLG’s reputation, based in part on past experiences of the casino operators, as a micromanager that acted as a second regulator in the space and demonstrated little trust toward its partners.
“Nobody was gratuitous,” said one source, “But they said, ‘We’re not working with these guys.’ ”
***
All just a wager
Wild projections abound on the size of the market for online sports betting in Ontario and Canada, but industry experts say some should be taken with a grain of salt.
$10 billion
The amount the Canadian Gaming Association estimates Canadians spend each year on illegal bookmaking operations, but the criminal element makes this amount difficult to verify.
$323 million
The amount H2 Gambling Capital estimates Canadians spent on unregulated sports betting websites in 2019, after accounting for prizes and winnings paid out.
$19 million
Total spending by Canadians (after prize money) on regulated sports betting websites in 2019.
$340 million to
$708 million
The potential size of Ontario’s new regulated online sports betting market within two years of legalization, according to a PwC report on the Canadian market. The range between the lower and higher amounts depends on factors such as the tax rate imposed (a lower tax rate is expected to attract more private operators to the licensed regime), and the Star performed a rough calculation of Ontario’s portion based on its percentage of the Canadian population.
After the Frost building meeting, the AGCO took the lead on further consultations with the industry, and the decision was formalized in the provincial budget last November: the government would create a new subsidiary of the AGCO to conduct and manage the igaming market.
The new subsidiary, iGaming Ontario, was officially established in July and will manage commercial agreements with online gambling operators. So far, it is a small agency with a separate board from the AGCO itself, which will continue to regulate the industry and license private operators.
The provincial government did not comment specifically on the decision to give the AGCO responsibility for the new market.
The AGCO told the Star it works collaboratively “wherever possible” with the OLG. Spokesperson Raymond Kahnert said the AGCO has tried to reduce regulatory burdens in the industry, adding, “We are committed to working with the OLG to identify and eliminate areas of overlap, duplication and burden in the casino sector.”
Bitonti also said the OLG is “collaborating well” and has a “renewed sense of partnership” with the AGCO.
He said privatization has brought “world-class casino brands” to the province and private operators have invested about $1.5 billion in additional capital and created 500 new jobs (based on pre-pandemic numbers). “Without private sector involvement, these investments wouldn’t have been possible.”
Asked about the OLG, representatives for Ontario’s private casino operators largely said in brief statements that they have positive relationships with the organization (Hard Rock did not comment and Mohegan said it meets regularly with the OLG.)
Unless it’s handing out a novelty cheque to a lottery winner, the OLG tries to stay out of the news.
When it does make the papers, the OLG is often tied to some sort of controversy, such as fraud allegations over lottery insiders claiming winning tickets or a scandal over internal spending.
But before the impact of the pandemic, the OLG funnelled close to $2.5 billion in gambling profits to the treasury department every year. That dividend is worth roughly the same to the province as the gas tax or alcohol sales from the LCBO, and industry insiders say this has long helped protect the OLG politically.
Yet, the OLG is likely to face renewed scrutiny later this year and could struggle to justify its size — and public gaffes — as the online market takes off.
Earlier this year, OLG board chair Peter Deeb quietly left his post and the Toronto Sun reported his departure was tied to a police investigation in which he was later cleared. (The Ontario Provincial Police would not comment on Deeb but a spokesperson said it was involved in an investigation “related to Ontario Lottery and Gaming Corp.” but “no criminal offence was identified” and no charges were laid). Bitonti said Deeb told the OLG he was stepping down for “personal reasons.” The government has yet to appoint a permanent replacement for Deeb.
Rigby, who was CEO for five years, had already said he planned to step down last year when the OLG came under fire for paying executive bonuses during the pandemic after the government extended the organization a line of credit to weather COVID-19 closures.
Earlier in his tenure, Rigby also faced reports of expensive office renovations that spurred Premier Doug Ford to promise an audit of the OLG’s expenses.
Two years later, the audit has yet to be published. Ministry of Finance spokesperson Emily Hogeveen said it will be “complete in the next few weeks and subsequently published.”
Sources close to the industry expect the audit to address whether expenses at the OLG—which has about 1,350 full and part-time employees and two head offices in Sault Ste. Marie and Toronto—are outsized considering it has outsourced responsibility for casinos in the province.
A review of the OLG’s annual revenue, expenses and net income paid to the province since 2012 shows that by 2018-19 (the last full year not affected by COVID-19), its profit margin — net income as a percentage of overall revenue — had remained flat at about 27 per cent.
The organization’s revenues increased over that time to $8.4 billion, up from $6.7 billion in 2011-12. But expenses — which include prize money and fees paid to the casino operators as well as the OLG’s own overhead spending on items such as payroll, marketing and IT — also ticked steadily up, growing to $6.2 billion by 2018-19, up from $5.1 billion pre-modernization.
Bitonti said casino revenue has gone up by about $600 million annually since the modernization process began and that the OLG’s profit “solely from gaming revenue” has grown by $450 million.
When the audit is eventually published, the OLG is expected to face calls to justify the ongoing bureaucracy and legacy costs of the organization. And that will come as the province heads toward launch day on a significant new market.
The Ministry of Finance is in the midst of finalizing the commercial terms of this new market, including the tax rate online operators will have to pay. Industry lobbyists have proposed rates in the range of 15 to 20 per cent (and even lower than that for sports betting, which operates on very thin profit margins).
However, the Star has learned that the OLG has been advocating for a tax rate of more than 30 per cent, a rate sources say would be a disincentive to online players entering the regulated regime, as many of them are already operating in the province and paying zero tax.
“The OLG responds to requests for information from the (government) on a range of gaming/lottery topics on a regular basis,” Bitonti said. He did not comment on the rate the OLG recommended.
When the federal government legalized betting on single sports events in late August, the OLG was the only operator in the province approved to take wagers and took advantage of its head start by heavily promoting its Proline+ product. Meanwhile, its casino partners still face uncertainty over whether and how they can run sportsbooks of their own.
Bitonti said the OLG is in “active dialogue” with them over sports betting at casinos and how private players could use existing customer data to expand into the igaming space.
“The OLG was a monopoly for a very long time and offered a subpar product,” said Bragg Gaming’s Spielberg.
“Ultimately the OLG as we know it today will die if they don’t step up their game against all these private operators that are coming in with years of experience in very major jurisdictions around the world.”
