By Paul Leyland, Founding Partner, Regulus Partners
“There are only two forces that unite men - fear and interest.” Napoleon Bonaparte
During Wednesday’s Budget, the Chancellor of the Exchequer announced that a Horserace Betting Right will replace the current Levy. After more than a decade of vacillation, the government has conducted three quick-fire consultations and (rather rapidly) made its decision.
Matthew Hancock, MP for West Suffolk (Newmarket), former Chief of Staff to George Osborne, and a business minister, has been a leading champion of the Right (no pun intended). Clive Efford MP, Shadow Minister for Sport, has also given his backing to the change. The details remain unclear, but the course seems set for a Right whichever combination of parties wins power (or at least office) in May.
So far the response has been one of muted delight from racing and a mixture of incredulity, rage and fear from the bookmaking community.
First off, it is worth saying that I think the bookmakers deserved to lose this fight. As discussed elsewhere (http://regulusp.blogspot.co.uk/2014/09/the-horse-racing-betting-levy-what-is.html), racing is a sport designed (in the most part) for betting on (especially off-course), and as such betting should pay more to racing than to other sports, which are nowhere near so inter-dependent and symbiotically entwined (excepting dogs). The betting industry should also see this as an investment that will deliver a return: sustaining and influencing what remains a key product (c. 45% retail; c. 33% remote) rather than dressing up its neglect as (self-fulfilling) ‘inevitable decline’.
Despite this very real symbiosis, the last decade has been dominated by disengagement on product and belligerence on economics. With the growth of remote and now channel shift (retail to remote), we estimate that c. 33% of horseracing gross win is occurring over remote devices and this mix is growing. Bet365 pays the Levy despite now being offshore; Betfair pays the Levy on commission, which is much better than nothing; the big UK retail bookmakers have agreed a Levy top-up which I don’t believe comes close to covering their lost remote Levy (in total across the four); the rest – in a rapidly growing sector - quite glibly freeload (shrugging at ‘anachronism’ without engaging in alternatives). Moreover, racing’s economic comeback of Picture Rights is so geared to landbased betting that it merely accentuates the remote funding time-bomb. Something had to be done; and as the bookmakers were not collectively willing to play nicely (as well as gaining bad press on other issues), that something is overwhelmingly in racing’s favour.
However, the fact that the bookmakers deserve to lose the fight (or at least round one), does not make this situation positive.
A Horserace Betting Right is potentially a very bad thing in my view because it is so one-sided. The government consultations spoke of symbiosis, inter-dependence and balance. A Right does not conceptually reflect this: the government is arming one side of the fight and disarming the other.
This is dangerous and to demonstrate why, let’s consider a possible scenario playing out over the next few years (this is not a prediction, just an illustration):
- Racing, understanding the difficult economics of the bookmakers, attempts to get an agreement on a material but not significant rise on current the Levy: somewhere in the region of the £100m of recent yore which has featured in consultations.
- Some bookmakers, seeing the need for an accommodation, agree in principle but a large proportion of (remote-led) bookmakers, which have never paid, much less understood, the Levy, refuse to play.
- A critical mass of bookmakers seek to challenge the Right legally; straining relations with racing, DCMS and Parliament, at a very sensitive time for gambling regulation generally.
- Separately, retail bookmakers attempt to minimise downside risk by playing as hard as possible on Picture Rights, further straining commercial relations with racing.
- A series of fudges are worked out while the legal position is settled (in my view the likelihood of a successful challenge is extremely low but the bookmakers could play for time / hope).
- Racing wins its Right, but it now feels it has been given the run-around for several years; fraught commercial and legal battles have given more power to hawkish elements.
- Separately, bookmakers are under pressure from machine and remote regulation; they need to ensure sports / racing revenue mix remains high from a business continuity and risk perspective almost whatever the short-term P&L cost.
- Bookmakers are on the back foot legally, politically and commercially; the Impact Study gave a(economically unsustainable) value range for the Right of 30-50% - Racing thinks in these circumstances why not? It’s payback time after all…
And in such circumstances, there is very little the bookmakers could do but pay up – racing has the Right, not an independent body; a Tribunal may settle disputes but it cannot set the rate. Sure, in five years’ time racing may regret pillaging bookmaking to near extinction and return to moderation - but by then it may be too late for a beaten industry - and who gets bonused on taking a five-year view anyway?
This is a doomsday scenario and it probably won’t happen as the bookmakers will see sense and racing will show restraint. But looking at the last ten years should we be relying on a model which requires sense from bookmakers and restraint from racing?
The only way to ensure racing does not have the power to Terrorise betting, even if it chooses to be moderate, is to enshrine balance constitutionally. Not with a Right, which essentially allows one group to decide what is ‘best’ for all; but with a genuinely two-way transfer of value in which both sides have an equal say in a properly governed and independent process.
Bookmakers should not repeat the mistakes of the past by going on the offensive (and therefore appearing offensive to many stakeholders); they should use the hiatus of the election to reach out to racing and form a working long-term agreement which encompasses all betting revenue on GB racing, pays a fair share toward putting on the betting product, and stakes a reasonable claim to governing its investment. It may now need to be called a Right, but even one-sided rights tend to lead to sensible constitutions in the end (though usually only after a lot of bloodshed). I only hope that after such an emphatic victory in round one, racing is still prepared to listen, before a really damaging fight begins in earnest which risks poisoning everything. Over the next few months and years one maxim should be at the forefront of the thinking of both sides: the only sustainable solution to betting and racing working together effectively is one built on interest, not fear.