Most of the focus on sportsbetting in the last few years has been on product (especially in-play and false/self-fulfilling assumptions on the decline of horseracing), user experience (especially mobile and retail self-service) and the ability to attract customers (advertising and sponsorship in abundance, affiliates getting a bad press). It seemed that cracking these operational drivers was the key decider of growth (and their aggressive exploitation a key driver of criticism), and to a large extent they still are. However, a new front has been opened to challenge the success or otherwise of bookmakers – how regulation might impact gross margin. Turnover taxes have been popular in some parts of Europe for some time (eg, Germany, France, Ireland, Poland, Portugal, Austria), factor into the US at the federal level (0.5% handle) and are effectively present as product fees in some parts of Australia (especially Victoria); Italy is something of a lone positive in (recently) moving from turnover to gross win -based taxes. All of these fiscal-regulatory choices, to some extent, impact the price the customer receives from domestically licensed operators.
Similarly, concerns have also been raised by some stakeholders (eg, horseracing in GB) that operators could ‘tactically’ lower gross margins on certain products to make less revenue (hoping to generate it elsewhere – effectively running ‘loss leaders’), potentially impacting specific product revenue – and that margin control mechanisms could be the answer. Such measures would also impact price. Indeed, price distorting fiscal-regulatory frameworks are surprisingly prevalent – by our count in 30% of jurisdictions where some form of domestic regulation exists (counting the US and Australia as one each), and as more jurisdictions and product owners adapt to online wagering, this could easily grow.
There is sometimes logic for this: if the duty is collected for or by a sport then a direct stake in benefiting from outside chances could raise fiduciary issues. Equally, if the duty is sufficiently low as a proportion of turnover that it can be absorbed by the bookmaker (however painfully) then this need not be particularly distorting for the customer (typically 2% of turnover or less from a purely pricing perspective for most products, but highly liquid soccer singles are often now priced at 2% or less, meaning some products will be distorted some of the time at almost any level).
However, the majority of jurisdictions which go down this path have rates either much higher than this, or additional burdens imposed on top (eg, taxes as well as product fees). Equally, very few regimes recognise that since turnover is a product- and customer-related outcome (more of this later) one-size-fits-all rarely works (eg, soccer singles / exchange fees at 1-4% margin vs. multiples at c. 15-30%, all on the same underlying pricing, cannot logically all be treated with the same turnover tax/fee rate without creating significant distortions and – for what it’s worth – unfair trading terms).
When turnover taxes are so high that the customer is directly impacted (ie, taxes are too high to be absorbed), the competitive economic model starts to creak and a leaky oligopoly almost certainly follows (whether this is a bad thing is up to governments – our concern is that it may not be an intended consequence). However, our focus here is not on what happens to supply – the bookmakers keep arguing that point and very few stakeholders seem to listen (bookmakers have few friends at the best of times, especially on the issue of their own profitability – and this is not the best of times, anywhere). Instead, we want to explain what the demand (ie, customer) impact is on price distortion – and why it is a bad thing for policy, regardless of bookmakers’ profits.
Fixed odds betting used to be simple. An adversarial contest between punter and bookie, where the bookmaker held the advantage of margin and a few punters held the advantages of more diligent study and/or better information. The breadth of sports now offered, market access point expansion (especially mobile), availability of data (especially real-time in-play), and the capacity of bookmakers to cope with this (swapping opinion for maths, counters for computer screens) has made this old world obsolete at best and redundant in many instances. However, some vestiges remain in the operating assumptions of some older bookmakers (surprisingly) and wider stakeholders (more forgivably).
There remains a central assumption that customer staking (bets placed, turnover, handle) is a meaningful measure of ‘activity’ and the margin is a measure of bookmakers’ success in monetising that activity. In the very short term (eg, for an event, or at best a financial quarter or two), this can be true: high margins mean high revenue, and vice versa; and it is certainly true on a race-by-race / match-by-match basis (as old fashioned bookmakers tend to think of the world – and with their cash flow on the line every time they opened for business, one can understand why). However, this assumption completely misunderstands consumer behaviour over time (especially in an account-based online environment, where the bookmaker keeps the customers’ money), as we will attempt to demonstrate.
Customer segmentation in gambling is typically not sophisticated enough and we are not about to help matters. However, to address this issue with some meaningful behaviours and figures we have created two axes: whether or not a customer is ‘price sensitive’ and whether or not they are big spenders. Both of these is a spectrum and customers can vary over time and/or by product, but we seen these as the two key drivers for understanding the impact of price distortion.