How will the High Court’s decision impact racing and wagering?

 
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By , 3 Apr 2012 ScottWoodward.me is a Roar Guru

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    Punters are the big losers following the High Court of Australia’s decision last Friday.

    The High Court rejected Sportsbet and Betfair’s claims that the decision to impose a 1.5 percent wagering turnover fee for the right to publish New South Wales race fields was unconstitutional on the grounds that it is discriminatory and protectionist in its nature.

    By now, we understand the views of Racing New South Wales (RNSW), the corporate bookmakers, as well as the betting company Betfair, who all have their own agendas to push in this dispute. So let us have an objective look from a punter’s perspective and see how the decision will impact the ability to wager in a competitive market place.

    RNSW CEO Peter V’Landys said on TVN on Sunday, “this was never about the punter”. However, what he has always failed to comprehend is that everything starts with the punter’s dollar and the finished product in his patch is likely now to be more expensive and slowly force racing punters to more attractive options, of which there are plenty.

    He claims to want to look after the 50,000 participants in the racing industry, but continues to ignore his most important and valuable participants, the four million punters who actually fund the industry.

    There are two burning questions. What will happen to Betfair, and what will happen to the bookies?

    It remains to be seen if Betfair Australia will test their arm at the ACCC, but given their business model is based on punters betting against each other with high turnover and potentially little or no gross profit, the new tax would render their business on horse racing in New South Wales unsustainable.

    Under the current model it is possible for two punters betting against each other to turn over $1m, with both breaking even, but Betfair has to cough up 1.5 percent tax of the amount ($15,000). Every day punters back horses at 1.01 “in the run” for large amounts, and while the punter who may invest $1,000 would stand to win only $10, Betfair would be taxed $15.

    James Packer, the 50 percent part owner of the Australian part of Betfair, is not noted for continuing to put in good money after bad, and the only way likely for him to stay would be for the exchange to apply for a corporate bookmakers’ licence. The odds are he will either dilute his stake or sever his ties to focus on his casino empire.

    Given that it will now be six times more expensive for Betfair to offer New South Wales racing to customers compared to offering racing from any other state in Australia, the only viable choice they appear to have is to withdraw, either blacklisting racing in NSW or marketing it from the U.K.

    This would dramatically and adversely impact liquidity and make the New South Wales racing product less attractive and competitive, forcing thousands of punters to turn to sports betting and online casinos.

    ChampionProfits.com trading guru Tony (The Badger) Hargraves underlined the dilemma facing Betfair Australia based on some typical trading scenarios that he experienced on Sunday. The Badger was pre-race trading on the Randwick meeting. On one race he turned over $2,400 and made a $30 profit on the race.

    Betfair took a commission payment from the Badger of 60 cents, but under the new 1.5 percent turnover tax law, a further $36 fee would have to be handed over to RNSW, who would actually make a bigger profit than the Badger.

    However, the big loser is Betfair Australia. This is a very typical trading scenario and one that the Badger typically implements on 15 or more races every day, like thousands of other traders.

    The flow-on impact will also reduce turnover for other operators like the TAB, as the very nature of the Betfair betting exchange generates millions of incremental dollars in bet backs and arbitrages.

    There will be many nervous Betfair employees in Hobart and Melbourne this week wondering what Easter will bring.

    The world’s second biggest exchange, Betdaq, owned by Irish billionaire Dermot Desmond, pulled out of Australia last July, promising to be back. But paying a tax based on turnover for any exchange does not compute.

    A horse is traded at the odds of 1.01 on almost every race. As an example, imagine Punter A wins $9.5 after paying Betfair 5 percent commission when he backed a horse (at $1000) in the run at 1.01 and it won. Punter B, who bet against Punter A, lost $10. Betfair, who facilitated the bet, won 50 cents from Punter A, but had to pay RNSW $15.

    As for the bookies, the major players will build the new tax into their product mix and look at different ways to develop incremental margins, like promoting multis and so on, but clearly the millions that they have invested into marketing racing in New South Wales will now be diverted into other states and sports.

    They have been promoting racing in New South Wales with expensive TV commercials and adverts in the print media, but due to RNSW’s exclusive arrangement with their buddies at the TAB, the bookies have been banned at the track.

    U.K. betting powerhouse Bet365 is one of the world’s largest gambling sites, and has been set up in North Sydney for almost six months now waiting on the High Court’s decision. We can expect an announcement shortly once they re-write their business plan.

    The small to medium bookies will likely struggle to maintain a tax on turnover, and it is known that not all bookies accrued back payments, with at least one high-profile mid-sized bookie not expected to be splashing out on expensive eggs this weekend.

    Sportsbet Executive Chairman, Matt Tripp, who also founded Sportingbet Aust, expressed concern that last Friday’s decision may lead to reduced income for racing.

    “As has been proven by the increase in wagering turnover since the emergence of corporate bookmakers, competition stimulates choice and in turn drives growth and revenue to racing. Giving the TAB a walk-up start will hinder competition, and restrict growth which may harm revenues to racing.” Tripp said.

    “However, we will continue to provide competition to the TAB by providing our one million-plus customers with the best prices, the best range of products, and the best service in Australia. For every dollar staked, the TAB takes more than twice as much from punters as we do. This won’t change as a result of the court’s decision,” he added.

    “If product fees are pushed too high, it has the potential to reduce both competition and consumer choice, to reduce racing’s wagering appeal compared to sports, and ultimately some wagering operators may decide to relocate offshore.”

    The major benefactors from the court decision are racing’s fat cats, the big breeders and owners, who can now buy and sell yearlings for more as the punters’ money will increase prize money.

    “Things just got more expensive after Friday,” according to Sky Racing’s Ron Dufficy, when asked if he will be buying at the sales.

    RNSW would have declined to prize money levels of the 60s had they been unsuccessful in court, and many observers are concerned that the industry should never have been put in such a precarious position, especially when Racing Victoria are thriving under a gross profit strategy with bookies.

    RNSW were on their financial knees when they were defeated in the initial court case almost three years ago by the corporate bookmakers, giving them a powerful bargaining position, but in the interests of the racing industry, the bookies agreed to allow RNSW access to the accrued funds of some $150m.

    The bookies could have played hard ball and withheld the funds pending the appeal which would have activated enormous pressure to negotiate a mutual early agreement. What RNSW do not know is that the major bookies would have passed on the funds even if they were successful in the High Court as a gesture of goodwill and to cement their position as a future long term strategic partner.

    Sadly, a tax on bookies’ turnover as opposed to gross profit will make the New South Wales racing product less attractive and competitive, and long term the turnover tax will continue to reduce consumer investment and crowds at the track.

    As Matt Tripp correctly pointed out, “the emergence of corporate bookmakers has been a wonderful shot in the arm for punters” as they have a choice now. They can experience expanded markets that are more attractive to consumers, stimulating interest levels that were not prevalent when the punter only had the TAB and SP bookie.