R&D in the gambling sector: Retrenchment and Deals?

© Slangford3035 | Dreamstime.com - Albert Einstein, Physicist Photo

By Paul Leyland, Founding Partner, Regulus Partners

“If I knew what it was that we were doing, it would not be called research...” Albert Einstein

The gambling industry is becoming an increasingly complex and expensive one in which to operate. In land-based sectors, software and service-culture is replacing hardware and transactions. In remote, the pace of regulatory and technological change has never been faster. Customers are expecting more, while suppliers are being squeezed in an effort to share the burden and maximise returns. Across sectors and jurisdictions, all operators keep a wary eye on politicians, the regulator and the tax man.

There is an obvious (and sometimes effective) response to these trends: consolidation. Bwin joined with Party; Scientific Games bought WMS and Bally; GTECH acquired IGT; Amaya and Intertain have been highly acquisitive; and, now Ladbrokes is looking to merge with Coral.  Between them these deals represent c. US$22bn (£14bn) of assets (potentially) changing hands.

With the Canadian-listed businesses the exception, a (the?) key reason for these deals is the capacity to deliver operating synergies. The list is common to all M&A: consolidating to one set of head office costs; combining central functions; stream-lining operations; increasing buying-power; cutting waste.

All of these things are good for the bottom-line and, if well executed (a big if), can also be good for the company and its customers. But cost synergies are a one-off and they often cost money to achieve (deal costs, finance costs, redundancies, contract renegotiations etc). They buy larger pre-exceptional profit, which markets like, and they buy time to adapt to changing situations, if used wisely (another big if).

I would flag two issues which concerns me about this direction of travel.

First, no-one likes to be a synergy. Deals cause huge disruption to businesses: from management time, to operating structures, to changing loyalties and motivations, to grass-roots morale. This disruption is often poorly understood by markets (it is hard to model in a spreadsheet) and often de-prioritized from a human perspective by senior management, which suddenly have a lot more ‘tangible’ issues to deal with. Given these pressures, M&A requires extremely high calibre management with a thoroughly thought through and well communicated plan, along with a competent and loyal core team.  Otherwise, all the cost cutting and reorganisation will simply undermine long-term productivity and growth, leaving the whole worse off than the historical parts.

Second, cutting costs does not grow markets. Competition can grow markets. Innovation can grow markets. The two tend to be linked. Increasingly, customers have a wide choice of “brands”, but with a highly homogenised offer underneath (land-based and remote). Equally, operators have a very narrow range of large suppliers to choose from in each major product set. This is good for the short-term profits of the sector, but it is not good for growth. And in an environment where underlying costs are only going one way (tax, technology, regulation, upskilling), what is not good for growth is not good for long-term profitability.

To be a healthy sector, supporting growth and favourable regulation, the gambling sector needs to innovate. To do that successfully it must do six things that it has been historically poor at:

• Be prepared to spend money without the certainty of a return (or it isn’t real R&D)
•  Be prepared to try things that may disrupt the status quo (even in a controlled way)
• Create proper test conditions and plan to learn (science, not hope and politics)
• Accept that the cumulative impact of small change can be just as powerful (if not more so) than searching for a silver bullet.
• Do not be afraid of failure: in the longer run failure is a lot more instructive to strategy than success (luck runs out far faster than relevant experience)
• Ensure the regulator and wider public is as behind the growth potential as possible (communicating, demonstrably acting responsibly)

All of these things are hard to do in a tough trading environment and within an ‘operator’ culture. However, such an environment simply makes growth and productivity more important. It is also much harder to do when the teams being relied upon are in constant fear of ‘big change’: equity markets might be motivated by synergies, people are not…

Patriot Games - Scottish Nationalism and the future of gambling in Great Britain

© Jamieroach | Dreamstime.com - Highland Games Caber Heavy Man Toss Photo

By Dan Waugh, Partner, Regulus Partners

At first appearances, it might seem that the gambling industry hit the jackpot in the General Election...

The electorate returned to power the only major political party which had not pledged to get tough on gambling (or more specifically, FOBTs); the Prime Minister appointed as Secretary of State for Culture, Media and Sport an MP with genuine interest in (and empathy for) the sector; and the Labour Party’s post-mortem recriminations have hinted at a return to the Blairite brand of politics that provided such a benign environment for gambling in the first half of the last decade.

As my colleague, Paul Leyland has argued in his post-election article (‘General Election 2015: Sounding the All Clear?’), any relief felt by the bookmakers or belief that a bullet has been dodged may well be premature; but it has also distracted attention from what is a far more significant development for the whole industry – the potential devolution of Britain’s gambling laws.

If the Smith Commission opened the door on the question of localised regulation by recommending that Scotland be given specific powers to control machines in new betting shops, the SNP’s election landslide may well have knocked it off its hinges. Indeed, Nicola Sturgeon’s party has already called for devolved authority on all gambling (not simply FOBTs) – something that would appear to be one of the simpler concessions for David Cameron to grant.

The suggestion that FOBTs alone should be a matter for devolved regulation was a choice piece of political fudge - carving out one isolated aspect of the industry’s activities never made a great deal of sense in the real world. If Holyrood is to control 50% of gambling in a betting shop, why not the other 50%? If there are to be Scottish laws governing roulette machines in betting shops, why not Scottish laws for roulette wheels in casinos?

Whether the SNP recognised these shortcomings or whether its desire for wider powers is simply another instance of doubling down on devolutionary concessions, specific gambling laws for Scotland are now a distinct possibility.

If it comes to pass, the stakes for gambling companies may be much higher than simply the welfare of their northern-most businesses. For two reasons, the development of a Scottish system of regulation may prove to have far-reaching consequences for British gambling at large.

The first and most obvious of these is that localised control of gambling may be extended to other authorities – to the Welsh Assembly, the Greater London Authority or to George Osborne’s putative ‘northern powerhouse’ – as part of a more general trend to decentralisation.

The second is that change in Scotland (for the good or ill of the industry) might trigger successive reappraisals of gambling laws across the rest of the United Kingdom.

The domino effect has been an observable characteristic in the development of the global gambling market in recent decades. Perhaps the most obvious example has been the expansion of gambling in the United States of America. In 1968, New Hampshire broke ranks with the rest of the Union in launching a state lottery to support public spending. In the years that followed, state after state followed suit until only Hawaii and Utah were left with gambling prohibition intact. Similarly, Nevada enjoyed a nationwide monopoly on casino gambling for almost half a century before New Jersey licensed casinos on Atlantic City’s Boardwalk. Today, no fewer than 23 (and rising) states feature commercial casinos while 28 host tribal gaming casinos (39 states have some form of casino gaming). A number of companies are banking on this pattern being repeated in remote gambling in the decade ahead.

To take an example closer to home, the gambling laws of Spain have undergone radical transformation over the course of the last few years - most notably the opening up of sports betting and remote gambling markets and the creation of a regulatory (and importantly fiscal) framework for resort casinos. The fact that gambling in Spain is largely a matter for the 17 regional autonomous communities has been central to this process. Had it been a matter for the federal government, it is unlikely that these modernising proposals would have progressed as far or as fast. 

The domino effect works in gambling because regulatory reform is quite simply easier to achieve at a local level than at a national or federal level. There are three reasons why this is so. The first is that the expansion of gambling in one state will often be accompanied by tax leakage in neighbouring states as citizens are forced to cross borders in order to gamble. In such instances, the logical response is to protect revenue by correcting the regulatory imbalance.

The second reason relates to political risk. Normalisation of gambling, based on visibility, familiarity and proximity is the most effective means of addressing societal fears of gambling-related harm (chiefly problem gambling and crime). Put simply, the best way to defuse the political risks of gambling liberalisation is to see it expand (profitably, cleanly and responsibly) in a neighbouring state.

The third reason is that while gambling tends to be a fairly trivial economic activity at a national level, it can be significant at a local level where there is greater awareness of the jobs and taxes (if also devolved) it brings. Of course this can cut both ways and it’s worth reflecting on the fact that the current FOBT controversy became a national issue in large part due to agitation by local councillors and constituency MPs.

There are of course a number of reasons to be wary of a decentralised gambling market. There is a danger that fragmented regulation would lead to a dilution of regulatory expertise and effort and that this in turn would involve risks for the consumer. Companies are also likely to be concerned that localised regulation would give rise to greater operational complexity and higher licensing and compliance costs. Some would undoubtedly prefer the preservation of the status quo - no matter how unsatisfactory – than run the risk that change might be negative.

Yet life is about the risks we take. As unlikely as it seems, changes to gambling laws in the land of John Knox and Gordon Brown might just crack open the door for a more vibrant and enterprising gambling market for Britain as a whole.

General Election 2015: Sounding the All Clear?

By Paul Leyland, Founding Partner, Regulus Partners

"You may have to fight a battle more than once to win it" - Margaret Thatcher

The UK gambling industry is probably feeling very relieved right now, perhaps even jubilant. Not only have voters returned a surprise Conservative majority, but John Whittingdale has just been announced as Secretary of State for Culture, Media and Sport.

The Conservatives were the only major party not to have a manifesto commitment to increase the regulation of FOBTs. They are also the only major party that was not committed to raising taxes to combat the deficit (albeit no party mentioned gambling taxes explicitly). Finally, Whittingdale has proved himself to be pragmatic and sensible as head of the Culture Select Committee, even presiding over the (stillborn) recommendation to increase the number FOBTs permitted per betting shop in order to alleviate clustering (back in 2012).

As outcomes go, this is probably better than anyone in the industry dared hope for. But is it right to sound the ‘All Clear’ on the sector?

I would advise considerable caution for five reasons.

The first reason is that the Conservatives have only the slenderest of Commons majorities (12), meaning that this will be a parliament driven by consensus, lobby tactics and quid pro quo. The views of the smaller parties cannot therefore be ignored, especially if they coalesce and/or find resonance with elements of the Conservative party. It should be remembered that Labour, SNP, Liberal Democrat and UKIP manifestos all contained references to toughening FOBT regulation. It should also remembered that the highly influential but non-ministerial Boris Johnson came down in favour of tougher FOBT regulation prior to the election. 

(for more detail on party policy relating to gambling in the run-up to the election, see the Regulus - Olswang Election Briefing piece here: https://goo.gl/B5bFe8)

Second, the SNP is determined to wield its newfound influence in Westminster. Given his overall majority Cameron may well be tempted to be hawkish and push the English agenda, though a slender majority may tempt a more consensual approach (eg, Smith-plus in return for support on Europe). The SNP are on record that Smith did not go far enough in limiting FOBT numbers via licensing only for new shops: they could get more powers, and if they do the Local Authorities of England and Wales (not least Boris’s London) are highly likely to demand the same.

Third, pressure from external sources is likely to redouble rather than diminish, given that the Conservative manifesto effectively implied that enough had been done. This pressure has proved highly effective in the past (vide the number of manifesto commitments on a relatively narrow issue; as well as ministerial action last year) and it would be dangerous in the extreme to write it off now.

Fourth, Osbourne has made several spending commitments that look unfunded (most notably £8bn extra for the NHS) and is on the hook for material cuts elsewhere. He has limited room for manoeuvre in increasing the major taxes given the Conservative Party’s electoral stance. He is also facing an increased anti-austerity voice from the opposition. In such an environment, any tax rises which are not felt by the wider public or business as a whole are highly attractive. Gambling is an obvious area for raiding on this basis.

Finally, with attention fixed on FOBTs, the Racing Right, and potentially tax, it is easy to forget that there are large swathes of land-based gaming, remote gambling and lottery which are currently ‘below the radar screen’. History has shown that it does not take much to put other sectors in the firing-line and it would be dangerous to be blind-sided by complacency.

Despite these notes of caution I am not necessarily gloomy. The industry has had a very lucky break in being presented with a pragmatic government in terms of gambling policy, that it willing to listen to its side of the argument as well as the anti-lobby. This is good fortune: not a vindication of past errors. 

For anything like the regulatory status-quo to remain, the government will have to be confident in defending it, or it will be thrown under the bus for political leverage. The industry must therefore redouble its efforts in being (not just appearing) open, transparent, compassionate and responsible.

The old industry has been given a stay of execution while it reforms; only by maintaining the pace of reform can it get out of the danger-zone.

Omni-channel: castles in the sky?

By Paul Leyland, Founding Partner, Regulus Partners

“Neither Admiral Roland nor I claim to be omniscient or infallible – but we do claim to be omni-channel” - Where Eagles Dare 

(if it reflected modern gambling company boardrooms)

UK land-based gambling operators have historically struggled to convert their brand and retail footprint into material remote businesses. William Hill, the UK land-based group with the most successful remote business, rather proved the point by reversing online stagnation through a Joint Venture with Playtech and a wholesale detachment from UK retail operations. None of the other UK land-based businesses with significant market share in any licensing class makes the top six of UK remote operators by market share.

Fishing for an edge over multi-national remote operators, ‘multi-channel’ has been deployed as a buzzword / aspiration / article of faith for many land-based businesses for some time (the author remembers naively enthusing its imminent potential over a decade ago). Given the almost total failure of multi-channel strategies to convert into meaningful market share, it is perhaps unsurprising that the very term disappeared quietly and un-mourned from the catechism at some point late last year.

Omni-channel is now the the latest buzzword. It is expounded almost everywhere with the fervency of new hope; as if ‘omni-channel’ is somehow so radically different from ‘multi-channel’; that multi-channel was so last year and previous failures can be brushed aside; that the potential for land-based to deliver significant remote market share as part of a coordinated customer offer is now (really) shortly upon us.

I can understand why gambling wishes to deploy the lexicon (even the practices) of the wider retail market: omni-channel is not a gambling buzzword just as multi-channel was not. However, words to not change operations, much less make sales. My concern is not with the word, but with three underling problems its current use disguises:

1.       Many customers are already ‘omni-channel’ due to industry-wide supply changes

2.       The solution involves technology but it is not a technology solution

3.       Channel shift means the requirement is defensive rather than a growth opportunity

Operators are increasingly talking of giving their customers “an omni-channel experience”. It is certainly the case that the remote offer of most land-based businesses is more-or-less disconnected from the land-based in all but brand. However, does this matter to the customer? The customer can already bet ‘in venue, online and on the move’ and can choose from a wide range of operators in each category. Some customers may add remote gambling to their land-based activities because of in-venue promotion, but the vast majority who want to are likely to be doing it already.

For example, 54% of William Hill’s UK remote customers use shops while 34% of shop customers use online: this is without much ‘active’ omni-channel activity from the supply side. Certainly, there are a few benefits around the edges that a land-based business can (and should) provide over remote only (eg, integrated loyalty and CRM; cash-in/out; wallet) but these pale in comparison with being able to match the quality of other remote offers, which new remote customers soon discover and come to expect.

This quality has been historically lacking from land-based businesses’ remote offer, which is a key reason for multi-channel failure: the reason does not go away with a new name. The first pillar of omni-channel success must therefore be a remote product that can compete with the best in class in all products offered. The alternative is brand damage, operational failure, and, over time, loss of market share (see below).

All the major land-based businesses already have remote businesses. They tend to be on different platforms with limited product and CRM over-lap. This creates headaches for an omni-channel strategy and it is telling that the major technology providers are investing in omni-channel technology to overcome these hurdles. Technology is, of course, a key enabler for successful supply-led omni-channel (vs. already existing demand-led omni-channel) and suppliers will undoubtedly benefit from the push for omni-channel.

But, why should a customer be drawn to “brand A” online just because it has a land-based presence? And not just to visit the site and register (the brand works there, as evidenced by lower CPAs), but to successfully deposit (first point of failure), gamble and keep gambling (regular point of failure).

In the retail universe, where stock is tangible, the quality of the product is a key reason. However, in the gambling world much of the product is intangible and has been largely commoditised (with some important distinctions). In the remote world this is overcome with offers and lower margins; the land-based environment on the other hand answers the commoditisation problem by being determined to protect product margin and keep investment to an acceptable minimum.  These tensions of strategy rip apart any attempt at a common offer or user experience.

Another key reason for theoretical land-based edge is the ‘personal touch’ with the customer. With a few exceptions, the systematic quality of contact and service in most land-based gambling is beyond poor. That is not to denigrate staff: many do an amazing job of fostering loyalty through dedication and force of personality; but they tend to do it in isolation from employers, without consistency and with very few levers to cross-sell and/or up-sell.

The second pillar of successful omni-channel is therefore to improve levels of product and service across the board. Many remote-only customers would be shocked at the lack of value and investment in land-based; many land-based-only customers would be surprised (some dangerously pleasantly) at the offer (churn) driven remote model. These can be reconciled but it requires a real focus on customer service alongside understanding (and delivering) what the customer actually wants rather than what the industry think they want.

In my view customer service is far more important than technology for delivering successful omni-channel strategies and this is not something the sector has historically excelled at.

Successful omni-channel therefore requires significant investment in both the remote and land-based businesses; not just in technology but also in remote capabilities, retail infrastructure and people. Getting all of this right takes most land-based businesses far outside their areas of expertise and comfort. However, it is eminently achievable with a lot of hard work and focus on successful execution (not just buzzwords).

Nevertheless, there is a sting in the tail. Getting all of this right has historically promised growth. It now promises survival. As the statistics quoted on William Hill demonstrate, many customers are already omni-channel and each new cohort swings the dial further to remote.

According to our own figures, land-based gambling has barely grown in the last five years (2% CAGR, with many areas in decline), while remote has achieved a CAGR of 17%: channel-shift is occurring. Moreover, demographics, the ubiquity of mobile, the focus of marketing and investment, regulatory pressure, and the lack of meaningful R&D in the land-based sector means this trend is likely to accelerate.

What does this mean for land-based operators? In a nutshell guaranteed loss of market share in the “omni-industry”.

Historically this has been relative in a (relatively) stable landbased environment. However, in an environment where remote spend occurs instead of land-based spend, then a ‘typical’ landbased market share of c. 25% (of a given licensing class) gets converted into a ‘typical’ remote share of sub 10%: even the highly successful William Hill has a much higher LBO market share (30%) than remote (14%); for less successful multi-channel businesses, the conversion rate is much worse. 

Moreover, this is structural: even in a fully taxed and regulated regime, the remote channel can deliver more operators to a given customer than even the most competitive and diverse local landbased environment can ever hope too; further, land-based tools for building market share (rollout; M&A) do not work to anywhere the same extent in remote due to the lack of tangible space to control. To state the obvious, lower market share in a value transfer environment means lower revenue in absolute terms. And lower revenue in a high fixed-cost environment means rapidly declining profits.

Being omni-channel is not about promising growth. Nor is it about technology fixes. It is about re-engineering entire businesses to avoid medium-term extinction.

One day a prince will come….

An Innocent Man: Gordon Brown and the ‘killing’ of the super casino

By Dan Waugh, Partner, Regulus Partners

The great British super-casino whodunit is replete with enough twists, turns and intrigue to stand comparison with Agatha Christie’s best yarns. Not simply a tale of mistaken identity, it may also prove to be a case of a death faked; the perversion of the course of justice rather than homicide.

The ‘crime’ in this instance was the killing of the British super-casino (or ‘regional casino’ as it is known to legislation). The culprit, according to popular lore is that great pantomime villain, Gordon Brown, the conviction politician who brought his Presbyterian sense of morality to the question of how and where people in Britain should be permitted to gamble.  

At first glance, the facts fit. Under Blair our Britannia was cool – perhaps not Vegas cool but closer in spirit to the Rat Pack than to the Gang of Four. Blair gave Sir Alan Budd the freedom to review Britain’s gambling laws through the eyes of an economist rather than a moralist – and he decided as many other governments have done (including those to the left and to the right in Beijing and Singapore) that destination casinos or integrated resorts were good. Brown’s premiership was a correction to all that. It was back to basics (again) - a time for Labour to sober up after the party turned sour in Iraq and Afghanistan.

At the start of 2007 with Blair as PM, the Gambling Act (despite a tumultuous passage) had been in place for a year-and-a-half and we were on course for our first super-casino. By the end of the year, with Brown in Number 10, hopes for ‘Brit Vegas’ had been consigned to the dustbin. The ‘Son of the Manse’, cheered on by gambling’s bogeyman (and editor of the Daily Mail) Paul Dacre had prevailed by stopping Blair’s folly in its tracks.

Only it wasn’t quite like that…

According to voting records, Gordon Brown’s sole parliamentary involvement with the regional casino was an affirmative vote in March 2007, when the House of Commons endorsed the Casino Advisory Panel’s decision to award the licence to Manchester (along with the allocation to other local authorities of the eight ‘large’ and eight ‘small’ casino licences). I don’t know (and don’t particularly care) whether Brown’s conscience was troubled in voting for the measure. His vote was consistent with his priorities at the time (as boss of the Treasury) to attract investment to the UK.

The truth is that plans for integrated resorts and destination gaming were killed in the Lords and not in the Commons. In a monumental act of folly, Blackpool’s unsuccessful bid team persuaded a sufficient number of misty-eyed peers to form a united front with the anti-gambling lobby in order to defeat the statutory instrument.

Brown’s role in all of this was to persuade his culture secretary, Tessa Jowell to decouple the regional casino from the other 16 licences. His government probably could have pushed it through but Brown’s own interests had shifted with the move to Number 10. Rather than killing the super-casino, Brown’s role was to turn off the life-support machine.

Only it’s not quite like that either…

The intriguing fact behind all of this is that the regional casino isn’t dead after all. Look – it’s sitting right there in primary legislation – on the face of the Gambling Act. All that is required is the political will to resubmit the enabling legislation; and this is something that may not be as difficult as is commonly supposed.

If the decision to award the regional casino to Manchester was returned to Parliament, it is difficult to believe that Blackpool City Council would be sufficiently exercised to protest this time; while the backdrop of the FOBT controversy might even help to emphasise the virtues of destination gambling over the convenience market. Whoever wins the General Election in May will need to address the Budget deficit - and this will require investment ideas as well as simple tax-raising. Meanwhile, the opening of Genting’s Resorts World at the NEC will have helped to reframe thinking about how gambling can be harnessed to more productive economic ends.

What is really needed is not so much political will but industry ambition – for someone to paint a picture of what the regional casino (probably but not necessarily in Manchester) might look like – what amenities it would incorporate, how many jobs it would create, how much investment it would attract, how much it would generate in taxes, how it would support tourism and (importantly) explain convincingly how inevitable concerns about social responsibility can and will be effectively addressed.

This sense of ambition has not hitherto come from within the domestic industry, while many of the global titans of casino (such as MGM, Wynn, Las Vegas Sands and Crown) have bad memories of Britain as a place to do business. They may also be too besotted with the prospect of integrated resorts in Japan to bother about a return to our small island. And yet…..

And yet, Europe remains a major gambling market that the big operators have yet to crack. Investments in Britain by Genting, Crown and Caesars were effectively market entry plays and remain fairly marginal in terms of their global businesses. Meanwhile, Sands may now ‘own’ the customer in most of the major gambling markets in the world – Las Vegas, Macau, Singapore – but not in Europe.

There was a time when some very bright minds (in government, in academe, in industry) considered that destination casinos would work in Britain and work for Britain. It may not be in vogue to say so today but that is no reason to disregard their considered work on the subject.

The super casino is not dead; it is simply sleeping. It pricked its finger on a spinning wheel and now waits for Prince Charming (Prince Steve, Prince Sheldon, Prince Jim, perhaps even a homespun Prince….) to bring it back to life.

Meanwhile, as he prepares to retire from life in the Commons, we should pause to exonerate Gordon Brown for the crime of killing our super casino and perhaps remember him instead as the man whose betting tax changes (GPT) responded to sound economic arguments and paved the way for a rebirth of that sector….

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.

Taken to the cleaners?

By Michael Ellen, Partner, Regulus Partners

Why the industry and regulators need to seek common cause to pursue shared objectives

"He who seeks to regulate everything by law is more likely to arouse vices than to reform them." Baruch Spinoza (a very influential 17C dutch philosopher)

Balancing acts are tricky - ask any regulator. Leave too much to market forces and sooner or later those forces will bite you on the bum; over-legislate and you may find yourself the proud owner of watertight regulations that operators seek to bend or avoid at every opportunity.

Generally, the public interest is best served by laws which provide proportionate protection against harm without stifling legitimate commerce.

So it goes with gambling - an industry which (in Britain) has, by and large, benefited from well-balanced regulation – so far.

However, the forthcoming application of the EU's Fourth Directive on Anti-Money Laundering (“4 AMLD") has prompted fears in the remote sector that the balance between protection and commerce may be moving out of kilter. If correct then the consequences for Britain's regulated market could be damaging.

This is not a question of the narrow parochial interests of gambling. Even the most blinkered industry executive would refrain from suggesting that the well-being of the industry should be placed above the state's need for protection against the toxic and destabilising effects of money-laundering. Instead, it's a question of whether the solution (i.e. its regulation) is proportionate to the problem. If not, the regulations may cause the migration of customers from regulated, responsible (and now tax-paying) businesses to unlicensed operators - and in doing so undermine the very objectives that the legislation is designed to achieve.

At the moment, the Danish Gambling Authority (DGA), which regulates one of the most liberal demand-side regimes in Europe, claims that 90% of play by Danish residents is on domestically licensed sites. Meanwhile, the Dutch government has set as a licensing objective for its new remote regulator a target of regulating 75% of Dutch resident player activity. By comparison, the French regulator (ARJEL) probably captures less than 50% of French players’ remote gambling spend, despite attempts to enforce. Italy and Spain lie somewhere in the middle, again shaped by their regulatory approach.

UK, Denmark, and now the Netherlands are aligned with the commercial ethos of attracting players, promulgating the merits of regulation and regulated sites and in this way effectively working to discourage players from straying toward low-to-no regulation offshore sites when seeking a flutter online.

It remains to be seen whether this approach wins out in Europe more broadly. The fact that legislation has generally moved in the opposite direction (with bureaucracy trumping pragmatism) for such a long time suggests not (though there is an encouraging liberalisation pipeline from both Italy and Spain).   Accurate analysis of the state of the industry is needed to support policy if we are to move into an informed and constructive era of political involvement in gambling: facts speak far louder than opinion and the industry has for too long been much longer on the latter than the former.

However, too often the key vested interest (and the strongest voice) in the room in any National or EU debate on remote gambling has been the protection of state monopolies – which has emerged as a key obstruction in the development of co-ordinated EC remote gambling standards.

Under its new Latvian presidency, Brussels has given priority in its legislative program to 4 AMLD, which represents seven years of Brussels’ thinking on money laundering. It builds on 3 AMLD, which is incorporated in the UK Money Laundering Regulations 2007.

Seven years has not been enough time to agree what should fall inside the central definition of remote gambling, so that sports betting – ironically seen by many informed onlookers as being at the top end of money-laundering risk within the sector (because of the possibilities around exchanges and off-market transactions) – may fall outside the general ambit of 4 AMLD as it is implemented in each Member State.

The Directive, as presently drafted (and now close to final approval), tightens the requirements around the remote casino operator’s ability to accept player deposits. It requires due diligence to be undertaken on the ownership credentials for every transaction (a term itself subject to interpretation, potentially causing a patch-work of requirements across states) over €2,000. This introduces very unwelcome interruption to play for many (crucial) higher-value players (potentially a fillip to black-market operators), unless the state regulator chooses to make, and subsequently justify, a risk-based exception for the relevant product. The underlying logic given for the change is that because the player is not present at a remote casino, its business falls into the highest risk category for money laundering.

Logical enough, you may say; the problem is that it is not supported by either practical experience or academic research. Over the last decade, the International Monetary Fund’s jurisdiction reviews of each of the major offshore centres for e-gambling operations have identified a consistent theme of low volume reporting of suspicious transactions, relative to other e-commerce activity.

The work of Professor Michael Levi of Cardiff University (one of our most respected experts on organised crime) explains why this is so. Quite simply, regulated online gambling does not present an attractive environment for money laundering due to three key factors:

1.    depositors are properly identified

2.    all transactions are recorded digitally and are subject to scrutiny, exception analysis and then retention

3.    money is returned to the same (identified) card/ account source as the deposit originated from i.e. the known, named, identity-verified player

Money laundering activity does occur in remote gambling; but the regulated sector is a very difficult place to do it successfully. Regulators already know this, yet the imminent implementation of 4 AMLD in Europe will cause major disruption to the industry, and according to informed commentators, “gambling and payment firms will need to lobby governments on a nation-by-nation basis when countries start to implement it”.

The onus is on the industry and regulator alike to ensure that the implementation of policy is based upon facts rather than myth and supposition. The regulators are unlikely to boast of their success in controlling money laundering while the ability of operators to inform the debate is hampered by political and media prejudice against the industry

The application of disproportionately restrictive pressures on regulated operators seems likely to improve market conditions for illegal operation, where money laundering is much more likely to prevail. By the same token it buries the regulator in work that would not otherwise rank so highly on a risk-adjusted scale.

And so the industry and regulators face yet more fragmented jurisdictional requirements on which to build their compliance systems, around a threat which on current evidence seems low; the clear evidence presented on the effects of the difference between ‘good’ and ‘bad’ regulation seemingly lost in translation.

So that is the problem – what is the solution?

Enlightened operators and enlightened governments have a shared interest in the development of healthy regulated remote gambling markets (and the successful suppression of unregulated companies). In order to achieve this (and to ward off the threats from ill-considered European legislation), companies need to do more to find common cause with those who regulate them - an antagonistic relationship serves the purposes of neither party. They also need to deploy facts to demonstrate the efficacy of their position.

An obvious initial step for both parties would be the commissioning of independent research into the extent of money-laundering within remote gambling and how this splits between regulated and unregulated sites. Only by first understanding the problem can we hope to apply effective remedies. Without such research, the interests of the operator and regulator will remain prey to the unintended consequences of Brussels bureaucracy.