GB betting and horseracing – it is time to urgently explore Common Interest

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GB betting and horseracing – it is time to urgently explore Common Interest

“They had learned nothing and forgotten nothing” Talleyrand on the (briefly) restored Bourbons

The funding, relations and future of GB horseracing and betting operators is at the most significant crossroads in its chequered history. From a positive perspective, a reformed Levy is now effectively omnichannel, media rights deals are almost universally in place, and horseracing still commands c. 37% of the total GB betting market (c. £1.1bn revenue, roughly the same size as football). From a negative perspective, highly lucrative retail media rights are at risk from channel shift and regulatory action on machines, while horseracing’s betting market share is being eroded by more mass-market and in-play friendly sports (across channels, but especially online). At the very point at which racing and betting appears to have stabilised, it is potentially facing yet another funding crisis and structural relative decline. Further, this is not a nil-sum game: betting has at least as much to lose as racing. This is therefore the time for a comprehensive look at how to make betting on horseracing more attractive, responsive and efficient – while peace reigns between the protagonists and before it’s too late.

Common Interest I – show me the money
At its most basic, the value transfer between betting and racing is simple: racing provides a product in return for money. We have written extensively elsewhere why large swathes of this value transfer cannot be purely commercial (see: http://regulusp.blogspot.co.uk/2014/09/the-horse-racing-betting-levy-what-is.html), others have (rather obtusely) attempted to illustrate the flow of cash. However, the current flow of cash is really very simple, and can be summarized as:
To explain the workings:
  • Racecourse infrastructure is all annual racecourse opex less contributions to prize money and an average capex cost over three years to factor in project cycles (37 courses identified and analysed as large and/or group of 60 GB total, remainder estimated and assumed at the smaller end)
  • Prize money is based upon 2016 figures, adding annualised offshore Levy, removing the deficit (we have factored in 75% Executive Contribution from bookmaker media rights – we estimate that bookmaker media rights account for 98% of ARC’s Executive Contribution + EBITDA; 92% for JCR, so an even higher figure is arguably justifiable, with 75% conservative in our view)
  • Regulation and integrity includes HBLB admin and raceday services, and BHA costs
Four things stand out immediately, to us at any rate:
  • Bookmaker funding of racecourse infrastructure when expressed this way is material, but almost certainly represents very good value (see below)
  • Bookmaker funding of prize money is very substantial when indirect sources are factored in (racecourses channelling media rights revenue, bookmaker sponsorship)
  • Bookmaker funding of regulation and integrity is relatively light given the vital requirement of both to a functioning horseracing betting market
  • Prize money is the only major contribution bookmakers make to horsemen, but a mechanism which primarily rewards the race winner is tangential at best and conflicting at worse to what betting should want out of racing (we explain this rather obtuse statement below); nor is prize money the same as the cost of horsemen (runners)

Common Interest II – focus on value rather than price
Again, at its most basic, betting needs five things from racing on a ‘collective hygiene’ basis (other things can provide differentiation and therefore suit commercial deals):

  1. A large number of fixtures spread efficiently throughout the year / week / day-parts
  2. A base-level of competitiveness for substantially all races
  3. A critical mass of well-orchestrated events with mass market (bettor) appeal
  4. A well-regulated sport with very high standards of integrity
  5. An accessible sport that is open and understandable
Existing structures have all attempted to address these fundamental drivers at some point. However, the world has changed and many protagonists have forgotten the once practical underlying purpose of now arcane procedures. Considering each key driver in turn:

Fixture volumes are largely optimised from a ‘big picture’ perspective: improving on an average of c. 28 races per day practically every day of the year can only be tactical or operational in nature. While optimisation is very important, GB horseracing is fulfilling its strategic Common Interest requirements spectacularly well. Equally, the need to ensure weather redundancy (especially in the critical jumps season), maximise the use of regional horse populations, provide the three major codes (jumps, flat turf, All Weather), and give individual turf courses a rest, means that talk of racecourse ‘rationalisation’ often misses vital elements of infrastructure provision. Moreover, a nil direct contribution to this infrastructure and sub 20% indirect commercial support should only be seen as exceptional Common Interest value for bookmakers: the vast majority of races are run when they are run to suit a ‘bookmaking pattern’, not a racing one.

Base levels of competitiveness are another story, however. A stabilisation (indeed slight growth) in field sizes to approaching 9 per race is only 0.93 of a horse above the 8-runner field which gives each way terms interesting to the mass-market customer, while too many races (c. 15%) go off with a practically pointless from a betting perspective 5 or fewer runners. More critical to competitiveness than field size (though linked) is the price of the favourite: adding no-hopers to bulk up races will add no value. Nearly 15% of races go off with odds-on favourites and this is also bad for bookmaking outside a few ‘superstar’ horses which do more for profile than they cost in short-odds winnings. As well as providing betting ‘slots’ racing must also provide a betting ‘pay-table’ with broad appeal (ie, the framework of betting opportunities from short odds ‘near certainties’ to long-odds ‘punts’, the ability to create attractive multiples, etc: the greater the number of runners and competitiveness, the better the pay-table for the mass market; small fields and odds-on favourites appeal almost exclusively to a small group of more ‘professional’ bettors and exchange users). Racing is providing the slots effectively but the pay-table is patchy at best, with clear and increasingly structural points of failure.

The racing calendar is peppered with glamourous and/or nostalgic events, many of which guarantee sell-out crowds. However, anecdotal evidence suggests that only the Cheltenham Festival has been a standout success in recruiting new customers and driving volume growth. However, ‘Cheltenham’ is only one event and (poor for recycling into more racing) occurs toward the end of the jumps season. The Derby has tried some mass-market innovation to appeal to a wider audience, as well as maximise sponsorship value; the Grand National has gone for ‘teatime’, and; the All-Weather Championships combine a league with a quality finale (on a relatively new raceday – Good Friday); these are positive innovations, but they are too few and too tactical in nature to confidently predict that the declining hopper of dedicated race bettors is being refilled by new generations of engaged customers. Critically, betting has had relatively little to do with trying to address this engagement issue, despite it being a fairly obvious and long-term critical Common Interest.

Writing that GB racing is well regulated and strong on integrity the week after a ‘misidentified’ horse romped home might raise eyebrows, but racing’s track record is creditable in this field. Transparency has also increased dramatically in the recent past, as has a willingness to learn and change. This is not yet universal, but the regulation and integrity of the sport works. The key question here is whether or not such key Common Interest symbiosis should not be better reflected in a division of costs and representation.

Accessibility is another area of issue. Racecourse attendance has typically been strong within leisure-cyclical and amenity-driven bounds, often boosted by an increasingly rich programme of non-racing events. However, on-course Tote is a relatively sclerotic product while on-course bookmakers are practically museum-pieces. Wifi is increasingly available, but this is the limit of innovative accessibility from a betting perspective. Certainly, bookmakers do not help themselves here either, by typically offering Byzantine lexicons and user journeys; not putting off the seasoned punter is of course crucial, but this is too often an excuse to accept an ‘inevitable decline’ in relative engagement comfortably slow enough to keep the lights on while growth is sought elsewhere. This tactic (accidental or deliberate) might work when double digit growth is easy to come by (be it FOBTs, SSBTs, in-play or slots), but it is very dangerous in a more difficult growth environment – especially given the still significant size of horseracing as a betting product (c. 42% of retail; c. 30% of remote and by far the biggest pre-match market). The ability to stabilise and grow the appeal of betting on racing (or otherwise) is therefore likely to be a key driver of UK bookmaker performance into the medium term, for both landbased and online.

Common Interest III – what should be done
The biggest structural failures of Common Interest are currently competitiveness and mass-market appeal / accessibility. Usefully these two drivers are linked, and fixing the second is pretty pointless without fixing the first. Equally importantly, these failures will not be fixed by tweaking the status quo or by either racing or bookmaking alone (let alone at loggerheads). Historically, bookmakers have demanded more races and got them. This has increased the number of fixtures on a declining (GB) horse population of relatively static efficiency – the result, fairly predictably, was fewer runners per race. This trend has been relatively impervious to significant increases in Prize Money:

The correlation between prize money and average field size is -0.78: worse than none. There are lots of reasons to be cautious about expecting too much from relatively short-term improvements, but we can say with confidence that a material increase in prize money has had no discernible impact on volume (number of individual runners hovering around 18,500), productivity (number of runs per horse is a static 4.8), or on number of owners (stubbornly below 9,000). It would be obtuse to suggest anything other than that the current system of prize money on its own is very poor at delivering what bookmakers need. And yet it is the only major tool currently available (particularly in terms of bookmaker to racing funding), especially to reach and incentivise (or not) the all-important horseman.

We have commented previously on the extent to which growth in prize money has principally benefited the top-end of racing. While this set-up may suit some (and has some justification from a Pattern and international competitiveness standpoint), it does not suit (the) many and it positively undermines the betting product, in our view. If racing and betting is to grow together, this is the key area which needs to be addressed. Specifically, it needs to be worth the while of a critical mass of horsemen to run their horses more often, while also providing the means and mechanisms to encourage new owners into the sport. Only then will an increasingly counter-productive transfer of value ‘up’ racing’s hierarchy be reversed and the state of the betting product (as well as the vast majority of horsemen) will start to improve. The BHA’s decision to put an additional £9.7m of prize money (c. 6% of the new total) into grass roots racing is to be welcomed, but it can only be seen as a small start and a tactical-level response within the broader structural context.

Overall, to effectively address the areas of structural failure, we would suggest four key action points which racing and bookmakers should work together on:

  1. Focus on incentivising competitive participation in races rather than winning them (ie, structural reform of the betting-contribution element of the prize money system, including commercial payments to racecourses/media groups when contractually possible)
  2. Seek to redistribute the Common Interest bookmaker contribution going to the top of the sport to support the bottom (eg, reduce Group race support and take on owners’ BHA fees)
  3. Examine the blocks on improving productivity within the horse population (including international participants); provide support and incentives to unblock them (eg, including issues such as the number and availability of stable staff)
  4. Examine all areas of participant entry into and engagement with the sport (betting, attendance, ownership etc) and ensure the process is as open, inviting, comprehensible and joined-up as possible (eg, including a meaningful and broadly adopted ‘Punters’ Charter’)
The remarkable thing about betting and GB horseracing, especially given recent issues and spin, is that it is building on a position of strength and historical resilience. However, the pillars of this resilience are now being eroded by a combination of market forces and regulatory change: if racing and betting does not work together to embrace structural, strategic change now, then the false prophesies of decline and doom so often made in the past will start to ring true.