Regulus Partners, the strategic consultancy focused on international gambling and related industries, gives an insight into some of the key developments in the gambling industry as part of its ‘Winning Post’ column.
US: sportsbetting regulation – slam dunk or airball?
The nature of any US sportsbetting opportunity ‘post PASPA’ is now starting to take shape, with a number of states and a key sports stakeholder developing their position. While it is still too early to call a pattern, let alone an outcome, some important (and pretty predictable) themes are already emerging. First, initial permissive focus is likely to be overwhelmingly centred on landbased casinos. Second, fiscal regimes are likely to be tough and may be essentially unworkable. Finally, US sports bodies are probably the group with the most to gain.
Given the (relatively) recent history of online gambling in the US, and the power of the landbased casino lobby, it should not surprise that the main focus of most states’ preparation is for landbased casinos to allow on-premises sportsbooks (eg, Kentucky, Rhode Island), with only some extending the same operators online (eg, Indiana, Michigan); ‘only’ California appears to be preparing to keep its options open (though this is the Golden State in more ways than one). Therefore, in most cases, while there will clearly be some B2B opportunities for sportsbook providers, these could be pretty narrow in scope and significantly favour the licence / customer holder. William Hill’s US business gives a good indication of current structures. It should be noted that William Hill generates over half its c. US$900m Nevada handle (at sub 6% win margins) from mobile now – as an operator – and nearly a quarter from in-play. The extent to which this business model will be allowed in other states is uncertain at best; WH’s ‘traditional’ retail business generates only c. US$440m of handle (again effectively as an operator) and commands only 10% Nevada share (accounting for c. 1% of group revenue). In other words, the B2B opportunity for in-casino retail sports betting should not be overstated, while the online element is (where allowed) likely to be driven by tax, product restrictions and highly competitive commercial terms.
Nevada is largely an intangible export market for casino (less so for sports betting), meaning that the state can afford to offer very low tax rates (6.75% GGR + fees) since they are mostly levied on the visiting consumers of other jurisdictions. The vast majority of US states are not in this position, and generate most or all gambling revenues from their own citizens. With this in mind, Pennsylvania has proposed a sportsbetting tax 5x higher than Nevada’s (34% GGR), RI nearly 10x, while Kentucky is aiming for one of another quantum entirely: 20% handle (ie, a totally different business model is needed); Indiana is proposing a more ‘reasonable’ 9.25% GGR, but there is another sting in the tail.
After years of either negative or ambivalent positioning on sportsbetting, at least one major sport has now come out in favour of not just repealing PASPA but also allowing online betting. The NBA made this clear in New York this week, and has also achieved its solution in draft legislation in Indiana: a 1% charge on handle for integrity, with a requirement to use official data services. This position has precedent in France, Ireland and Australia, and the experience of the latter two demonstrates that it does not need to distort the market materially if: a) the sport is sufficiently important that customers/operators will not or cannot substitute (as is the case with basketball in the US), and; b) it does not sit alongside material other restrictive practices (eg, banning product, high turnover taxes: moot). The big issue here is that 1% of handle equates to c. 15-20% of directly related revenue on current margins: a significant share when room for tax, marketing, infrastructure, partnerships and profit also needs to be found, especially if (or when) others follow. It is also possible that sports will insist (or have thrust upon them) restrictions to in-play betting which would almost certainly distort the market (only racing can thrive under such a ban since frequency of races make in-play far less important, hence the product mix in Australia).
All of this suggests a much more expensive, fragmented and limited opportunity in the US than some bulls seem to be predicting (good for landbased casinos, potentially good for limited B2B, uncertain for mid-sized hopes and fairly negative for ‘strategic’ visions). We would reiterate one further point: for these opportunities to be realised any time soon PASPA would need to be repealed with either a vacuum or a permissive Federal stance. While two bills seek just that, we believe that they are ripe for amendment or replacement by law which allows the Capitol to retain the whip, and so kick the whole issue into the long grass: the US market is no slam dunk for even ‘well placed’ betting businesses…
We will be blogging on our estimates for the prospects of US sports betting in February
UK: in Parliament – Lottery in spotlight as gambling gets rolled over (again)
This was just another week in Parliament for the gambling industry: a week of bulging postbags at DCMS as the deadline arrived for submissions to the Government review of machines, advertising and social responsibility; a week of meetings in Westminster committee rooms; a week of Parliamentary Questions in which even the Prime Minister was put on the spot; and a week of rumour and protestation.
The Sunday Times set the pace with an article suggesting that the racing sympathies of the new Secretary of State, Matt Hancock (Cons, West Suffolk) would not unseat the cause of FOBT reform. Hancock, readers were told favoured substantial stake reduction – perhaps all the way to £2.
The Government’s Kafkaesque approach to gambling policy has encouraged plenty of speculation in the past but the fact that this story carried the Tim Shipman (political editor) by-line indicates that it ought to be taken seriously. The markets did just that, marking down shares in both Ladbrokes Coral and William Hill. There was much wailing about the deleterious effects on horse racing but also considerable scepticism given the tortured debates of recent years over the Levy and media rights (where it was argued that the turf was getting too much).
It is a troubling sign when an industry builds its defence on indirect benefits and even more concerning when those benefits turn out to be costs. The fact is that the three corners of the FOBT defence – jobs, taxes and payments to horseracing – are all business costs; items that management spends great effort on seeking to control and reduce. To pretend that they are benefits (and that they should be protected by Government even as companies attempt to diminish them) is disingenuous as well as economically weak.
On the Tuesday, the spotlight shifted to the question of restricted and closed betting accounts. In a committee room in the Lords, the bookies’ MP Philip Davies (Cons, Shipley) refereed a debate involving Richard Flint of Sky Betting & Gaming, Simon Rowlands of the Horseracing Bettors Forum and Bruce Millington of the Racing Post (with Brian Chappell from Justice for Punters and the ever-entertaining bookie Geoff Banks providing good support). It was a more grown-up affair than the partisan spats that we have become accustomed and closed with the flourish of an olive branch (grasped at either end by Flint and Rowlands).
Wednesday was National Lottery day with the chief executives of both Camelot and the Gambling Commission summoned before a Commons select committee to respond to Parliamentary laments over diminishing returns to charity from the National Lottery (and the perception that these had coincided with rising profits at Camelot).
Elsewhere that day, John Hayes (Cons, South Holland and The Deepings) challenged his party leader during Prime Ministers Questions to meet with him to discuss “the devastation, debt and despair caused by Fixed Odds Betting Terminals” and the need to “crack down on online gambling sites that target young children”. It is difficult to read too much into Mrs May’s response that “we are clear that fixed odds betting terminals stakes will be cut to make sure that we have a safe and sustainable industry where vulnerable people and children will be protected”; although betting operators may naturally hang onto the reference to sustainability.
Parliament considered questions on a range of gambling subjects, including Chris Ruane (Lab, Vale of Clywd) on “the effect on the vibrancy, and resilience of high streets” of betting shops (along with payday lenders and pawn brokers); David Drew (Lab, Stroud) on TV company lobbying on betting adverts; and Meg Hillier (Lab, Hackney and Shoreditch) on DCMS plans to address the Gambling Commission finding that “2 million people in Great Britain are addicted to gambling”.
This last question is a reflection on the current position of gambling in Great Britain. The Member for Hackney and Shoreditch would appear to have conflated gambling addiction (something that is very difficult to diagnose) with problem gambling and at-risk gambling. It is the type of sensationalism that many who ought to know better have been engaging in during recent months; and it is unlikely to lead to constructive outcomes. However, as was noted by industry executives this week at a gambling law conference, operators currently lack the confidence to push back on such misreporting.
Next week the focus shifts to betting integrity as changes to schedule 6 of the Gambling Act are considered in Parliament – but it seems unlikely that will be all.
UK: Gambling may need another review like it needs a hole in the head…but it needs this one
The publication this week of the Gambling Commission’s consultation document on the Licensing Conditions and Codes of Practice provided another demonstration that the regulator means business on the licensing objectives.
Not that long ago, the Commission inhabited a fairly narrow regulatory sphere within gambling and appeared hesitant to step outside the scope of traditional compliance (largely shaped by the old Gaming Board). Questions of advertising and marketing were devolved to other regulators (Advertising Standards Authority and the Competition and Markets Authority) while the scope of what might be considered gambling-related crime was also limited.
The Commission’s planned changes to the LCCP seem to indicate an appetite for direct action in the interests of keeping gambling fair and transparent – without necessarily being required to wait on partner agencies.
The general rule of Gambling Commission consultations is that they unleash the forces of conservatism (no matter how unsatisfactory the situation, the status quo often seems more palatable to industry than the uncertainty of change). In this instance, operators may do well to reflect that empowering the regulator to control more of the gambling ecosystem is likely to lead to more coherent policy and the more effective resolution of public concerns.
Gambling in Great Britain is currently subject to more reviews and investigations than one can wag a admonitory finger at. We don’t need yet another review – but perhaps we need this one. Given the extent of issues facing gambling right now, the need for a strong and empowered regulator with proper regulatory oversight for the licensing objectives has rarely been greater.
UK: horseracing – racing fans not so long in the tooth…
Analysis undertaken for the Racecourse Association using advance ticket sales data, shows that ‘millennials’ (those born between 1980 and 2000) make up 44% of attendees at race meetings, bringing the average age of racing’s audience to 45 (surprisingly, one year lower than the average age across all sports). The report also suggests that women make up 40% of attendees.
While these figures are likely to be materially skewed by the online purchasing habits of the younger generation and the pre-booking mix of music festivals after race meetings, it is nonetheless positive news for a sport with an historical reputation for popularity among older (often white) men. Racing has made great progress with making the sport attractive to a wider (and often greater) audience, including themed racedays and music concerts, which is clearly paying off – although sometimes to the detriment of its more ‘traditional’ fan base. Balancing the drivers attendance and the drivers of good betting content is likely to become an even more acute need if there is a severe DCMS Review outcome for FOBTs, but a focus on productivity rather than dependency should encourage further positive product reform.
Greece: tax issues – beware of Greeks bearing bills…
GVC has announced that it has been hit with a €189m tax bill relating to a period prior to acquisition in 2013 (ie, Sportingbet-Centric). Despite the figure being way in excess of Greek revenues during this period, GVC has entered into an agreement to pay €7.8m pcm for 24 months (ie, the full amount, which is c. 75% run-rate annual EBITDA ex-Turkey), while contesting the decision. The situation illustrates three key points that are worthy of wider stakeholder consideration. First, markets with unsettled regulatory positions, especially if they have a colourful fiscal approach, can be far more dangerous places to monetize than a simple view on direct .com gambling regulation risk can suggest. Second, the more large, public and M&A-focussed (where open-ended litigation is a real problem) companies become, the more vulnerable they are to ‘enforced compliance’. Finally – and perhaps most dangerously – the result of the contest, if negative for GVC, may point to the dangers of the offshore business-model: with minimal lobbying power and few friends (interestingly, GVC’s Greek partner Centric sold out in October), there is a danger that some jurisdictions see ‘to be regulated’ businesses as increasingly easy targets.
Europe: media consumption – Sky’s shift to streaming
Sky TV announced this week that it is soon to launch a complete internet streaming service, which could replace its core satellite offer (although this remains a customer option). Initially launching in Austria and Italy, it will then roll out across Sky’s other European markets. The news was accompanied by H1 results, which showed that the average monthly Sky subscription had fallen by £1 (-2%) to £46 after having been static for three years, and churn rates had increased from 10.2% to 11.6% YoY. This shift to streaming services is further evidence of the channel shift which is affecting media distribution and the need for traditional channels to adapt to changing consumer habits. Typically, streaming services operate at lower price points than bundled services and therefore Sky is likely to refocus its investment strategy in the future. Indeed, the company added that it would reduce its spending on second-tier sports, focusing on providing content which will have wide market appeal across all territories (which could create or at least illustrate wider streaming opportunities for betting-led sports content businesses). Sky needs to invest in new services to remain competitive with the growing strength and relevance of streaming ‘challengers’, but lower bundled subscription pricing will likely reduce the licensing revenue available for all but the top tier sporting events. Equally, the evolving way in which sport is consumed is likely to continue to have a material impact on betting habits across markets.