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Winning Post – British gambling industry undergoes structural changes

Regulus Partnersthe 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.

UK: 2017 Participation statistics – profound structural change continues

The latest Gambling Commission Participation Data demonstrates a GB sector continuing to evolve along relatively established lines. There are few surprises in the data, though this does not mean that it does not point to some important ongoing structural changes. National Lottery participation illustrates crisis, while low participation among younger customers is as concerning from a commercial standpoint as it is reassuring regarding harm. Online growth continues to be significant, though account concentration among heavy users remains high and recent drivers of growth are likely to be both slowing and more discriminatory going forward. Finally, while problem gambling metrics remain broadly stable, areas of concern and likely scrutiny remain.

Overall participation

Overall gambling participation (in the past four weeks) continues its medium-term downward trajectory, falling to 45% from 48% last year and over 53% in 2014. This is a double-edged statistic from a policy risk perspective, in our view. On the face of it, it seems to suggest that reports of increased gambling have been overblown. However, the decline is concentrated in lottery (see below), while growing UK gambling revenue on a smaller consumer base points to increasing concentrations of spend: something legislators and regulators might consider cause for concern.  The rate of decline was also the most pronounced among 16-24 year olds (-13.1ppts since 2014 to 32.4%), where the stats exclude National Lottery draws, which is concerning demographically; the average rate of decline for over 45 cohorts was only 1.8ppts for the same period (albeit on a relatively small sample).

Participation by product

Unsurprisingly, National Lottery draws are showing the steepest decline, -10ppts since 2014 to 27.3%, the data also suggests this decline has not been caused by other lotteries, on a fairly static 11% participation (up 1.6ppts since 2014 but down 1.2ppts YoY). FOBT participation remains a flat 1.4%, while other gaming machine participation records 2ppts growth to 4.4%. This implies an average revenue per FOBT user of £2,460 pa, vs. £700 for all other machines (including £540 in pubs), but we would caveat sample size makes these figures dangerous to take literally, while the 4-week question also leaves out occasional players (likely a relatively small group for machines). Other ‘traditional’ products that are showing life include bingo (+0.9ppts to 3.3%) and dogs (+0.6ppts to 1.1%), though the standout growth was sports betting (+2.3ppts to 6.4%, though with a 0.7ppts YoY decline due to football, almost certainly Euros related). Casino games remain relatively range-bound and all below 2%.

Participation by channel

From channel perspective, the participation data shows that online betting has grown 1.8ppts since 2014 to 5.6%, implying a ‘regular’ population of 3m and a spend per head of £720 (likely overstated due to the likely higher mix of occasional bettors). Other online gambling is a very large 18.3% (+2.58ppts), showing that channel shift in the National Lottery has been considerable but not enough to net off land based participation.

Data on the number of accounts per online user also reinforces a clear pattern. The survey tells us the average (c. 3.8), the percentage of players with only one account (44%) and the percentage with more than five (13%). We can therefore infer that 43% have between 2 and 5 accounts; if we assume that the mean within this cohort is 4, then the average number of accounts for the top 13% of players (NB, active within the last 12 months, so excluding dormant accounts) is 12.6.

The average number of accounts per active has actually increased YoY in 2017, but we attribute this to the Euros effect. We would anticipate the number to fall materially in 2018 due to the World Cup, with a continuing long-term declining trend due to a greater proportion of mass-market customers who only have 1-3 accounts. Separately, the number of online gamblers using mobile has grown 8ppts to 51%, while those betting in-play remained static at 26%.

This steep difference and the changes in mix has three important ramifications for the industry, in our view. First, operators without a genuine brand will struggle to be noticed by 87% of the online population, squeezing them into a highly competitive pool of heavy users. Second, as mass market online penetration continues to occur, growth is likely to be concentrated in a few strong operators: a trend we have already seen developing since 2014. Third, while mobile and inplay still have some room for expansion, they are unlikely to be the significant growth drivers to the same extent that has powered double-digit growth from 2014-17.

Attitudes: when the fun stops…

The headline rate of public trust in gambling edged down slightly from 34% to 33% (the percentage of respondents who agree that gambling is fair and trustworthy). Bucking the recent trend, this was attributable to non-gamblers more than to gamblers. The report suggests increasing concern over the contentious issues of TV advertising and sponsorship. Compared with 2016, the issues of protecting young people from exposure to gambling, restricting the hours in which gambling adverts may be aired and putting greater controls on content all appear to have grown in the public consciousness.

The findings that a majority of respondents recalled seeing a gambling ad in the prior week (nine-in-ten on a past-year basis) and that more than half of gamblers claim that they have been prompted to gamble by adverts may on balance prove unhelpful for those trying to stave off restrictions in this area. It also provided a timely reminder (given the rather odd DCMS plan to reduce public concern about gambling ads through a public health campaign about the dangers of gambling) that gamblers are humans rather than econs – and may not respond to communications in the fashion intended. The Commission research found that promoting responsible gambling agenda can result in increased gambling as well as greater moderation.

For all the good work that gambling companies are doing in developing ‘responsible gambling’ tools, usage is low (in part perhaps because they tend to be positioned as safeguards against negative behaviour rather than as concomitants to positive play). This should act as a prompt to think about safer gambling in terms of user experience rather than simple functionality or virtue signalling.

While the headline rate of public trust has collapsed over the last decade (from about one-half to around one-third of respondents endorsing the industry), results from the eight-point ‘Attitudes Towards Gambling Scale’ (ATGS-8), suggests a more complex picture. The ATGS-8 derives scores based upon responses to a variety of questions about gambling and may reveal more about true beliefs than a binary question of trust.

The overall ATGS-8 score of 21.0 represents a mean negative view on gambling (24.0 is neutral) but this is only slightly lower than the score of 21.2 obtained in the British Gambling Prevalence Survey (the ‘BGPS’) in 2007. There are reasons to be wary of comparing the latest Commission data with the BGPS series but in gambling policy we are used to having to make do with imperfect information.

UK: in Parliament – It’s snow so quiet

This was a rare quiet week for gambling in Westminster. With one eye presumably on the FOBT debate, Adam Afriye (Cons, Windsor) posed a question about the effect of the revised horseracing levy on racing itself and on the public purse.

Meanwhile, Peter Dowd (Lab, Bootle) asked the rather odd question of “how many people received an exemption from value added tax on betting and gaming and lottery duties?” We’re not really sure what Dowd meant by this – and judging by the response from Financial Secretary to the Treasury, Mel Stride (Cons, Central Devon) – we’re not particularly certain the Government did either.

Elsewhere, Jo Stevens (Lab, Cardiff Central) asked when the Government would come to a conclusion on regulatory reform for society lotteries. The DCMS expression of “hope” that it would “conclude considerations and provide an update in due course” left Stevens and the rest of us better informed but none the wiser.

GB: horse racing –  there’s life in the nanny yet

Betfred has confirmed that it is in advanced talks to sell a 25% stake in the Tote. The potential buyers are reported to be a consortium of racing figures, who, according to Fred, “want to put a lot of marketing money in” and believe “there is big business to be done both nationally and internationally.” Despite the impending loss of the Tote’s exclusive licence in July, Fred’s Tote still has deals in place with retail bookmakers, an on-course partnership with Ascot as well as comingling with the Hong Kong Jockey Club, and the benefits of both incumbency and product (eg, Placepot).

This positioning and the recent interest show that the Tote should not be written off just yet. While the years have not been so kind to the Tote since the 1960s, a fresh outlook and some much-needed innovation (and marketing) could see it become a compelling alternative to fixed odds and exchange betting, potentially with more money going into racing in the long run. However, getting to that long-run is likely to divide the existing pie, something liquidity-driven products can ill afford: Fred’s fighting talk, newfound allies and war chest is suitably Churchillian to take his creation forward, but might smack more of the Dardanelles than the Finest Hour.

GB: horse racing – not Done enough spending..

The Racing Foundation, the charity set up to spend the money from the sale of the Tote (to Betfred in 2011), has released its spending strategy for 2018-20. Despite nearly seven years of costs, and £9m of investment into racing related projects, it still has £93m (principal and returns on investment). The plan is for a more coordinated approach to further funding, with a welcome start of £10m set aside for the next three years.

While racing’s stakeholders are not always in agreement, it is welcome news for the long-term health of the sport as an industry that there is a more joined up approach with its strategic planning to ensure funding is directed to the areas where it is most needed: especially given such large sums of money are available without needing bitter infighting to unlock.

Racing’s grassroots (both business and sport) is its backbone and has lacked vital funding for a long time, causing a disgruntled workforce, static prizemoney and shrinking ownership. At elite-level racing is thriving, but without its foundations, it is only a matter of time before the cracks at the bottom begin to weaken its top-heavy structure. While this is structurally difficult to change, recent moves in a number of areas should help to rebalance the position, which is vital for sustainable growth, in our view.

UK: land-based gambling – AGC fix for LCL?

This week it was reported in the national press that LCL had put in a licence application for an AGC in Coventry. Faced with the prospect of significant FOBT disruption, the strategy to open arcades would seem like the obvious choice to retain some of the potential lost gaming revenue.  After all, AGCs can offer unlimited machines (with up to 20% B3) and if the new staking levels make B2 games unattractive to players, more B3 machines seems to be a likely outcome.

However, the arcade industry reveals a sector that has been in long term decline with only c. 1,475 locations (plus c. 150 bingo-licensed arcades) remaining, compared to c. 8,600 LBOs. With an average revenue of around £240k pa, and many locations underachieving this level, the opportunities for material profits are limited, in our view. In our estimation, an LBO chain at best could hope to economically switch use on c. 100 locations, each doing well to generate a contribution of £25k or an annual EBITDA contribution of £2.5m – worth doing to avoid closure costs perhaps, not enough to provide a true substitute to broad LBO closures, in our view.

Ladbrokes has opened (and subsequently closed) arcades in the past (as well as a failed attempt at casino, albeit in very different circumstances) – it its latest foray into land-based gaming is likely to be in the teeth of commercial and political opposition, with material economic headwinds thrown in.

Europe: CJEU ruling – Hungary for liberalisation?

The Court of Justice of the European Union has ruled that Hungary’s attempts to restrict online licences to land-based operators is unlawful because it does not appear to be a proportionate way to deliver social protections and therefore unreasonably restricts freedom of trade and establishment. Hungary’s convoluted and transparently self-serving online gambling laws have been under pressure for some time (eg, CJEU also finding blacklisting unlawful) and have been widely ignored by operators.

This ruling should not therefore be a surprise, though we would be more cautious than many about the extent to which the look through is clear, or that it backs ‘liberalisation’.

Within Europe, online licences linked to a land-based presence are in force in Belgium, Croatia and (currently) Slovenia, and may be considered elsewhere (eg, Germany casino), and so if the CJEU case is the end of this link, it is important (operators seem far less willing to complain about it in the context of the US market).

However, Hungary did not just insist on a land-based presence, it required one for 10 years (later reduced to three) explicitly to demonstrate that an operator was ‘trustworthy’. The two standout issues here, in our view, are that backdating the land-based presence (or dragging out online entry) distorts the market, while having only these means of assessing ‘trustworthiness’ is clearly discriminatory to non-Hungarian EU businesses.

It is entirely conceivable that if the licensing process were transparent and even-handed, a land-based requirement could be justified (assuming non-domestic EU operators could apply). As usual, we see this as a case of the EU stepping in to prevent egregious protectionism: we believe more subtly delivered protectionism is likely to continue to be uncontested, especially now that the EC has withdrawn infringements on the sector.

US: sports betting regulation – state of play

Connecticut (pop. 3.6m) is the latest state to give serious scrutiny to potentially legalising sports betting if PASPA is repealed, with a series of House Committee hearings scheduled, including the NBA and MLB this week. Connecticut has one of the most liberal wagering regimes in the US currently, with Sportech offering pari-mutuel horse racing and Jai Alai across 16 OTB venues and online (as well as two tribal casinos). Leveraging this presence will be easier than for many states, suggesting a credible, workable framework is more likely here than elsewhere.

The NBA also appeared to soften its stance on a 1% handle integrity fee, offering to negotiate the value (though the position on the existence of a fee is unchanged from the NBA and MLB). This is encouraging given that a 1% fee effectively represents a 17% price distortion in a 6% gross margin environment (likely encouraging illegal betting), and offers little room for both state taxes and effective operations. However, given the power of the sports bodies and the purpose of PASPA, some sort of settlement is likely in most states, in our view; meaning a sustainable framework is critical for both sides.

Austria: regulation – consumer protection to another level

Austria’s draft Gambling Act has been amended to include ISP blocking and the right for players to claim back winnings from ‘illegal’ sites. Whether this punchy rule will make the cut remains to be seen, and then the real question of what it is to be ‘illegal’ (rather than just not domestically licensed) will have to be settled. However, the move demonstrates the extent to which legislatures can get ‘creative’ in tackling unwanted .com gambling markets.

Separately, amendments to local betting laws are now being implemented (having passed EU scrutiny). Upper Austria (pop. 1.4m) is introducing some significant new player protection regulations. First, all bets over €70 require players to be registered by use of a player card or biometric access system (for example fingerprint recognition); second, all bets are now limited to a maximum stake of €500.

The final proposal requires players to initially register with photo identification in order to place sports bets, with any subsequent visits requiring the use of fingerprint biometric access to enable bets of over €70.

Unlike games of chance which are regulated by an Austrian federal law ‘Glücksspielgesetz’, betting legislation is legislated at the state level.  Austria is very progressive in its approach to player protection, having already introduced player registration in land based slot gaming locations together with other operator controls.

Casino operators are required to monitor player habits and visit frequency to determine if players are at risk of threat to personal minimum subsistence income, carrying out credit checks if they suspect there are potential issues. With these latest legislative introductions, Austria seems to be on a path to be the first EU member state to introduce player registration for all forms of gaming.

Global: sports integrity – Council of Europe rattles the tin

It was reported this week that the Council of Europe’s Kick Crime Out of Sport + (KCOOS+) project will start this year and run until 2020. This follows an 18-month pilot project (co-funded by the EU and the Council of Europe) which concluded last June.

This global project is focussed on assisting states with the implementation of the Macolin Convention on the Manipulation of Sports Competitions, and encouraging collaboration between all stakeholders across sport, gambling, government and law enforcement. The key to this ability to work in partnership is the establishment of national platforms, like the UK’s Sports Betting Integrity Forum.

In principle, a joined-up approach such as this is the only way to address the issue of betting-related corruption in sport, in our view, and the political momentum which projects such as this create is crucial. However, unlike the pilot, the KCOOS+ project does not benefit from EU funding and is dependent upon voluntary contributions. The fear is that, without a commitment from Member States to fund such initiatives, or at least mandate funding by other stakeholders, such initiatives may be destined to remain good ideas in principle, with limited effect in practice.

UK: sports integrity – anti-doping more than just a numbers game?

The FA and the EFL have been criticised for “unacceptable” levels of doping control tests on players in 2016/17, with at least a quarter of EFL players not having been tested. This is despite recent increases in funding and numbers of tests, allowing UKAD (in partnership with the FA, while the EFL has no role in programme management) to take more samples from footballers than participants in any other sport. Among European countries, only Italy takes more football samples than England.

However, it is artificial, in our view, to look purely at the numbers. Anti-doping programmes should be multifaceted, efficient, effective and intelligence and research led. Risk is a crucial consideration, which is why we believe that comparing testing levels in elite athletics to football is a nonsense, given the different risk factors involved.

While there may be question marks over the FA’s weighting of tests to the elite level, perception is a legitimate factor to consider as well, which many sports do. It should also not be forgotten that testing is one element in an anti-doping programme. Education and prevention is just as (or arguably more) important. An analysis of a sport’s approach to protecting its integrity (against doping, or any other risks) should consider all factors, and not be limited to one discrete element.

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