betting margins

Winning Post: Q4 betting margins… Feeling lucky?

Regulus Partners kicks off 2021 by analysing how the pent-up demand for sports betting from Covid restricted consumers enlarged betting’s Q4 margins, as well as the House of Lords’ deep interest in the Gambling Act’s review…  

In the depths of the first wave of lockdowns, online sports betting was among the beleaguered sectors of the gambling industry, lacking key product. However, even during March-May, margins were at least robust.

A combination of pent-up demand and additional content meant that by the end of Q3 most operators were tracking roughly where they could be in a normal year on a 9m view: an outcome barely imaginable at the end of Q1.

Soccer results in Q4, December especially, have produced results similar to Q417 levels: online sports betting ended the year comfortably up YoY in revenue terms. This is not necessarily a cause to celebrate.

The first and most prosaic point to make is that this is just luck. Just as operators would hope not to be punished for bad luck, there is little logic to rewarding good luck above a proportion of the excess cash generated: ie, an incremental PE of less than one. This is partly because results always normalise over time.

The chart below shows that the inevitable yoyo of Kambi’s quarterly margin is much less pronounced when annualised: the spectacular benefits of Q417 and now Q420 lead to weighted annual margin growth of ‘only’ 10.4% and 9.3% respectively (2018 was actually better YoY overall, driven by a much more consistent outturn).

A more important reason to be cautious however is that very strong margins don’t just normalise and create tough comps, they also distort customer behaviour. Very strong sports margins typically impact casino income immediately (reduced cross-sell) and sports volumes in the following period (reduced recycling). Even when customers are not directly price sensitive, nearly all are very ‘spend sensitive’ and adjust their behaviour accordingly. Even though distorted by another wave of lockdowns, Q1 is likely to be challenging. Indeed in 2021 only Q2 offers soft comps.

How 2021 shapes out for the gambling industry is less about comps and much more likely to be driven by how Covid-19 polices evolve, consumer responses to inevitable (further) economic dislocation, and regulatory impacts. And this provides another note of caution. Policy makers across the world will now be looking to repair the damage (potentially a far more dangerous economic and political landscape than the midst of a pandemic where options are few and financial support is ‘free’). They will be looking principally at three things: who appears to have benefited, who can pay more, and who is a soft target politically. Exceptional Q4 sports betting results arguably shifts the risk needle for betting operators across all three.

 

 

UK: In Parliament – Lords ponder the price of everything…

Christmas may be over but the House of Lords is still in pantomime season if this week’s debate on the Government’s review of the Gambling Act is anything to go by. Thursday’s short debate was prompted by a question from the Bishop of St Albans regarding the Government’s assessment of the cost to taxpayers of ‘problem gambling’. This is an important question – even if the noble prelate’s subsequent claim that the Government had ignored the issue was rather a long haul away from the ninth commandment (the Call for Evidence mentions social costs on at least two occasions).

Capturing the social costs and benefits of gambling (not that the Lords were very much interested in the idea that some people might rather enjoy a flutter) is notoriously tricky, fraught with issues of consistency, classification and attribution. The US economist, Professor Doug Walker has observed that, “If researchers continue to offer social cost estimates, they should estimate costs that are measurable (police, court, incarceration and therapy costs). But for other costs such as psychic costs that cannot reasonably be measured, or for negative effects that are not social costs such as pecuniary externalities, let us identify them without providing spurious empirical estimates. Offering methodologically flawed cost estimates does not improve our understanding nor does it promote sound policy.”

Labour’s Lord Sikka called for the review “to include at least the costs of the effects on immediate family, relationship breakdowns, domestic violence, depression, attempted suicides, crime, cost to the criminal justice system, loss of employment, job searches, health treatment, bankruptcies and productivity”. This is a good list but one that will in many cases defy meaningful measurement – and many of the items listed are not, strictly speaking, social costs. Establishing clear definitions and a scientific framework for recording costs and benefits is a critical challenge if the review is not to descend into farce.

The Government has commissioned two studies on harms from gambling – one from Public Health England and another from the National Institute of Health Research – with the results of both now (understandably) the best part of a year overdue. It is questionable how much attention should be paid to the latter project since the research team chose to publish its findings at the outset. The Public Health England project appears more promising although – judging by social media postings – the research team is not exactly on speaking terms with the concept of impartiality.

Other contributions to the debate included Lord Forsyth of Drumlean (Cons) yearning for a return to the days when gambling was an activity to be tolerated and not encouraged; Lord Foster of Bath (Lib Dem) questioning what had happened to the wall of money for treatment pledged by a number of operators back in 2019; and Lord Browne of Ladyton (Lab) lamenting the decision not to transfer ministerial responsibility for gambling to the Department of Health and Social Care (a questionable idea at the best of times – and the DoH is a long, long way away from the best of times).

Lord Curry of Kirkhale commended the Government for taking action but fretted that “it is highly likely that gambling, particularly among children, has increased during lockdown” – an assertion as lacking in common sense as it is in factual validity, given the shuttering of large swathes of the regulated industry over the last ten months. According to the Young People and Gambling Survey 2020 (which measured gambling participation in the 12 months to February 2020) only around 10% of children who gambled did so online – whereas around two-thirds either gambled with friends and family or in licensed premises (the latter figure skewed by the popularity of playing bingo in holiday parks). Given that lockdown has involved the closure of most of the places that children are known to gamble – schools, arcades and holiday parks – Lord Curry seems to be banking on a Covid-induced surge in the popularity of fun nights in with the kids and a poker set. Each to their own.

It is the duty of Baroness Barran to respond for the Government on such matters – and in recent months she has developed quite a nice line in impeccably polite put-downs to errant Lords. “The evidence of an increase is not as clear-cut as he [Lord Curry] suggests” was this week’s rejoinder.

Elsewhere the Howard League’s Commission on Crime and Problem Gambling made a submission to another Government consultation – this time involving confiscation of assets under the Proceeds of Crime Act. The submission argued quite reasonably that confiscation of assets may be disproportionately punitive (especially to family members) where the proceeds of acquisitive crimes have been lost in gambling; going on to suggest that assets might be retrieved from banks and gambling operators (instead or as well). The League acknowledged that such divestments are already a familiar feature of Gambling Commission enforcement cases while indicating that this route was too limited and too slow.

The basic premise of the Howard League’s submission is logical – but complexity lurks below the surface; and the issue requires attention, care and consideration from all stakeholders.

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Article edited by SBC from ‘Winning Post Sunday 10 January 2020 (click on the below logo to access a full unedited version)

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