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.

GC Assurance Statements: assuring better gambling businesses

By Paul Leyland, Founding Partner, Regulus Partners

“The government are very keen on amassing statistics. They collect them, add them, raise them to the nth power, take the cube root and prepare wonderful diagrams. But you must never forget that every one of these figures comes in the first instance from the local village watchman, who just puts down what he damn pleases. “
“It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities.” Josiah Stamp

The Gambling Commission is currently consulting on a new Annual Assurance Statement, which would require the larger operators (over £25m UK revenue, which the Commission estimates to be c. 40 operators with c. 90% combined UK market share) to inform the Commission as to how they are understanding, measuring and mitigating the key risks captured in the Commission’s licensing objectives, notably:

·         Keeping gambling crime free

·         Protecting the vulnerable

The consultation documents can be found here:

http://www.gamblingcommission.gov.uk/Publications-consultations/Consultations/Open-consultations/Supplementary-consultation-on-the-introduction-of-an-annual-assurance-statement.aspx

I believe that this process is an important addition to the UK licensing regime for three reasons:

• It puts operators’ social responsibility practises under clear and systematic scrutiny
•  It should encourage operators to further increase the internal and external priority of social responsibility measures
• It may start to resolve some the natural tensions between social responsibility best practice and (short term) profit maximisation

It will be tempting for some operators to see this as an unnecessary regulatory burden, or, worse, an attempt to gather (partial) information in order to justify increased regulation. If starting from that viewpoint, the resulting submissions are likely to be little more than desk exercises produced by ‘compliance people’. I think such a response would be both short-sighted and bad business.

Short-sighted because there will always be pressure from groups within society to curtail some or all forms of gambling activity; whether reasonable, well-meaning, protectionist or just plain atavistic. This pressure tends to get politicised when issues are denied or obfuscated, rather than tackled (convincingly) head on: if there is no problem then it is not unreasonable to demand evidence to demonstrate that fact, failure to do so raises concerns even from the previously indifferent.

Half-baked attempts to provide such evidence are at best unconvincing and at worst grist to the mill of tougher regulation. In order to escape current and future politico-regulatory issues the industry must be seen to be taking its social responsibility seriously: that is the reasonable expectation of large swathes of society; and now - election year after all - is the time to do it.

To see why it is bad business, let’s consider what the Commission is really asking for.

The Annual Assurance Statement essentially comprises six questions:

• What control systems and governance does the operator have, especially relating to crime (AML, criminal spend, integrity) and social responsibility (fair, protecting the vulnerable)
• What actions have been taken in the last 12 months to improve these
• What plans are there to improve systems and governance in the next 12 months
•  What is the operator’s narrative assessment of the extent to which its revenue potentially comes from harmful gambling
• What tools are being used to identify problem and at risk gambling
•  What actions have been taken and how is effectiveness and impact evaluated and improved

None of these questions are particularly onerous or dangerous and most operators should be doing some or all of the above already. Further, developed properly this can have significant positive impact on the business and the industry as a whole. We see five key business areas where this increased scrutiny and process should generate clear benefits.

Reputation is the most obvious starting point for a gambling industry which is regularly battered in Parliament and the press. A clear policy of focus and improvement is something forward thinking operators can use to demonstrate that they are on top of the problem, in a more sophisticated (and therefore convincing) way than before. The Gambling Commission and the industry can also reasonably argue that sufficient duty of care is being carried out. This could prove to be a key pillar in protecting the industry from further regulatory encroachment.

Risk management is another area which can prove to the benefit of the business. There have been several reported incidents where both remote and landbased operators have been caught inadvertently handling the proceeds of crime or assisting in money laundering. To state that this is bad business is to state the obvious (commercially, legally, reputationally) and systematically improved measures to prevent this bad business can only be a good thing.

Better customer understanding should come from enhanced problem gambling tools. Ladbrokes has flagged that it is rolling out its leading algorithm developed from its Odds On card. The temptation to believe that only card based or remote play is data rich is dangerously myopic, however – practically all forms of gambling are data rich and customer engagement is key. It has long been a valid criticsm of the gambling industry that it is not customer-centric enough (even in terms of customer service), a clear spotlight on customer behaviour should be used to accentuate the fun as well as reduce harm.

The Assurance Statement is clear that it is to be signed off by very senior executives (eg, CEO). This is important in ensuring that social responsibility is recognised as a key business driver right from the top (and when a CEO cares about something the organisation tends to). While all operators pay lip service to this, a pervasive culture of pushing problems the way of compliance is only just being overcome and any accelerant to this will make operators much stronger in being able to deal with issues of public concern, from both a cultural and operations management perspective (ie, minimise poor practice and mistakes, and handle the mistakes that do occur more effectively).

I am also encouraged that the Gambling Commission intends to take an active role in fostering and spreading best practice: this is an area where the industry will fail to gain from a lob-sided or patchy approach: even though some operators are already embracing this approach, they are in danger of being let down by the laggards. Effective coordination, and even leadership, is therefore vital.

In short, by fully embracing and embedding the purposes of the Annual Assurance Statement, the industry will not only justify the logic of relatively light touch regulation, it will also improve its reputation and produce more profitable and more sustainable businesses.

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”.