Winning Post – UKGC recommendation gives hope to bookies

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.

UK: DCMS Review – Gambling Commission recommendations
The Gambling Commission has published its advice to the government on action to be taken under the DCMS Review into machine stakes, social responsibility measures and advertising. The 53-page document (less appendices) contains a lot of valuable thinking on the likely guidance given from a policy perspective and we will be reviewing this in more detail. Here, we consider the key advice and what it is likely to mean for the sector in this review round.

The main recommendations are:

  • The FOBT (B2) slots stakes should be limited to £2
  • The stake limit for FOBT (B2) non-slot games (which includes roulette) should be set at or below £30 if it is to have a significant effect on the potential for players to lose large amounts of money in a short space of time
  • Banning the facility for machines to allow different categories of games to be played in a single session
  • There is a strong case to make tracked play mandatory across machines categories (B1,B2,B3)
  • Extending to category B1 and B3 machines the kinds of protections, such as player limits, that are in place on FOBT (B2 machines)
  • Working with the industry and others on steps to make limit-setting more effective – this could include ending sessions when consumers reach time and money limits.
  • Consultations to be launched on enhanced social responsibility controls (prevention of underage gambling, more timely customer due diligence, guidelines for intervention)
The full text can be found here:
http://www.gamblingcommission.gov.uk/PDF/Review-of-gaming-machines-and-social-responsibility-measures-%E2%80%93-formal-advice.pdf

From a FOBT perspective, we believe the Commission’s position effectively rules out the £50 option, but politics and the balance of evidence almost certainly did that anyway. The recommendation for ‘£30 or less’ gives £30 hope to the bookmakers and ‘or less’ hope to anti-lobbies; again, while £30 cannot be ruled out the politics of the situation (backed by the ‘precautionary principle’) heavily militates against this outcome, in our view. However, the Commission’s guidance does reinforce the RGSB’s position and might steer government away from £2 for roulette (ie, no practicable roulette). The death knell has almost certainly been sounded for high staking slots; again, this should not surprise, but a product mix accounting for c. 8% of B2/3 revenue and which works well at c. £20 staking being lost is serious from a potential substitution/mitigation perspective, in our view. The door of ‘mixed play’, another potential substitution driver, also appears to have been firmly closed. While the Government is not bound by the initial four options, it is notable that only Option C (£20 roulette; £2 slots) would seem to fit the Commission’s advice.

Many of the social responsibility elements may have more impact outside LBOs: recommending existing practices for broader Cat B (bingo, arcades, casinos); in this the landbased betting industry can take some credit for showing the way, but given that this has been accompanied by increasingly shrill lobbying, it is unlikely that due credit will be recognised, in our view. (As an aside, the ABB’s latest response to the £2 lobby, that it is disproportionate because it would make stakes per minute on FOBTs £6 vs. £24 for pubs pretends that B3 and C content is not available on the same machines and as such could be portrayed as a dangerously self-defeating combination of misleading and disingenuous at an acutely sensitive time: http://www.bbc.co.uk/news/business-43422785).

However, as anticipated, mandatory tracked play for Cat B (NB, not just B2) has been suggested and this could have a very significant impact given many machine players’ distinct aversion to it, depending upon the (unclear to us) extent to which the customer is involved in the tracking process (eg, c. 80% avoidance of the £50 journey to lower staking limits, albeit at levels where roulette still works).

There appears to be a veiled threat here behind limit-setting – that it will give licensees no hiding place on problem gambling. Operators, we are told, will have “no excuse if they fail to identify players that are starting to show signs of problematic gambling.” This is consistent with the Commission’s enforcement logic on licensing failures online, where licensees appear to have been held to a higher standard due to their data tracking capabilities. However, it also might suggest an unhelpfully simplistic view of a complex field. Except in extremis, player data has only limited (if highly valuable) usefulness in terms of clinical diagnosis (it cannot for example, detect lying, loss to significant relationship, preoccupation or borrowing to gamble alongside a whole host of other qualitative and environmental data).

The emphasis on limit-setting (which is considered to be of low to moderate effectiveness in the research literature) may also be unhelpful in suggesting totemic solutions to complex problems. Risk mitigation should always be proportionate to risk and while it is clearly sensible to allow customers to set limits and facilitate tracking, requiring them may cut against the notion of “putting the customer at the heart” of policy-making. The suggestion that this should be undertaken on a trial basis is a sound one – and something that operators should seek to make as effective as possible (successful deployment of limit-setting based upon customer choice might forestall a more draconian solution).

Another double edged piece of advice from a B2 viability perspective is that the Commission does not recommend altering speed of play as a fix ‘alone’, flagging that a 60s spin speed “might try the patience of most consumers”, while recognising that slower spin speeds “might nevertheless be used in combination with lower stake limits to control rate of loss”, before recommending more long-term focus on the latter. The fact that spin speeds did not make the cut of key recommendations should encourage, but the way they are mentioned in the advice potentially leaves a ‘political compromise’ door open (£300 to £20 appears a lot more meaningful in headline form than £100 to £20, while also severely curtailing the ability to spend large sums of money quickly on B2 product). This should be a reminder to all stakeholders that the detail might have a far more profound impact than the headline figures.

The Commission’s advice was provided in February 2018 and the letter to the Secretary of State was dated 28 February. It is our understanding that the Government now has all the evidence and guidance necessary to make a decision. While undoubtedly distracted by Brexit and the developing Russian issue, if the Government wishes to implement this year it will need to announced its decision soon, with a Statutory Instrument almost certainly requiring a Parliamentary vote While the industry may reasonably claim that a long lead-time will be required to get all games and features ready for such a big change, we are not convinced that the Government will listen (especially since so much other lobbying has been so off-beam, leading to an additional risk of short-term implementation of a much reduced games catalogue while development catches up.

In short, we believe that the advice on the face of it does not strongly back an obvious decision, but does reinforce our central thesis of a Government ‘compromise’ of £20 roulette, £2 slots and enhanced social responsibility measures at much more material levels of Cat B activity than the £50 journey. Further, we continue to believe that the impact of such measures will be more severe on the sector than the DCMS’s own Impact Assessment, in part due to the impact of closures on the overall system.

US: sports betting legislation – American Pie?
US States’ positioning for a potential PASPA repeal is gathering pace, with New York, Maryland and West Virginia joining Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Missouri, New Jersey, Ohio and Pennsylvania in advanced planning or draft enactment, with other states (eg, Connecticut, Minnesota and Rhode Island) also in active legislative discussion. These 13 states alone represent a combined population of 107m: bigger than any single European country. Is it therefore time to get excited? The myriad regulatory models proposed should suggest nothing more than continued cautious optimism for heavily caveated opportunities in some areas, in our view.
One of the biggest questions to be settled by states is distribution (Intra-State only while the Wire Act still exists). As can be seen from the summary above, all sample states are primarily focussed on providing casinos and/or racetracks the ability to offer sportsbetting. While Las Vegas proves the destination-model has some merit (average landbased revenue per outlet in Clark County: c. US$1.3m), an average distribution of one outlet per 800k inhabitants is hardly a big economic opportunity and cannot hope to satisfy demand (some states – such as Connecticut – have broader and therefore far more effective OTB distribution, but these seem be left out of some key legislation, such as New York’s bill). Looking at it another way, taking the LV strip revenue as the likely upper limit per venue, this suggests a maximum landbased revenue opportunity based on the above states of c. US$90m – the sportbetting equivalent of c. 370 UK LBOs…

Allowing online and mobile is obviously key therefore, but so far this is only clear in seven of 12 sample states, according to our analysis. Moreover, if landbased registration and/or payments is required then this might not be the obvious distribution fix a fully remote offer could provide. In any event in all states an online offer seems to be linked to landbased supply, meaning most participants will be partners at best: dividing the pie and likely causing sub-optimal business structures (JVs are not famously successful).

Tax has been a mixed bag so far. Apart from Kentucky’s eye-popping 20% handle tax (perhaps appropriate for the KY state), proposed state taxes range from sensible to generous: whether this is a starting-point from a lobbying and compromise perspective remains to be seen (we have our doubts), but taxes c. 30-60% lower than European averages are likely to be heartily welcomed. Also, only 4 states have so far run with the 1% integrity fee, with NY suggesting a much lower figure. On the face of it a c. 15-25% levy (GGR equivalent on singles and in-play-led markets) before commercial agreements have been considered could create material market distortion and might leave states as well as operators feeling somewhat short-changed (what the integrity fee actually ensures remains unclear). However, given the power of the leagues some sort of compromise will be likely more often than not, in our view, and the key job is to ensure working legislation and active underlying integrity solutions rather than a potentially disruptive money-grab or standoff.

In summary therefore a number of small, fiddly opportunities in a number of often divergent markets. Some operators and suppliers will no doubt create material incremental value, but anyone hoping for a major slice of a significant pie is likely to be left disappointed (and perhaps a little sore), in our view.

UK: in Parliament – an elementary approach legislative reform?
Labour’s investigation into gambling and mental health went on the road this week as the party’s Deputy Leader, Tom Watson (Lab, West Bromwich East) visited Britain’s only NHS treatment clinic for problem gambling.

Watson met Dr Henrietta Bowden-Jones at her clinic in London’s Earls Court – a visit that was covered on BBC London News. Earlier, Watson and Labour’s shadow Health Secretary, Jonathan Ashworth (Lab, Leicester South) co-authored a piece in the Huffington Post, calling for the creation of a wider network of specialist clinics – picking out Liverpool, Glasgow and Birmingham in particular (on the basis of social deprivation and the concentration of betting shops).

Watson and Ashworth warned that “the gambling industry has to contribute a greater share of the cost. It can’t be left to the NHS to pick up the increasing tab for this acute mental health crisis” (it is interesting to note that while the review is still in evidence gathering mode, Labour appears to have decided already that a crisis exists).

This push from Labour comes at a time when the Government is allegedly considering tax hypothecation as a means of raising funds for the NHS (via a 1p increase in National Insurance Contributions). With the DCMS currently reviewing the suitability of the current voluntary system for funding problem gambling research, education and treatment, the idea of a gambling tax for the NHS may not be all that far-fetched.

Labour’s review poses a number of additional challenges for the industry. Watson and Ashworth’s article made it clear that the review would be far-reaching: “Labour’s review goes wider than the NHS…We have to look at how gambling behaviour continues to be normalized in our society; what impact does advertising and sponsorship have on people’s behaviour, how do we protect children, and how do we update our laws to make sure we can regulate the new forms of gambling online to ensure they do not increase rates of addiction further.”

Elsewhere, another glut of Parliamentary Questions was submitted for ministerial consideration. Anna Turley (Lab, Redcar) became the latest MP to express concern about gambling-style features (loot boxes etc) within video games, sending in four questions on the subject. Philip Davies (Cons, Shipley) probed on national Lottery funding for good causes and the practice of permitting betting on EuroMillions outcomes; and both Mary Creagh (Lab, Wakefield) and Jo Stevens (Lab, Cardiff Central) made enquiries on behalf of the Heritage Lottery.

Perhaps the strangest question of the week came from Maria Eagle (Lab, Garston and Halewood) who asked about limits on FOBTS in “staff workplace canteens”. Of course, no FOBTs are permitted in staff canteens, which makes one wonder what Eagle’s underlying point was.

Organisations can make submissions to the review by 31 March at: http://www.tom-watson.com/gambling

UK: horseracing – Cheltenham Festival
For many operators, a ‘good’ cheltenham usually consists of breaking even on the festival itself, and benefitting from the newly acquired or reactivated customers. A ‘great’ festival also covers the marketing costs. Only a few actually see a significant post-marketing contribution, but the culmination of the main GB jumps season remains vital to overall UK bookmaker positioning, and is as keen a test of betting operators as it is equine athletes.The 2018 Cheltenham Festival has provided a mixed bag for bookmakers, with tough results early in the week, followed by more positive ones on Thursday and Friday – a pattern not uncommon in recent years. Four of the five odds-on or evens favourites over the first two days obliged for the punters, with only (1/2 favourite) Apple’s Jade’s failure to win in part saving the day on Tuesday in what could otherwise have been a disastrous day, especially through multiple bets. One bookmaker told us “things were pretty tough over the first couple of days, but we survived it!” While other reverted to the one-word replies of “brutal”, “bleak”, “catastrophic”. Wednesday and Thursday provided fewer winning favourites and bookmaker-friendly results in feature races. Midweek football results also didn’t help some, with Betway reporting a half a million loss to one punter across the two sports.

Up to and including Friday’s Gold Cup, the average winning price (SP) over the festival was 9.75/1, only slightly below the 10-year average of 10.5/1 – comfortably between 2016’s (disastrous) 7.2/1 and 2017’s (good) 11.4/1. We have seen eight winning SP favourites, compared to 10 in 2016 and six in 2017. A customer backing a £1 ‘Lucky 15’ on the shortest of four selections every day would have been over 40% ahead after the first two days, but at an overall loss over the festival. Therefore, the festival will likely have been ‘ok’ for most (against tough comps), a position that would have been snapped up 48 hours ago.

This article was provided by Propus Partners

UK: regulation – FCA complaint highlights pitfalls of regulatory risk management
The FOBT debate appeared to take a new turn this week with allegations that quoted betting shop operators had created a false market in their shares through selective briefing on the impact of stake reduction. The ABB immediately sought to downplay the issue and they are probably right – particularly as the complaint originated with the Campaign for Fairer Gambling rather than from within the City.

Nevertheless, the episode does highlight the risk of creating a mismatch between lobby rhetoric and capital market communications. Painting stake reduction in apocalyptic tones while at the same time seeking to reassure investors that all is well can be a tricky balance to maintain. The much discussed but rarely seen KPMG report for the ABB is at the centre of the complaint. Whether or not disclosure rules have been broken, the decision to allow members of the press to see the report but to withhold it from parliamentary and public scrutiny may have backfired.

The complaint poses the question of whether any institutional or private investors have seen the report? If The Times can get hold of a copy, why not those institutions that actually own the shares? Was it considered in arriving at GVC’s valuation adjustment for Ladbrokes Coral (and if not, why not)?

Currently, in Australia, Crown Entertainment faces litigation in relation to misrepresentation of Chinese regulatory risk. It too may lead nowhere; but it seems clear that given the sensitivity of gambling operators to political intervention, investors and operators alike need to do more to understand and manage risk in this area. Making key information available and properly explained to all stakeholders (or none) would probably be a good start.

Denmark: market statistics – what the future looks like?
Spillemyndigheden has published Q4 revenue figures for Denmark, which shows the overall commercial market growing 16% to DKK1,806.4m (€235m). On an FY basis, online casino grew 15% to DKK1,806m (€235m), with gaming machines and landbased casino both declining 1% to DKK1,487m (€193m) and DKK375m (€49m) respectively; from a gaming perspective Denmark is now 49% remote. Sportsbetting grew 7% overall YoY to DKK2,329m (€303m), with 24% Q4 growth reversing previous sluggishness. Betting channel shift also appears to have stabilised, with 35% retail and 65% online (€197m: an overall online market of €432m), within which 76% was mobile (only 27% for gaming, but gaining 12.6ppts in mix over the year). Horseracing, provided now that the market is (in theory) liberalised, generated only DKK116m (€15m), down 2%.

While inevitably showing some local points of difference, Denmark continues to illustrate what a mature, liberal, wealthy, consumer technology-driven market is likely to look like. Remote channels, are dominant, with retail in steady but commercially manageable decline; remote growth is attractive but not stellar, with patches of low-growth / no-growth. This is now the reality across much of Northern (and some Eastern) Europe, with Southern and Central Europe c. five years behind on a similar curve. This suggests significant online growth in some markets (especially Spain and Italy), but increasing retail pain as channel shift bites.

UK: Sports betting integrity – SBIF 2018 Action Plan published
The Sports Betting Integrity Forum (SBIF) has published its Action Plan for 2018, with some significant actions carried over from last year. That should not be surprising, given the importance and scale of those actions (such as: initiatives to promote good practice and sharing of information and knowledge; monitoring the implementation of GDPR; supporting the implementation of the Macolin Convention against the manipulation of sports competitions; and assessing major threats to ensure a focussed approach). It is no criticism to suggest therefore that much of this constitutes the SBIF’s “business as usual” as it settles into its role as the UK’s national platform. More specifically, operator members remain focussed on raising awareness and sharing good practice with small and medium operators, having produced an online information pack while the RGA has developed a free to access eLearning module which will be rolled out this year.

Sadly, the finalisation of the funding of the SBIF still sits as an outstanding action allocated to DCMS. Of course, public purse strings are tight, but we cannot imagine that a substantial amount of funding is required for this group (we would estimate that the annual costs are unlikely to reach six figures). The department and the minister have been clear in recognising the significance of this subject and in expressing their commitment to it, in particular in the context of the “Sporting Future” Strategy, and the Home Office’s Anti-Corruption Strategy. There is no question that the SBIF brings together the right stakeholders, produces good ideas, and is making material progress. Such progress will likely be more effective and more swiftly achieved if / when DCMS is able to put its money where its mouth is.

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