I’m all right Jack

UK bookmakers may have played their hand extraordinarily badly leading up to the recent offshore betting levy announcement, but the government is in danger of reinforcing a dangerously one-sided relationship by giving racing the right to spend Levy income as it pleases, writes Paul Leyland of Regulus Partners.

Everything changes and nothing changes. But this time it might.

The announcement that the government intends to extend the Levy to offshore operators by April 2017, and give racing control over the purse strings, has a greater ring of certainty about it than most policy announcements on racing. We are likely to learn more in the Budget on Wednesday, but this time Levy reform seems likely to happen.

Leading up to this position, the bookmakers have played every hand they have been dealt extraordinarily badly. The Levy was dismissed as an anachronism, while the forum it provided to allow bookmakers to influence racing was neglected.

The cost of racing live streams in betting shops has continued to increase against a backdrop of falling revenue, while customers are still given a pen, paper and some pre-decimal mental arithmetic to bet with.

LBOs have become dependent on gaming machine revenue, attracting levels of opprobrium that would make Satan blush, even from the industry’s own minister. It has also recently thrown in some social responsibility own goals for good measure.

Meanwhile, racing focused on its other stakeholders (people who own horses; people who turn up to race meetings, not typically to bet) and (almost certainly without intent) neglected the betting product (competitive racing, decent field sizes).

Who did this hurt? Not the racecourses, whose income has been growing, but the UK land-based bookmakers, who have seen betting revenue in ‘structural’ (read self-inflicted) decline for nearly a decade.

Management asleep at the wheel would probably have been safer. About 18 months ago, at least betting (read the people who had managed the above) thought it might finally be winning against racing.

From Racing Right to ABP 
Online operators had mostly moved offshore, in (small) part to avoid the Levy, and continued to grow racing revenue (other than Bet365 and Betfair, which continue to pay voluntarily and are, incidentally, the two largest and most successful racing betting operators in the market).

Land-based operators were seeing growth from products other than racing, mitigating the decline in racing economically and providing a stick politically.

An attempt to bring the Levy to offshore operators appeared to have been thwarted by threats of State Aid litigation (threats that the government must now feel confident of overcoming).

The bookmakers could perhaps square up to racing on the vexed issue of picture rights with some confidence that economics would tell its own story. But there was a feeling that racing ought to be protected.

So Matthew Hancock (now Paymaster General and number 3 at the Treasury) spoke to Chancellor George Osborne.

And then there was the Racing Right, announced in last year’s budget to great fanfare from racing after three rapid-fire consultations, the nuances of which had been digested by the government at incredible speed.

Betting seemed to have conclusively lost, unless it could burnish its State Aid case further and go to Europe (Brexit, anyone?).

But the Racing Right, while full of firm words, is pretty much bereft of immediate action, at least for a couple of years (or more).

In the meantime, LBOs are coming under increasing economic and regulatory pressure, while racing revenue continues to migrate online at a rate of about 5% per annum.

Waiting for the Right did not look that attractive to racing. So what to do?

Someone in racing realised that some of what they had was quite important to bookmakers, even online ones.

Sponsorship and advertising perhaps, streaming definitely. Here was a carrot: have that cheaper; or (here comes the stick) more expensively/not at all.

Most large bookmakers spend about 25% of revenue on marketing and maybe a further 5% on content. The imposition of a Levy at the Statutory rate of 10.75% would therefore be a difficult pill to swallow and might cause undue resistance.

But what if a lower rate were to be mooted? That might grow the carrot somewhat. And so the Authorised Betting Partner (ABP) scheme was born.

And while the offshore Levy is now likely to come in at least 12 months before a Right was expected, that still leaves a year or more of the ABP in operation.

From racing's perspective, this APB bridge is eminently logical: a funding/channel-shift stop-gap until the Right is determined, using its commercial levers to ‘persuade’ online bookmakers to pay.

For some bookmakers, a lower rate might also be attractive. Betfair and Bet365 are paying anyway, so bring on a cut. 32Red agrees. BetVictor can probably see an historic disruption in sponsorship and advertising for a key betting product; if its motives are (in part) opportunistic, they are sound.

But is it logical for online bookmakers, faced with a large cost to swallow, to take part? That's difficult to answer. What they get in return is far less tangible than the cost.

Is it logical for multi-channel bookmakers to accept? Certainly, if the cost is reduced across all channels to net off (what was that about racing raising as much as it ‘needed’) but this (dangerously logical) suggestion from Coral was rebuffed by racing.

Racing wants more money
So regardless of the acronym, what does racing really want? Recent action suggests it wants money from offshore operators without reducing the amount (or rate) from land-based operators. In short, it wants more money.

What will racing do with this money? History shows that a small amount will go to improving racecourses. That is a good thing, but if it is principally to make celebrities feel more comfortable (if they turn up), it should probably not be funded by bookmakers.

A lot of it will go to prize money. That could be a good thing, but recent history shows precious little correlation between prize money and those things that betting customers like: big field sizes, competitive racing.

Prize money also does not stick very well to the grassroots of racing, which provide the volume, the runners, and therefore the desired field sizes.

So if racing mostly takes this money to increase prize money for the benefit of a small number of owners, to the neglect of punters and the grassroots, then is this a good thing? I think not?

Is it in the interest of bookmakers? Quite the opposite, as it increases the likelihood of unopposed odds-on favourites (i.e. losses).

At this point, racing will probably say that it is trying to increase field sizes and it does listen to bookmakers: the BHA is certainly making the right noises. Perhaps. But does it have to? No. Is giving more money to a system that lacks appropriate governance a good idea? No.

Are the bookmakers engaged to ensure that racing is a thriving betting product rather than entrenched in a purely political battle? No. Has racing delivered an improving or even consistent betting product over the last decade? No.

This is a dangerously one-sided story that the government seems to be reinforcing by giving racing the right to spend Levy income as it pleases.

In my view, the bookmakers are right to question the ABP/offshore Levy but are currently doing so for completely the wrong reasons. Bookmakers rely on sport for product.

No other sport (except dogs but if racing’s defenders want to claim poverty go to a dog track) arranges itself to provide an event every 10 minutes every afternoon and evening nearly every day of the year.

Further, no other sport ensures that the best competitor might not win, or invests so much in integrity, two benefits that the bookmakers should be paying for as they're designed and delivered for them.

More than that, they should be embracing the product, shaping it, ensuring the symbiotic relationship is a positive and growing one. In other words, the bookmakers should not be objecting on grounds of money but on grounds of governance.

So why is this fight different? The bookmakers (especially land-based ones) are on the ropes politically and facing tough times economically; they might be inclined to acquiesce to the offshore levy (depending on terms), if not to the ABP.

Online bookmakers are currently benefiting from these pressures, but the government is keen to level the playing field, at least where racing is concerned. The land-based bookmakers can fight but they have no allies: they are alone and they have never been alone before.

The online bookmakers may see a long-term threat from taking on the government, but they do not have the same history of stakeholder relations (however badly handled). They may seek to challenge and in so doing thoroughly anger a government already struggling with the sector.

Bookmakers need racing. Racing needs bookmakers. Arguing about money not only misses the point but risks the increasingly fragile ecosystem of both.

Bookmakers should want to pay racing for a high quality betting product (collectively, with no freeloaders); racing should be willing for bookmakers to formally shape their product in return.

That would be a fair value transfer; it wouldn’t be State Aid – and it would save both sectors.