In testing times we’d be daft to duck the question

"Guilty Mallard?"

By Dan Waugh, Partner

“If it looks like a duck, sounds like a duck and walks like a duck it’s unlikely to be a horse.”

One of the problems with regulating gambling in a relatively permissive society like Great Britain is that the target simply refuses to stand still. Changes in technology and consumer behaviour propel gambling companies forward in search of ways to grow the market and to capture greater share – sometimes rubbing up against the confines of regulation.

If the regulatory cords are tied too precisely, they may become outmoded and so create loopholes; too loose and they give rise to inconsistency of interpretation and possible exploitation.

This is the sort of problem that the Gambling Commission has been grappling with in trying to ensure that licensing regimes are used for the purposes intended (and more specifically to guard against the proliferation of machine gaming in ‘ambient’ premises). Attempts to set some measurable parameters around the principle of ‘primary purpose’ (the idea that a betting shop licence should be used primarily to offer betting, a bingo licence for bingo and a casino licence for table games) have been met with predictable entrepreneurship (often manifested in tokenism) from the industry. This in turn has led the Commission to seek to implement the well-worn ‘duck test’.

The ’duck test’ which focuses on outcomes rather than compliance tends to trump the industry’s best-laid arguments. The recent travails of DraftKings and FanDuel in the USA illustrate the point. The daily fantasy sports sector may be correct in asserting that their activities are exempted from the proscriptions of UIGEA and the Bradley Act; but if the regulator decrees that the carve-out is being exploited to offer sports betting by proxy, there will be only one winner.

Back here in Britain, local authorities may soon be asked to consider whether a bingo club is really a bingo club, not on the basis of technical specifications (bingo positions vs slots, floor space allocation, revenue splits) but on whether it meets their expectations of what a bingo club should be.

It is a common sense approach to licensing that the Commission hopes will put paid to pubs masquerading as bingo clubs, arcades aping casinos and betting shops bereft of sports. In some respects it may be seen in the same vein as the current regulatory emphasis on impact and effectiveness rather than simply compliance – a renewed recognition that the spirit is every bit as important as the letter of the law.

There is of course the risk is that the proposed new approach leads to inconsistency of interpretation between local authorities; but the Commission will be only too aware of its task in meeting this challenge.

Perhaps the more important concern is that in applying the ‘duck test’ to licensing, we are once again addressing symptoms rather than getting to the heart of the matter.

Britain’s terrestrial gambling operators are – generally speaking – a fairly well-behaved and conservative bunch. The widespread inventiveness in licensing that we have seen since the Gambling Act has often resulted from challenges to the traditional business model (such as the smoking bans of 2006 and 2007 or the casino duty increase of 2007) rather than base avarice. Sometimes covetousness creeps in where there are obvious regulatory imbalances (e.g. FOBTs being permitted in betting shops and not arcades; bingo clubs having better slots entitlements than pubs) but deep down this has been about the need to adapt to a changing world.

As I have argued in previous articles (notably http://regulusp.blogspot.co.uk/2015/02/time-to-think-outside-box.html), the prognosis for licensed gambling venues in Great Britain is worrying and this is largely because they are still defined by parameters set in the 1960s and the needs of a dwindling band of customers. Our arcades, betting shops and bingo clubs are looking increasingly anachronistic while the much vaunted rise of the casino has somehow failed to materialize. Gambling activity seems to be shifting inexorably to remote channels – a trend that may not be unambiguously positive.

Against this backdrop, it is unsurprising that operators have become more enterprising in how they interpret regulations. Done in the right way, it can even serve to force positive change. Several years ago, I was involved in the process to supplement machine numbers in bingo clubs through multi-licensing – a response to a restriction in the Act that limited clubs to just four jackpot machines per premises (at a time when some clubs were receiving up to 1,000 visits a day). With no evidence of harm arising from the machines expansion in bingo clubs, successive governments have relaxed restrictions and so largely obviated the need for multi-licensing.

Nevertheless, the rise to prominence of machine gaming in venues where it is intended to be a secondary activity is a justifiable source of concern for the Gambling Commission as is the land-based industry’s growing dependence on those machines. Application of the ‘duck test’ is a sensible response to current challenges (notably Greene King’s attempts to deploy bingo licensing in community pubs) but it is unlikely to end the game of cat and mouse over licence definitions, precisely because it does not address the root cause of incipient obsolescence. It asks the question of whether the licensing regimes are being adhered to rather than whether the licensing regimes are themselves appropriate.

This is existential stuff for the industry but will never be a priority for government; so the onus is on companies to address it. Put simply, if our ambitions fail the Commission’s ‘duck test’, perhaps it is time for us to consider whether we wish to be ducks at all – particularly those of the sitting kind.

Gambling in the UK: the perversity of eschewing diversity

Time to get another basket?
A decade on from the Act, gambling is still the only show in town for most of Britain's major operators.

By Dan Waugh, Partner
As Genting prepares to open Britain’s first truly integrated destination casino at the NEC in Solihull this week, Dan Waugh asks why our gambling industry has been so slow to embrace mainstream leisure.

A few years back, the American Gaming Association published ‘Beyond the Casino Floor’, a report which claimed that the economic value of commercial casinos in the United States was between three and four times greater than its $35bn of annual gross gaming revenue.

It is unlikely that the British gambling industry will be following the AGA’s example any time soon for the principal reason that gambling in Great Britain – unlike in an increasing number of US states and other markets - underpins nothing so very much more than....well.... gambling (and its traditional adjuncts, horse-racing and dog-racing). Whereas in the US, around a third of casino expenditures relate to non-gaming activity (more than 70% on the Las Vegas Strip), in Britain it is closer to 5% (in licensed gambling venues).

The unwillingness or inability of gambling companies to diversify revenue beyond gambling is perplexing to many overseas observers. For all the hyperbole of the Gambling Bill era, betting and gaming remain niche leisure pursuits - many of us do it but not very often; very few of us engage in it frequently.  As a result, consumer expenditure on gambling is relatively small beer at the macro level.

Restricting commercial activities to gambling thus confines the opportunities for growth. Given that most gambling businesses have fairly high fixed-costs, the opportunity to generate marginal revenues from existing areas of consumer spending should be highly attractive – but for a variety of reasons this has not proved to be the case.

The image of Britain as a nation of gamblers owes much to the National Lottery, which skews participation rates towards the three-quarters commonly quoted. The key sectors of land-based gambling – betting shops, bingo clubs, arcades and casinos – enjoy relatively low levels of patronage compared with leisure at large. This is despite the relatively high dispersal of licensed venues (there are around 10,000 overseen by the Gambling Commission) which makes gambling significantly more convenient than in many jurisdictions.

In the major global markets, the expansion of non-gambling amenities within venues has driven increased visitation and encouraged trial (if you want to be mass market then it pays to lead with mainstream activities rather than those which are niche or taboo – just ask Ann Summers).

The reason for the industry’s obsession with gambling may lie in the high gross margins and large VIP expenditures that are characteristic of certain sectors. If one can make millions through the relatively simple process of spinning a wheel or plugging in a slot machine, why bother with the grind of activities which require more labour, more effort, different skills and may yield lower margins? 

A decade ago, a gaming executive I knew defended the unspeakably bad food in his bingo halls by explaining to me that he would rather see his customers spend their time and money on high margin bingo games than on dining. He seemed to have completely missed the point that his customers were spending their money in the local chip shops instead (and then bringing the food into the clubs to eat). Things have moved on since then – but not by as much as we might have hoped.

So does gambling’s reliance on gambling actually matter? The industry appears not to care too greatly, the regulator has a range of other issues to deal with and the Government is not particularly interested; and why should they? Yet what if the question of diversification involved more than simply the opportunity cost of foregone revenues?

First, there is the fact that gambling is a politically volatile business, subject to unhelpful regulatory interventions and opportunistic tax raids. On three occasions in the last eight years, three different sectors of the gambling industry have seen their business models unexpectedly challenged by Budget Day changes to gambling duties - casinos in 2007 and 2009; bingo clubs in 2009; and betting shops in 2014 (this excludes the extension of remote gaming duty in 2014 to offshore operators which was well flagged in advance).

Such changes are not unique to Great Britain (think UIGEA, the current government crackdown in Macau, the backlash in Italy, the banishment to Siberia of the Russian casino industry, the imposition of retrospective remote gambling taxes in Spain, the outlawing of slots parlours in Poland – the list goes on) and the lesson seems obvious - a business that is built entirely on gambling revenues is one that is vulnerable to that which issues from the politician’s soapbox or the bureaucrat’s pen.

Gambling – a sector that often suffers from an unhelpful status in mythology and morality – is weak in part because it has so few champions. A small percentage of customers care passionately about their right to have a flutter, but taken as a whole the Great British public’s attitude to gambling is one of mild disapproval. Output is not significant within the context of national economics; employment is reasonably large (c.0.3% of Britain’s workforce) but highly dispersed, modestly paid and in decline; and while some communities truly value gambling (bingo clubs in some towns; arcades in seaside resorts, betting’s support for race courses), opposition tends to be more active and more vocal (e.g. the 93 local authorities who supported the London Borough of Newham’s Sustainable Communities Act gambit or the councils who have adopted no casino policies in spite of the fact that the law does not permit them to license casinos anyway).

Linked to this issue of political volatility is the question of gambling-related harm. There is a comforting story that we tell ourselves within the gambling industry that we are working towards a world where all gamblers spend within their means, allowing operators to benefit from affordable (and so sustainable) consumer expenditure and long-term customer relationships. Gambling businesses, we tell ourselves no more want problem gamblers than pubs wants alcoholics. It’s a neat line but what if it isn’t true?

Several studies (notably the Australian Productivity Commission and in this country the work of Professor Jim Orford) have suggested that gambling companies are highly sensitive to the expenditures of problem gamblers. We don’t know this to be the case but we do know that certain sectors (casinos, betting shops and remote) derive large portions of their incomes from a small proportion of highly frequent customers (n.b. frequency is a key flag for possible harm).

This is what the writer and former Wall Street trader, Nassim Nicholas Taleb calls ‘Extremistan’ – a place where the mean is meaningless and the behaviour of the few markedly skews the overall picture. Pubs on the other hand largely inhabit ‘Mediocristan’, where consumption values from one customer to the next are less divergent.

If Orford is correct then this suggests an unhelpful paradox where ‘responsible gambling’ may be put squarely at odds with commercial objectives. If (and this remains to be proven) certain types of gambling are sensitive to the expenditure of problem gamblers, it makes it that much harder for companies to take meaningful action because to do so is to work against near-term financial self-interest. Sacrifices that hurt tend to be harder to make.

In this situation, revenue diversification would seem to have two things going for it. First, companies are going to find it easier to do ‘the right thing’ if they are less dependent on ‘the wrong thing’; and second, by offering customers a wider range of amenities, there may be positive incentives for them to take breaks from gambling (as opposed to the negative incentives of limit-setting). It shifts our interpretation of responsible gambling from a series of mitigations to inherent characteristics. This logic was embedded in the Budd view of gambling reform that somehow got lost along the way.

All this is fine in theory but how on earth does gambling make that journey from Extremistan towards Mediocristan (noting that dependence on high-value customers is not the same as reliance on problem gambling and the distribution of revenues will always be more skewed than in other parts of the leisure market)? By dint of the current licensing regimes, casinos and bingo clubs have the greatest opportunity for revenue diversification. Indeed, Simon Thomas at the Hippodrome has been demonstrably successful in taking the casino mainstream despite the obvious limitations of the 1968 Act regime; and now Genting is raising the bar again (under the more generous 2005 Act) at the NEC.

Yet there is nothing to stop arcades and betting shop operators from seeking to exploit new revenue opportunities. Their business models may need to change in order to do so; but this is perhaps overdue anyway given the erosion of the traditional customer base and the need to appeal to younger customers in both formats. For all sectors, there are models of diversification from overseas that might be adopted or adapted (see http://regulusp.blogspot.com/2015/02/time-to-think-outside-box.html); and though this may require changes to regulation, reform is more likely to be achieved if its consequences are in keeping with social policy objectives.

The dynamic of land-based gambling in Great Britain appears today to be a long-term shift towards obsolescence with the threat of near-term regulatory shocks. Both require strategic action, including a willingness to do things differently. Kicking gambling’s dependence on gambling may just be an important part of that process.

Labour’s lurch raises the stakes for gambling

By Dan Waugh, partner at Regulus Partners

One should always be careful what one wishes for.

On May 8^th this year, the bookmaking industry breathed a collective sigh of relief as David Cameron’s Conservatives were returned to government by the British electorate. The spectre of an allegedly anti-FOBT Labour administration had been vanquished but few at the time suspected that Ed Miliband’s defeat would usher in an altogether more alarming era with his party lurching even further to the left.

The future of Opposition politics remains shrouded in uncertainty but the rise of Jeremy Corbyn provides a disconcerting political backdrop to gambling in Great Britain at a time when deal-making has raised the stakes on regulatory risk.

The gambling industry – and the bookmakers in particular – appear to have few friends (if any) on the new Labour front-bench, announced this week.

A quick scan of parliamentary records shows that only one member of the shadow cabinet (on one occasion) voted in favour of positive regulatory change on gambling between 2010 and 2015. Of course, this pattern was entirely consistent with the party line on these votes – but it is worth noting that Corbyn has never voted in favour of deregulation, even when Labour was in government.

More telling perhaps is the number of shadow ministers – 13 out of 26 - who have used their positions as MPs over the course of the last five years to express concern on matters gambling (via Parliamentary Questions and contributions to debates in the Commons); and nine of these related specifically to betting shops (across the intertwined issues of FOBTs, clustering and single-staffing).

Quite aside from the numbers game, this list includes some fairly vocal MPs.

Just last year, the now Shadow Secretary of State for International Development, Diane Abbott warned about the “betting shop scourge” in her constituency borough of Hackney; while the Leader of the House of Commons, Chris Bryant has in the past confessed to being “puritanical about gambling”. Of more immediate concern for the betting industry is the fact that the deputy leader of the Labour Party, Tom Watson counts the Campaign for Fairer Gambling’s Derek Webb amongst his supporters (Webb donated £5,500 to Watson’s office in October 2014). Watson did however vote in favour of increases to stakes and prizes on casino B1 slot machines back in 2013, suggesting that his animus is directed at the FOBTs rather than gambling in general.

Of interest to the gambling industry at large will be Luciana Berger’s focus on the issue of gambling addiction. The shadow minister for mental health is believed to be interested in shifting the onus of problem gambling from charitable organisations to the National Health Service – and that way may lie tighter regulation and tax hypothecation.

Outside of Parliament, Sadiq Khan’s run for Mayor of London is likely to keep gambling regulation – and FOBTs in particular – in the headlines. Khan has already made use of the FOBT issue to win his party’s nomination (with Tessa Jowell unable to shake her ‘pro-gambling’ tag a decade on from the Act) and is likely to continue to do so. This is against a backdrop of incipient devolution of gambling regulation, where the granting of limited FOBT licensing powers in Scotland may well prove to be the thin end of the regulatory wedge (see http://regulusp.blogspot.co.uk/2015/05/patriot-games-scottish-nationalism-and.html) .

Industry will take comfort in the fact that Labour remains the party of Opposition and that Corbyn is perceived to be ‘unelectable’ as Prime Minister. It is a view that ignores the facts that the improbable happens in politics more often than is acknowledged (and that ‘Corbynism’ appears to be in the vein of of a wider global political movement) and that policy formation tends not to be the exclusive preserve of the majority party.

Corbyn’s own record in Parliament suggests that he does not perceive gambling to be an issue of national importance but that does not mean that he and his team are not prepared to exploit it as a means to embarrass both the Government and the rump of ‘Blairites’ on the back-benches. The issue of FOBTs in particular is one where Labour should be able to make common cause with the SNP in order to put pressure on Cameron's slender majority.

We simply don’t know whether Jeremy Corbyn’s leadership of the Labour Party proves to be a seminal moment in British politics or simply a colourful interlude. We can only deal with the facts as they stand; and in the changed political environment, the barometer of regulatory risk in gambling may just have swung again. 

Time to think outside the box

By Dan Waugh, Principal Consultant Regulus Partners

“Creativity requires the courage to let go of certainties.” Erich Fromm

It may seem strange to suggest it now at a time when gambling is once again at the centre of a fairly major public policy debate – but there may come a time when even the Daily Mail recalls with misty eyes a time when gambling was part of the fabric of British high-street life.

Looking at data from the last five years suggests that – notwithstanding the current concerns around proliferation (principally betting shops) - we should be concerned about the future of land-based gambling.

Everyone knows that bingo clubs and arcades have been under pressure for some time. According to the latest Gambling Commission data, revenue from these sectors has shrunk by 4% and 19% respectively since 2009. These are the show-ers.

What is less widely reported is the state of the supposed growers. The betting shop sector has experienced solid growth this decade delivering a c. 40% gross win increase since 2004 – but decline in its core product (horse-racing and greyhounds) has been masked by stunning (and relatively easy) growth from machines. Over and above the political risk on machines, there is something unsettling for the industry about this situation.

It’s all a little reminiscent of Robert Putnam’s 1999 work ‘Bowling Alone’, in which the Harvard Professor of Public Policy described the decline in community participation in the USA during the second half of the twentieth century as age cohort by age cohort people gradually disengaged from traditional methods of interaction.

Meanwhile, the casinos sector exceeded £1bn in table revenue for the first time last year and has generated an impressive 7% compound growth rate over the last five years. However, the lion’s share of this growth has come from London (where Mayfair has benefited from a buoyant international market and the mainstream has been bolstered by about £90m of capital investment split between the Hippodrome in Leicester Square and Aspers at Stratford).Taking London out of the reckoning, casinos start to look a little anaemic with CAGR of just 2% over the last five years. Meanwhile, annual participation rates (for playing casino games in a casino) were stuck at just 3% according to the most recent health surveys – hardly the boom we were led to believe would follow the Gambling Act 2005.

On the other hand, remote gambling – now in its 21^st year – keeps growing, with mobile putting a new spring in the step of the sector. Indeed at over £3bn in revenue, remote is now bigger than any single sector of land-based gambling (other than the National Lottery)

One of the problems facing the land-based element of our gambling industry is that the unit classifications have not really changed in the last 40 or 50 years. We have on-course betting, betting shops, bingo clubs, casinos and amusement arcades – concepts defined in the 1960s. There have been product ‘innovations’ (but these have largely been limited to EGMs) as well as some significant regulatory gains. Bingo clubs and casinos are typically larger now than back then and betting shops are permitted to admit natural light and even to offer toilets (as well as four B2/3 machines per shop) – but the core nature of the units themselves has remained largely unchanged. We have had supply-side and regulatory modifications on a theme but nothing more fundamental.

In land-based gaming (unlike in the remote sector) the licence – rather than customer needs - still largely determines the product and experience: casinos are distribution points for roulette and card games; bingo clubs for bingo games; arcades for slots. Betting shops may now generate the majority of their revenue from machines but betting on horses is still the draw for most customers.

Britain is a remarkably accommodating market for gambling. Just about all products are available, gambling taxes are generally on the low side, advertising is (controversially) prevalent, and regulation is designed to be of the light-touch variety. Yet while we have all types of gambling, we don’t have all formats – and attempts to add new formats have been limited.

In Connecticut right now, a British company, Sportech is developing sports and sports wagering bars under the Bobby Vs brand – yet the idea that it might transplant the concept to its home market is almost unthinkable because the necessary regulations are not in place.

Taking a global look at each of the key gambling product categories – betting, casino, bingo and slots – it is apparent that our solutions are not the only ones available. The obvious example is casinos where Britain’s limited amenity locals market format looks increasingly out of step with the global development of destination-style venues. However, there are also international alternatives to the British model of bingo club (community gaming centres in Canada for instance or the new style venues emerging in parts of Spain), betting shops (casino-based sportsbooks in Nevada, PMU bars in France, TAB outlets in Australia) and slots arcades (the Station Casinos Wildfire concept in Nevada, arcades as mini-casinos in parts of Spain and in the Netherlands).

The common strand to most of these examples is that they tend to be larger and more complex outlets than their British counterparts – and typically incorporate a wider range of non-gambling amenities, including licensed bars.

Over the course of the last 50 years, Britain has developed as a convenience gambling market (the Gambling Commission regulates more than 10,000 licensed venues, not including pubs with slot machines). This is in contrast to the situation in a number of culturally similar jurisdictions where governments have favoured concentration and control rather than dispersal.

The problem with the UK situation (from a commercial standpoint) is that convenience is now the trump card of the remote sector. This presents a structural issue for ‘purely transactional’ gambling in traditional outlets. In order to compete effectively, venues may need to enhance the experience of gambling – and that is likely to require a much more sophisticated approach to concept development (including a willingness to embrace the risk of failure in order to learn and innovate). The alternative is to give up gradually on land-based gambling and seek to shift one’s business over time from venues to remote channels – but this is not without its risks.

Gambling often blames DCMS and the Gambling Commission for impeding innovation. However, it seems likely that the real culprit is a lack of industry imagination. Instead of trying to excite government about the possibilities of new gambling formats, or testing new concepts on customers, operators more commonly engage in trying to find loopholes through which to sneak in more products (generally slots) without offering much in the way of economic or social value or compensating customer protections. Unsurprisingly, this finds few supporters in government and tends to spark in-fighting with neighbouring sectors.

Remote gambling is now an important and valuable part of our gambling industry – especially in terms of consumer choice - but it would be a shame on many levels if it came in time to be our gambling industry.

Contrary to the current direction of travel, I believe that there is a ‘win-win’ solution in the gradual replacement of our existing formats with more sophisticated and more powerful land-based units – something that would arguably be easier to regulate, better able to offer social protections, of greater economic value and better suited to changing market conditions.  If so, it would seem that now is the time for the industry to start thinking ‘outside the box’.   

How I Learned to Stop Worrying and Love Taxes

By Paul Leyland, Founding Partner, Regulus Partners

 “Thinking is the one thing no-one has ever been able to tax” Charles F. Kettering

2015 was always going to be a difficult year for gambling operators from a fiscal perspective:

• UK remote Point of Consumption taxes (15% revenue from December 2014)
• UK B2 Machine Games Duty increase (5ppt increase from March 2015 to 25% revenue)
• EU Point of Consumption changes to VAT (especially impacting Germany-facing operators
• Italian machine tax increases (VLTs from 5% to 9% of turnover; AWPs from 13% to 17%
• Austrian enforcement of its 40% casino tax on non-domestic licensed operators
• Ireland’s 1% turnover tax on remote betting likely (finally) to come into force in 2015

It would be wrong to suggest that this is a one-way street: for example the UK bingo industry had its duty halved to 10% last summer (after some effective socially-focussed lobbying). However, the tide across Europe is very much in the direction of tax increases – in many jurisdictions and across many products and channels. We probably haven’t seen the last of it this year either.

This is hardly news, and I have written before (Sin Tax Error, October 2014; below) that I see some (most) industry attempts to halt the encroachment of the tax man as likely to be counter-productive on many levels.

Tax is on my mind again now for two reasons:

First, governments are generally persuaded that increasing the taxes which obviously impact ‘ordinary’ people (sales and income) is deeply unpopular and can be economically damaging; conversely the trend in business taxes and treatment of the super-rich is, if anything, increasingly liberal. And yet growth is proving elusive and deficits remain stubbornly high. So the temptation is to look for ‘specialist’ taxes to levy, which cause minimal economic and political (popularity) collateral damage. The only thing that stops gambling from being the perfect victim of this trend is its small size and fiddly complexity. Nevertheless, we are likely to be hearing a lot more about gambling tax increases this year.

Second, all other things being equal, there tends to be a correlation between a low tax footprint and growth. This is unsurprising - high levels of tax and regulation tend to inhibit growth in all sectors, and gambling is no different. Whereas business has largely won the debate since the Reagan-Thatcher era, gambling is not always seen as the sort of business governments want to encourage, even when those governments are supposedly ‘pro-business’. Consequently, the principle ‘economic benefit’ of many forms of gambling is seen by government as tax yield and an ‘optimised’ tax rate is the one that provides the highest yield (rather than promotes growth). More tax and regulation can therefore be handed down lightly by our political masters if it gets them out of a political or fiscal hole, with the risk of hitting growth not really bothering them.

So, with fiscal pressure building and gambling likely to be further squeezed (NB, there is likely to be two Budgets in the UK this year), am I bearish on growth in gambling? Well actually no. Quite the opposite, in fact (and for those of you who remember me as an analyst, not being bearish now might come as a surprise).

I am very bullish on medium / long-term gambling sector growth precisely because of the developing fiscal squeeze. One of the biggest problems with the sector over the last decade has been the relative ease with which many operators generated comfortable double-digit operating margins (often due to low-to-nil tax footprints). This led to big marketing budgets, big dividends, and big senior pay packages. But did it encourage innovation? No. Did it drive an even defensive focus on the customer? Quite the opposite.  Did it foster a strategic and responsible approach to stakeholders and suppliers? Again, painfully, belligerently and often counter-productively, emphatically not.

As with Tesco – once a doyen and now being dragged over the coals – success rarely breeds anything other than arrogance and complacency, which can lead to bad decisions and loss of control. Thanks to mounting fiscal and regulatory pressure, I believe this attitude is now leaving the sector - and its departure will leave it much stronger (when the humility stops – stop).

A leaner, more humble, gambling sector will have to fight to retain its customers, not just pay to obtain (and re-obtain) them. It will have to get every last ounce of innovation from its supply-chain, not just every last ounce of saving from a contract. And it will have to treat its key stakeholders with responsibility and respect in order to avoid further encroachments on its capacity to do business. All of this points to a more intelligent, more productive, more customer-focussed, and more strategic gambling sector. Each of those traits drives growth far more surely than big cash flow returns.

There are bound to be losers as well as winners because of this change – not all will manage it effectively (or even try). The process of change is also likely to be painful and difficult even for the winners. However, my prediction is that 2015 will mark the beginning of a new culture in gambling – a culture fit for driving growth which has been largely absent for nearly a decade.  Existing ‘big’ businesses need to play by these new rules to adapt to a less forgiving environment – otherwise they will see themselves replaced by more dynamic newcomers though some (much needed) “creative destruction”. 

Discourses on Levy: what is the Horse Racing Betting Levy for?

By Paul Leyland, Principal Consultant, Regulus Partners

“To ensure long existence to religious sects or republics [or even racing levies], it is necessary frequently to bring them back to their original principles” Nicolo Machiavelli [mostly], Discourses on Livy

The Horse Racing Betting Levy has been criticised from pretty much all quarters for the fourteen years since I have been following the subject. It has survived this long, with some minor tweaks (and a major positive change in moving to gross profit), for one simple reason: nobody can agree on what a suitable (and legal) replacement should look like. In order to solve this, the government (DCMS) is now consulting on whether to reform or replace a mechanism which dates back to the early 1960s.

The government’s consultation (https://www.gov.uk/government/consultations/modernising-the-horserace-betting-levy-a-consultation-on-reform-or-replacement) invites all stakeholders and interested parties to answer 33 questions to ascertain the future. We at Regulus shall be doing so.

Significantly, one question remains unasked, a question I believe it is dangerous and unproductive to leave unanswered: what should a modern Horseracing Levy be for?

Back in 1961, the purpose of a Levy was clear: to compensate racing for the loss of on-course and Tote betting revenue caused by the legalisation of betting shops. At that time, racing was the key betting product and a well-connected lobby, so an economic transfer of value from betting to racing was taken for granted. Subsequently, it seems to have been taken for granted in the other sense of the term, to the detriment of both sides. In the twenty-first century, ‘compensation’ for a product which is now c. 38% of land-based betting revenue and c. 27% of remote (both percentages GB racing in the UK) seems to be an anachronism, and the offshore remote operators mostly treat it as such. Conversely, the cost of racing has increased significantly for land-based bookmakers (due to media costs) even as gross win generated from the product has declined.

Indeed, the Levy is no longer racing’s principle source of funding from bookmakers – commercial media rights are. Further, while the Levy is still an important source of prize money, it is by no means the only source, representing only c.30-45% depending on the yield. In terms of total racing revenue, the Levy represents only c. 7% (according to Deloitte), with the total revenue from bookmakers at c. 35-40% (Levy, media rights, sponsorship). Much of this bookmaker-derived revenue now finds its way back into prize money independently of the Levy (in FY2011-12 the courses provided £28m of prize money vs. the Levy’s £36m for a total of £97m, though the total and the Levy’s proportionate contribution has been rising again from this level).

The Levy has therefore become increasingly marginalised as a source of revenue, while fewer bookmakers (offshore) pay less and less of it (mix). Ironically (and impressively) in a period of (supposedly) declining betting gross win from racing, racing has effectively rebalanced its economic position with bookmakers both in terms of overall revenue and prize money contributions. However, this has occurred outside the Levy, and at the expense of both governance and multi-channel security, which I believe is storing up significant problems for both industries.

Rather than laboriously trawl through the current complexities and debate their resolution piecemeal (as both industries are naturally inclined to do), it might be more productive to do as Machiavelli advised and go back to first principles: what should a modern Horseracing Levy be for?

Since the Levy is a statutory transfer of value from betting to racing, which is unique to that sport, it must follow that the betting industry as a whole requires specific things from the sport of racing which would not exist if the sport were left to its own devices and could not be brought about through business agreements between companies. Otherwise, a solution could (and should) be commercially arrived at.

In my view, the requirements of the bookmaking industry from racing boil down to two very simple things, the combination of which is what makes racing so different to other sports (excepting dogs):

1. A programme of fixtures designed to deliver regular and attractive opportunities to bet

2. An infrastructure which provides integrity, probity and trust to the highest possible standard

Does the current Levy achieve these things? A long way from perfectly, so consider each in turn.

This is not the place to debate the optimisation of the fixture list. The question more germane to the future of the Levy is: does the money taken from bookmakers get effectively spent on ensuring that racing provides attractive betting opportunities as well as quality sporting ones? The short answer to this question is no, on two levels.

First, it is curious from a philosophical perspective that racing largely pays to organise itself, largely for the benefit of betting, through BHA fees (c. £30m), whereas betting only helps to pay for the winners (c. £56m prize money) and some integrity costs (£16m – see below). It is overwhelming a betting need that races are put on circa every 10 minutes every day of the week and do not clash (unlike nearly every other sport) – which drives pretty much all other organisational decisions within racing: bookmakers should therefore logically pay for it.

Second, is the Levy spent to ensure the sort of things punters like (large field sizes, racing at accessible times, festivals) rather than  what ’racing’ likes (much smaller field sizes, a largely effort-free chance to get a run, access to big prize money)? This is not an unequivocal no but it is closer to no than yes, in my view. Again, it is illogical that betting’s transfer of value to racing is not effectively and transparently being spent on reinforcing betting-friendly content (the bookmakers are also at fault here for imperfectly understanding what ‘betting friendly content’ is and how it is evolving).

From an integrity perspective, UK racing does a good job; a few high-profile failures being inevitable. However, similar to organisation, for integrity racing in large part funds itself, notwithstanding betting being the most obvious and significant reason to throw a race, while trust in the result is of at least as great a value to the betting public and bookmakers as to racing’s direct participants. The Levy currently contributes to this, but much is left to courses and the regulator.

Given these issues, how do we see a modern Levy being justified, legal and fit for purpose on the basis of first principles?

In my view, a modern Horseracing Levy should do five things:

1.       Fund the organisation, regulation and integrity costs of the racing industry

2.       Provide a ‘base level’ of prize money for all fixtures to underpin fixture volume (with KPIs)

3.       Provide a range of incentives to attract larger field sizes wherever appropriate (including, but explicitly not limited to, prize money, again KPI-driven)

4.       Provide R&D into product improvement from a betting perspective (properly governed)

5.       Give bookmakers a seat at the table in organising and planning racing

Equally, I see little logic in the Levy continuing to:

1. Fund equine and veterinary research (this is a racing, not a bookmaker issue)

2. Fund large prize money pots (this can and should be achieved commercially rather than through what is ultimately a highly regressive tax)

It should do these things with an independent executive steered by a board equally balanced by both racing and bookmakers, with an independent Chair. From a funding perspective (not fully covered in the consultation, in part perhaps because the Levy’s unclear purpose and objectives go unchallenged), I believe the Levy should be calculated on a bottom-up (and independently audited) needs basis, driven by points 1-4 above, with the costs shared among all bookmakers (including offshore), on the basis of gross win generated on the product across all channels. This would be far more transparent, sustainable and efficient than annually attempting to plan on an outcome driven by unknown variables, unduly (and dangerously) biased toward a single channel.

In this way, the Levy will be clearly spent on the things, and only on the things, that the betting industry as a whole needs, wants and/or should pay for. The sport can then spend its time, effort and commercially generated money on providing a better sport.

Why should racing support this? Simple, its core funding is built around need, and therefore effectively underpinned, for ‘keeping the show on the road’ as a betting product. If it wishes to put on a bigger or different show it must do so on commercial merits, like any other sport (almost certainly with bookmaker support and investment). Perhaps less palatably, but critical to governance, fairness and long-term success, bookmakers’ money comes with a greater say in how the show is put on.

Why should bookmakers support this? Perhaps this is less simple since a greater share of the cost of racing is borne by the bookmakers on a statutory basis. However, this system would provide a seat at the table on product, with clear KPIs and funding for improving the product from a betting perspective, transparent use of funds, and a far less adversarial negotiating position. A larger statutory element of betting’s value transfer to racing would also help to defuse the economic time-bomb facing both industries of unsustainable retail racing costs (trending toward structural problems for both sides), structurally limited remote media revenues (vs. current LBO picture values), and an acute lack of product innovation. Finally, it could undoubtedly be a catalyst to negotiate efficiencies elsewhere.

Many stakeholders may not agree with my answer, and I do not pretend that it is much more than a first attempt to look at the question from a different perspective, after years of industry failure to achieve change. However, for all stakeholders, in order to successfully reform or replace the current Levy, by far the most important question is yet to be answered is: what is it for?