Winning Post – The current state of the Australian market

Regulus Partnersthe strategic consultancy focused on international gambling and related industries, gives an insight into some of the key developments in the gambling industry as part of its ‘Winning Post’ column.

Australia: market development – the state they’re in

The Australian betting market was significantly rearranged this week, with William Hill bowing out and Stars becoming an important player. New South Wales has also launched a public consultation on betting POC taxes, seven months after Victoria’s (with 3.4% state revenues from gambling being referred to as ‘small’). Australia is a market of mixed messages. Regulated online growth has been strong despite a (recently reinforced) ban on in-play and gaming as well as material product fees. Gambling spend per capita is the highest in the world, despite a strident and frequently effective anti-gambling lobby. A cultural propensity to gamble is matched by high mobile penetration, high disposable income and continued popular interest in horseracing. The attractions of the market are obvious, but are they now under threat?

There has been significant organic and M&A-driven consolidation in the Australian market. The creation of one major monopoly (ex RWWA) has given Tab a 38% market share online (including telephone) and a 52% market share overall. Its business model is designed around high taxes (or more precisely monopoly rights payments) and product fees, further assisted by an over-index in occasional customers who yield materially higher gross margins than the mean. However, retail is now only 33% of the total market, and is in decline despite significant distribution and investment in self-service terminals (where in-play is allowed, unlike online). This is a fairly similar mix and underlying trend to the UK (where retail has in fact been slightly more resilient, driven by football coupons and SSBT multiples).

There are now three major players in the remote market. PPB remains comfortably the biggest corporate, with 26% share and three-year revenue CAGR of 18.3%: outperforming the market’s 14.9% (including telephone) by a convincing 3.4ppts. Equally importantly, a 2017E EBITDA margin of 34.4% gives it material wiggle room for what might be happening next (see below). Stars has created a 15% market share business (NB, not 20% as previously reported), with the blended growth rate of an under-performing WH (flat) and an outperforming CrownBet delivering market growth of 15%; post synergy EBITDA margin of c. 25% is materially below PPB but not by any stretch bad.  Ladbrokes is a trailing #4 with 9% share but strong growth (52% 3-year CAGR); the key question is whether this growth has expanded profit margins or effectively been bought. bet365 has been unable to leverage its key in-play strengths and trails at 4% share, 11% growth and poor margins.

In summary, Tabcorp can probably take a material increase in costs (especially given market disruption), PPB and Stars can take some, the rest will struggle: POC taxes coming out at 15% will more than halve Stars’ EBITDA and it is clear that the key states of NSW and Victoria are heading in that direction (with declining retail and SA/WA models acting as a catalyst and blueprint). Victoria’s positioning is particularly sensitive. On the one hand, legislators are being told (by both betting and racing) that material POC taxes will hurt product fees, but on the other the optical dangers of a lower figure than other states are being made clear by less pro gambling lobbies. Further, Victoria has precedent for turnover levies and this dangerously distorting system being applied to betting tax cannot be ruled out (the thrust of question 3 of its consultation). Here, the fact that Australian horseracing has effectively filled the gap created by no proper taxation system for corporate bookmakers (with only 10% GST being levied), is cold comfort with an obvious victim. Consequently, given that the underlying profitability of the newcomer likely to at least halve, with no gaming to cross-sell (hopes of poker legislation are probably just that in the current climate) and the risk of distorting as well as expensive taxes, why would anyone choose to be in Australia?

The answer to that might be painfully simple. Limiting regulation, escalating taxes and a skewed product mix is in danger of becoming the new normal in many markets, and if an operator can’t make it work in gambling-mad Australia, they have little chance elsewhere, in our view. The irony here is that William Hill couldn’t thrive in the world’s most traditional betting market, but is hoping for a much easier time in the US: if operators think Australia is in danger of becoming an over-taxed patchwork of distorting state-driven regulation which favours domestic incumbents, they ain’t seen nothing yet…

UK: in Parliament – Harris bombs bookies
Despite the pressures of running for deputy leader of the Welsh Labour Party and campaigning for women’s pension rights, the formidable Carolyn Harris (Lab, Swansea East) still found time this week to take a swipe at the betting sector. In fact, she took more than one – submitting seven written Parliamentary Questions in relation to both FOBTs and to the recent high-profile money laundering and social responsibility failures at William Hill’s online operations.

Harris has the bit between her teeth on gambling regulation. As chair of the Labour Campaign for Gambling Reform, she is likely to retain a strong interest in the industry even after the conclusion of the current DCMS review (assuming of course that the review does ever end). Other MPs appear less bothered. Just 43 MPs have signed Early Day Motion 174 (‘Fixed Odds Betting Terminals’) – half the number who signed the very similar EDM 61 in the 2015-2017 Parliament. No MP has signed EDM 174 since October last year, in spite of all the rhetoric and press coverage (perhaps a sign of the extent to which larger affairs of state dominate parliamentary thinking).

Elsewhere, Lord Stevenson of Balmacara (Lab) became the latest to quiz the Government on the status of yet another interminable gambling review – the DCMS investigation into the regulation of society lotteries. Meanwhile, MP comments in The Times on the subject of advertising ban for junk food may have read across for gambling. Sarah Wollaston (Cons, ), the chair of the Select Committee on Health is reported to have said that: “when it comes to children … it’s absolutely right for government to make progress and pull the levers that will make a difference”. Irrespective of the Government’s apparent preference for a compromise solution (RG ads rather than ad restrictions), the issue of gambling advertising may have a way to run yet.

Next Tuesday will see the publication of the Government’s Spring Statement. It is expected to be a fairly low-key affair and – while we would not rule out the odd consultation – we do not foresee any changes to gambling taxation being announced

UK: regulatory reform – a train (of thought) bound for nowhere

The legendary poker player, Doyle Brunson tells the story of a college student called Tom who carried to the card table a book with the title ‘How to Bluff Constantly and Win’. Several hours later, as he cashed in his winnings, Tom threw the book on to the table for the other players to read. The pages were blank – all except the first one which simply contained the word “Don’t”.

On the face of it, it looks as though Ladbrokes Coral may have overplayed its hand on FOBTs. Last Friday, the BBC claimed that LCL had threatened to withdraw sports (and notably racing) sponsorship if FOBT stakes were cut. Five days later, the company appeared to backtrack on the comments, explaining that it had simply intended to point out that any hit to revenue would have cost implications – and that sponsorship was one area that might be affected.

In between the BBC story and LCL’s apparent climbdown, Paddy Power played its hand – emphasising its pride in supporting racing and its commitment to continue to do so, regardless of the Government’s decision on FOBT stakes (presumably because it is economically rational, as some parts of LCL probably knew while other parts got political). This was a typically agile and opportunistic move from PPB, demonstrating (with some justification) that the group continues to take a different approach to regulatory risk management and PR than its ABB peers.

The FOBT defence erected by the major high street bookmakers has been constituted largely of third-party ‘shields’ – the articulation of consequences for others in the event of Government intervention. We are told that people will lose their jobs, HM Treasury will miss out on taxes and racing will face a funding crisis. There are two obvious issues with this approach. First, it highlights a failure to make the consumer case for non-intervention. Second, it seeks to depict costs which management teams are trying to control as societal benefits. The jobs case appears weak when sector employment is falling as a result of management action; the tax case is undermined by a case history of duty allergy (historically in Great Britain; currently to some extent in Australia); and the tears for racing appear rather amphibian given recent spats over media rights and the ABP scheme.

There is also something a little perverse about threatening to take action in one area of public policy concern (sponsorship) if greater restrictions are placed on another. Moreover, the idea that racing will suffer if FOBTs are meddled with provides support for allegations that Britain’s retail betting companies have forgotten how to be bookmakers.

Of course, the bookmakers are right to point out that a margin squeeze will affect each of these areas; and Government should approach policy change with eyes open. However, the game becomes dangerous when explanations are perceived as threats. As we (and Kenny Rogers) have pointed out before, “you’ve got to know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run…”

Germany: retail betting tax – everyone wants a cut

A small but potentially significant number of German municipalities are adding to mounting ‘DACH’ pressures by seeking to add a 3% local turnover tax to 5% existing Inter-State taxes. Ironically, this is in part due to a court’s recognition of the limitations of square footage tax, while recognising that the existing 5% levy was ‘rather low’. Operator cries of double taxation probably confuse a legalistic point borne out of balancing POS regimes with simply being taxed by more than one authority for the same thing (as in normal in many Federal jurisdictions for GST, for example). More significantly, it is showing that a number of German authorities think: a) 5% turnover tax is indeed rather low, and; b) punitive taxes which reduce supply are overall a ‘good thing’. The economic and channelling arguments against this position are clear, but a lobby which looks too similar to ‘betting companies don’t like tax’ does not seem to be cutting much ice. This might be a tax increase which falls hardest on German retail franchisees, but it would be naïve at best to assume the remote sector and retail ‘supply chain’ is not immune to the logic, or the impact

Brazil: gambling reform – when a black swan is just a swan in the dark

Many commentators reacted with surprise to the ‘shock’ news that one of Brazil’s progressive gambling liberalisation bills was soundly defeated in Senate Commission of Constitutionality and Justice Committee 13-2. The decision has been described as a distortion, with a full chamber likely to be much more sympathetic to the allure of legalised resort casinos and regulated online gambling. We would be less sure. It is a global pattern that gambling liberalisation wins the support of interested parties who take meetings with sympathetic stakeholders and persuade themselves that they are being listened to in the corridors of power. Often, with a shadow timetable the anti-lobby are at work, but never the twain shall meet. Then, the force of conservative reaction to economic and social liberalism comes as a surprise – every time. What will be really surprising is a gambling lobby which recognises the concerns of its anti-gambling (or anti certain types of reform) counterparts and seeks to address them head on – economic arguments always look cheap (to most politicians) next to social ones, and pro-gambling lobbies tend to give the latter field to their opponents. The defeat of this particular bill is not a black swan moment – it is painfully common, and it will continue to be common while the global gambling industry lobbies as it does.

Global: Football World Cup – BoJo boycott scare

Operators’ hearts would have been in their mouths for a short while this morning as it was reported that Boris Johnson had threatened to withdraw the England football team from this summer’s World Cup, after the suspected poisoning of a Russian dissident in Salisbury at the weekend. The Prime Minister’s spokesman moved quickly to clarify that Johnson was referring to the attendance of diplomats and political representatives at the event in Russia, rather than the team.  While some may question the extent to which British civil servants (or even the England football team for that matter) would be missed in any event, operators will be acutely aware that as big a betting event as the World Cup will be, if it were to take place without an England team at all (given that a tournament life expectancy of three games is the best that fans can realistically expect anyway), their anticipated big business on the event would be materially negatively impacted. In a fluid and escalating situation, the Foreign Secretary’s (or his aides’) pronouncements on this subject might have to be given more attention than normal by the sector…

Global: eSports – land based tournaments gaining traction

Following the announcement that the Luxor Las Vegas would open its dedicated 30,000 sq ft eSports facility in March, Caesars Casino have joined the eSports fray. Partnering with H1Z1 Pro League, Caesars Casino will host the Battle Royale eSports League starting on the 21st of April in its 50,000 square foot production facility dubbed, ‘Caesars Entertainment Studio’. The Tournament will host 15 professional teams over two 10 week cycles, culminating in a championship in the Autumn. Facebook are partnering as the dedicated streaming provider, and fans will be incentivised to tune in, receiving in game redeemable rewards. In a statement Caesars claimed that this latest eSports development builds on the strategy to be at the leading edge of all forms of Interactive Entertainment.

In the UK, European Gaming League also announced it is hosting its ‘Gears of War’ eSports Tournament at the Sheffield Ponds Forge Arena, on the 21st and 22nd of April with a total prize fund of $20,000(yes USD not  GBP!). These unrelated developments suggest that there is a growing optimism for land based eSports tournaments, given the size of the investment, albeit one that does not yet contain a direct betting involvement. How soon will we see a land based eSports tournament combined with real money gaming? Whilst there may be a betting appetite from punters so far most eSports providers are treading extremely cautiously.