Declaration of the Rights of Racing

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.

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?