Regulus Partners, the strategic consultancy focused on international gambling and related industries, takes a look at some key developments for the gambling industry in its ‘Winning Post’ column.
New Zealand: NZRB – the trouble with monopolies?
New Zealand Racing Board’s results to July 2018 demonstrate continued progress online, with 20% growth in customers to 230,000 (nearly 5% of NZ’s population), including 78,000 first time bettors – driving mobile revenue growth of 30% (mobile customers +45%), and digital now being the primary channel by turnover (52% mix). Overall, NZRB generated NZ$360m (US$245m) of revenue (+4% LfL), with 74% coming from racing (fixed odds growth, tote decline – VIP Australia comingling driven), 16% from sports and 11% from gaming (machines only, 3-4% share). This allowed NZ$74m to be paid in duties and GST (20.6%), NZ$2.3m to problem gambling (0.6%), NZ$10m to sports other than racing and NZ$151m to racing – a total return of 66% revenue. Moreover, this progress was delivered against continued delays to the new online platform (OpenBet-PPB). It is unsurprising therefore that the CEO was moved to state “There is a persistent myth that NZRB is not performing but this simply is not true”.
Monopolies tend to get a bad press. First, they have been losing favour in mainstream economic circles since Colbert (excluding Marxism, which we might just have to recognise as mainstream in the UK next year on our current political trajectory). Second, monopolies tend to create enemies among all those which are not holders – ie, most commercial businesses (an interesting question is whether they would say no if offered one…). Some monopolies also perform miserably in competitive circumstances – racing monopolies offering sports betting is a good case in point almost everywhere, but the UK Tote, Germany’s Oddset, Netherlands Tote (among others) have managed to lose whatever traction they had domestically in racing also. However, HKJC, PMU, ATG, Rikstoto, Tabcorp and NZRB demonstrate pretty clearly that some racing monopolies can hold their own against pretty fierce online competition (licensed or not) in their core product. The key differences here are quality of operations management and the depth of the monopoly, in our view (in that order).
The obvious big benefit of monopolies is their ability to channel much higher rates of revenue into duties and equivalents than commercial enterprises. If monopolies can command strong market share (and we believe that NZRB has comfortably over 50% betting share in NZ), then this model works well. The problem is that most hard gamblers want choice (especially in sportsbetting) – even when the monopoly offers an effective product. This means that among those top 10% of customers which have over 10 accounts and represent c. 70%+ of revenue, a monopoly will be lucky to get 30% share – ie, a combined share ‘ceiling’ of only c. 50% (potentially higher in racing if pools are liquid and competitive fixed odds is provided).
In other words, if a monopoly gets less than 50% market share (which is likely) and is paying less than 50% of revenue in tax equivalents (increasingly likely in more competitive digital environments), a commercial GGR tax of 25% would be economically more efficient. However, monopolies can also provide broader benefits such as a much clearer and accountable focus on issues such as domestic job creation and social responsibility. From an economic standpoint therefore, monopolies in gambling are neither ‘good’ nor ‘bad’, but efficient where products broadly lend themselves to monopoly and operational execution is strong; inefficient in structurally competitive environments and where operational execution is weak. From a policy standpoint, monopoly can be an effective channelling tool for ‘the many’ and some jurisdictions actively prefer this to engineering an entire commercial regime to effectively capture ‘the few’ (again, this is a policy choice, in our view, rather than necessarily ‘good’ or ‘bad’ – if taken actively and with full knowledge of the consequences).
Another reason why monopolies tend to look ‘weak’ is that their starting point is landbased, where monopoly is easy to enforce. Channel shift therefore causes a structural loss of market share, with retail losses almost certainly outweighing online growth in rapidly maturing markets. However, focussing on these headline numbers tends to miss a key point – monopolies are still capable of being very strong online in operational terms: monopolies have #1 market share in online gambling (ex lottery) in: Australia, Nez Zealand, Denmark, Sweden, Norway, Finland – that is an impressive roster of highly competitive and mature (from a consumer perspective) markets.
Monopolies should not be dismissed therefore as a policy option or assumed to be a weak competitor. The former potentially reduces government returns and potentially increases social responsibility risks. The latter leads to a set of potentially very costly false assumptions about market dynamics (eg, that Australia is/was ‘ripe for the picking’, or that Swedish ‘reregulation’ will lead to strong .com growth, or that governments are bound to ditch monopolies over time and turn to offshore operators as ‘the answer’). Monopolies don’t always work; but when they do, they can be just as dynamic as many commercial operators and provide far greater benefits to wider stakeholders.
UK: In Parliament – all together now
With momentous affairs of state unfolding in Downing Street and the Palace of Westminster, this was a refreshingly quiet week for the politics of gambling.
The year’s final set of DCMS oral questions (on Thursday) prompted a brief discussion of whether the Government’s announcement on the timing of stake reduction was linked to GVC’s £700m contingent payment to former shareholders in Ladbrokes Coral.
Bob Blackman, the Conservative Member of Parliament for Harrow East asked Sports Minister, Mims Davies whether: “the shareholders of Ladbrokes, including UK pension companies and employees, should get that £700 million, or should the offshore gambling company GVC pocket it and use it for irresponsible gambling adverts?”
Elsewhere, there were further manoeuvres from the Labour Party with three MPs asking a very simple (and simply identical) question on what steps the Government is taking to reduce gambling-related harm. This question was submitted to the DCMS by Labour MPs in England, Scotland and Wales – Paul Blomfield (Lab, Sheffield Central), Danielle Rowley (Lab, Midlothian) and Jessica Morden (Lab, Newport East).
The guns of gambling policy debate will hopefully fall silent over Christmas – but Labour may well be preparing for an all-out assault in the New Year.
UK: Integrity – Posh and Bets
Those concerned about the cosy relationship between gambling and football loaded up with ammunition as the FA revealed that it had charged Barry Fry, the colourful director of football at Peterborough Football Club with misconduct linked to betting.
Meanwhile, Celtic and Scotland forward, Leigh Griffiths is reported to have taken a break from the game in order to deal with a number of personal issues, including gambling problems.
The fact that Griffiths, who wears a dafabet sponsored shirt when he plays for Celtic and last season picked up winners medals for the Ladbrokes Premiership and the William Hill Scottish Cup has problems with gambling is unlikely to aid the cause of an industry that had hoped that the voluntary whistle-to-whistle ban might draw a line under present policy concerns.
UK: regulation – Barclays offers account blocking; now there’s a thought
This week’s announcement that Barclays Bank would make gambling blocks available for account holders was a welcome signal that the financial services sector was stepping up to its responsibilities for tackling gambling-related harm.
For too long, gambling licensees alone have been expected to deal with excessive or harmful gambling behaviour while opportunities for the broader supply chain to play its part were ignored. It has taken the initiative of challenger banks (Starling and Monzo), together with the efforts of campaigners (notably Tony Franklin) and attention from the Gambling Commission to change this.
We should expect other banks to follow Barclays in what ought in theory to be a useful harm prevention measure (precisely because it puts the individual in control rather than disempowering him/her as some other measures do). It may also alleviate pressure on the Government and Commission to recommend a ban of credit cards for online gambling.
UK: horseracing betting levy – what could primary legislation change?
As expected, a second parliamentary committee criticised the creation of the Racing Authority via an Order, suggesting that primary legislation would be more appropriate, while the putative chairman of the Authority – former Sports Minister (and current Chairman of the BOA and Camelot) Sir Hugh Robertson indicated support for a continued Levy Board during his speech to racing stakeholders at the annual Gimcrack dinner in York. While much of the scrutiny has been procedural rather than substance, the ‘fiasco’ created does open up the possibility of considering the substance, in our view. We will blog on some of the detail in the new year, but for us the critical point is to ensure that the value transfer from betting to racing is designed to reflect the needs of betting within racing – otherwise productivity will continue to fall, betting will be incentivised to promote other products and the logic of the levy will in time be undermined. Allowing ‘racing’ (albeit with many stakeholders typically under-represented) to spend the money in any way ‘racing’ sees fit might work for the good of all stakeholderds (especially with a strong RA chairman – which Sir Hugh undoubtedly is) – but by taking out the independent element (albeit itself certainly in need of reform and a reframing of purpose), the current proposals make it less likely to, in our view. Interestingly, this is an issue a bruised and battered GB bookmaking industry, increasingly less sure footed both politically and in relation to racing, seems not to wish to tackle – this represents a dangerous and potentially very expensive abrogation of influence, in our view.
US: sports betting – NJ November stats still more heat than light?
New Jersey sportsbetting statistics revealed another encouraging month, this time on more normalised settled gross margins (6.0%). Overall settled revenue was US$19.8m, with a 68% online mix and now relatively low futures betting distortion (0.4% handle, still 6.6% revenue). On this basis NK sportsbetting has matured incredibly quickly: already reaching 40% of online revenue, roughly where many European markets are.
However, there are inevitably a few important caveats. First, November is seasonally the busiest sporting month for US sports – over-indexing the average by 1.6x; December – March are relatively more muted (March Madness notwithstanding), followed by a Spring – Summer lull. Second, market shares have some way to normalise, but Resorts (DraftKings, Stars) has gapped down another 11pts, demonstrating that first mover advantage is nice to have but not the be all and end all (even this early). Finally, excluding the New York servicing racetracks, casino landbased revenue has proved extremely patchy, with most generating less than US$1m revenue per month and two having loss-making months so far: the majority of landbased sportsbetting across the US is likely to be much more of a customer service than a material profit centre – certainly for the foreseeable future, in our view.
Australia: horseracing – no more secrets, agents..
Racing New South Wales has made the decision to extend the scope of its rules on prohibition of betting and the passing on information to include jockey’s agents from the 1st March 2019. A jockey’s agent has the responsibility of booking rides for their clients, and most rely on their network of owners and trainers and knowledge of yards in order to do this so the majority are party to a great deal of inside information – and could potentially have an unfair advantage over normal betting customers.
The rules on those betting with ‘inside information’ or who could potentially affect the outcome is much stricter in the southern hemisphere and when combined with more conservative betting rules ensures a better public perception of the integrity of sports. While in the UK the BHA is implementing rules to ensure more transparency to betting customers (most recently the necessity to declare breathing operations), there is no prohibitive measure for trainers and those associated from betting (although they are not supposed to pass on inside information in a relatively uncodified way); jockeys are not allowed to bet. There is also a perceived right by some trainers and owners, that they should be allowed the advantage of inside information as a sort of compensation (hence in part the furore over declaring wind ops). This is clearly a dangerous path to tread from a regulatory, key stakeholder and public perception perspective, and perhaps demonstrates how far elements of racing have still to come to ensure consumer and stakeholder buy-in in the 21stCentury…
China: regulation – just not cricket
The New York Post reports this week that authorities in China raided an underground ‘casino’ that had been organising cricket fighting. It seems that around $140,000 were bet on the bugs during the course of a week’s wagering.
Cricket-fighting in China dates back to the Tang Dynasty (618-907 AD) but was banned during Mao Zedong’s Cultural Revolution. Two men have been arrested in relation to the bust, although reports of involvement by a small wooden boy with a long nose appear unfounded….
UK: horseracing – safety first
The BHA has published its review in to safety at the Cheltenham Festival following a higher than normal number of incidents. The review and recommendations include the trial use of safer hurdles, vet’s inspections for all runners, fewer starters in selected higher risk races, and course walks and coaching for amateur and less experienced jockeys. There will also be further consultation on fallers and post mortems are to be performed on equine fatalities in order to identify risks.
This is a welcome move by the BHA (including borrowing some basic best practice from other equine sports) and is timely considering the recent scrutiny on the use of the whip in racing and further welfare issues. With any sport there is the risk of injury, but the public reaction to animal injury is generally worse than that of athletes (logically enough given choice and consent) – particularly from the younger generation. If incidents can be minimalized, with more information and education provided to both fans and participants, potential bad press can be reduced and mitigated leading to a more accessible and popular ‘product’ for generations to come.
Most importantly though, the BHA’s improvements demonstrate the extent to which changes are still largely basic common sense: this represents an opportunity to get ahead of the problem to us, if the industry proves sufficiently responsive to much-needed modernization. In this context the issue is probably worth putting starkly: the present generation of ‘great and good’ can choose to protect its comfortable status quo at the expense of current wider participants and future generations, or they can accept the need for change in ways few may find comfortable or even instinctively necessary.
UK: eSports and games – a dose of reality
DCMS has launched a consultation into ‘Immersive and Addictive Technology’ with submissions required by the 14thJanuary 2019 (link here):
(https://www.parliament.uk/business/committees/committees-a-z/commons-select/digital-culture-media-and-sport-committee/news/immersive-technologies-inquiry-launch-17-19/). The inquiry will look at the current success of the games and eSports sector within the UK, as well as the more negative aspects associated with the industry – addiction, regulatory issues and the relationship between ‘gaming’ and gambling.
It is positive for the potential growth and regulation of the gaming and eSports industries that government is taking an active interest in its future. Over recent years the focus on eSports has been the commercial opportunities causing inflated growth, leading to a lag in regulatory development both in competitive gaming and also leisure. The recent scrutiny over loot boxes and the use of in-game items for gambling has brought this to a head and encouraged a closer look by regulators and law makers (indeed at the latest and last EU-sponsored meeting of European regulators, this was raised as the #1 regulatory concern).
International: eSports – no Olympic dream just yet
The recent Olympic Summit, held to discuss matters relating to the administration of the Olympic Games, new policies and the future and development of the games, also looked at the potential for eSports inclusion within the Olympic Movement. It was decided that a combination of the commercial nature of the gaming industry and the incompatibility of some games with the Olympic values would exclude its inclusion at this stage. The summit also advised other sports events organisers within the Olympic Movement to respect this decision.
Most elements of the eSports industry are in complete contrast to the Olympic Charter (notably ‘peace through sport’ and ‘healthy body image’ (see our analysis in the WP of 21/04/17). Without material changes to games titles, elite competitions, a globalized set of rules and integrity measures, and athlete development programmes, or indeed the entire Olympic Charter, it will struggle to be considered a ‘sport’ within the context if the Olympic Games. This is unlikely to bother pro eSports players however, as the commercialized nature of competitions ensures enormous prizemoney – a likely greater incentive than a medal and brief national glory.
UK/International: sports rights – dividing the cake
Eleven Sports is reportedly reviewing its UK rights portfolio since it has failed to secure redistribution rights for Serie A and La Liga football, while a UFC deal (due to start next month) has also collapsed because of similar redistribution problems – management has blamed (at least in part) “rampant piracy” (alongside the lack of carriage agreements) in the UK-Ireland market. A third point we would add is the extent to which a basic subscription model gets stretched outside the top tier of (usually domestic) sports content beyond (usually only a handful of) dedicated fans.
This news reinforces two important trends, in our view. First, the explosion of OTT solutions and the rapid retrenchment of traditional media distributors is creating a highly uncertain market for ‘middle men’ to effectively price rights: owners of content and owners of eyeballs increasingly hold the power, but in a commercial environment often not yet settled or proven (for either side). Second, the “rampant piracy” in question is at least in part driven by betting, which has historically embraced streaming somewhat patchily (outside a few standout operators).
As streaming becomes increasingly critical to overall media value, this rather louche approach to IP is likely to be increasingly resisted by powerful stakeholders with deep pockets, an appetite for litigation and much to lose. There is an extent to which this potential source of friction is being headed off in the US with sports partnerships (MGM-GVC leading the way, all major betting data distributors involved, even NFL considering options), but ironically increased exposure in the US could very well lead to increased scrutiny globally – the era of having ones cake and eating it looks increasingly under pressure…
Global: M&A – summary
– 888 bought out the remaining half of All American Poker Network (AAPN) for US$28m