The impossible dream - the evolution of remote betting platform choices

By David Loveday, Principal Consultant, Regulus Partners

‘To dream the impossible dream, that is my quest.’ The Impossible Dream, The Man from La Mancha, 1965

The gambling industry is a something of a ‘glass half-full’ business; as shown in the evolution of its technology:

A decade ago betting systems were simple and predominantly focused on horseracing and dogs. Now they have evolved into masterpieces of transactional scalability producing excellent performance figures.

Multi-functional systems encompassing sportsbook, account and wallet are complex and high-performance pieces of technology; however, in spite of this gambling business executives have a tendency to focus on the negative aspects of their own systems rather than looking in to why the elements work better for a competitor.

The technology we see today has ‘stood up to the job’ and grown with the times and needs of punters and operators with few exceptions. For example, at the turn of the decade when high volume in-play betting was in its infancy, most systems were unable to cope with this new demand; yet it is now basic functionality. Not everybody would agree, but I would strongly argue that the deliverers of gambling technology have out-performed in their task and long may this continue.

So in light of this what kind of system would the average online gambling Chief Executive dream of having at their disposal? What are the realities and what are the options?

I would say it is a fair assumption that most CEOs would want as system that:

·         Outperforms the competition

·         Is developed and IPR-owned by their organisation

·         Is flexible enough that new functionality can be developed and added on swiftly

·         And the costs of running the system would decrease every year

Of course, this wish list falls into the category of the impossible dream.

SAW (sportsbook, account, wallet) systems are immense pieces of software, heavy in code and complexity. They can’t be re-engineered in a stack and layered model. Interdependencies are common and they will only get bigger. The bigger they get the more they cost, and when they don’t fully support the objectives of the business, then tensions rise as the systems are inevitably the heartbeat of the company.

My view, from experience, is that operators are unlikely to get exactly what they want when it comes to SAW functionality and this could mean that companies could head down one of four possible routes to get something of that original shopping list:

1.      Build your own

A small number of companies have built their own software from scratch, and have delivered good systems and performance as a fortunate result, however, I am sure that no one now lives under the misguided impression that this is easy.

SAW systems are huge, complex and in constant need of TLC. The cost of maintaining these systems will only ever increase and the moment you take the foot off the investment pedal they fall behind.

As for attempting this feat in the present climate, I think it is fair to say the investment and logistical demands on any operator with serious hopes of achieving the home-grown option are immense – as is the requirement  for suitably large levels of profitability to achieve a return on investment.

2.       Mix and match systems

Most operators have followed this route, sourcing individual components from a plethora of suppliers, while perhaps building some of it themselves.

This approach requires a lot of supplier management and there is always the danger of said suppliers playing the blame game when things go wrong. That said, using skill and ingenuity most operators that have chosen this road have reached their destination.

Would they like to do it all? Perhaps. But as with option one, questions arise over whether it is optimal for a gambling company to morph by stealth into a technology outfit.

3.       One-stop shopping

It is now possible to buy almost everything you need from a number of the big suppliers.

This route solves the problem of accountability, but does so by passing a lot of control to the supplier. Is this is good thing? Possibly for some businesses, but certainly not all and questions like this can open up lively debates within organisations.  However, one thing is certain - the underlying issues of cost and complexity don’t go away.

4.       Beyond white-labelling

This is the approach that I find the most interesting:

Bookmakers are, by nature, tribal and territorial, and while the online industry was growing fast this was a sustainable position. But given the multiple regulatory issues the industry is currently facing, most notably Point of Consumption tax in the UK, it might leave some organisations thinking the unthinkable and looking once again at collaboration.

There are a number of companies which have built excellent systems and technology, and it is well within their technical grasp to host their competitors on their architecture. All the tenant would need is a new shop window.

The cost savings would be significant and the hosted operator would be left to focus on their core competencies as well as naturally being part of a bigger liquidity pool.

Though many will see some of the above sentiments as a heresy, the sobering reality is that in the UK the Point of Consumption Tax and other cost increases will force all operators to drive efficiencies wherever they can. Sacrifices will have to be made and the possibility of reducing operating spend to preserve customer marketing means that we could come to see 2015 as the true beginning of the era white labelling. 

Sin Tax Error: resisting reasonable gambling taxes risks a much worse outcome

By Paul Leyland - Principal Consultant, Regulus Partners

“Friends and neighbours complain taxes are indeed very heavy and if those laid on by government were the only ones we had to pay we might more easily discharge them; but we have many others and much more grievous to some of us: we are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly.” Benjamin Franklin

The Gibraltar Betting and Gaming Association, having failed to overturn the UK remote Gambling (Licensing and Advertising) Act, is now attempting a Judicial Review of the forthcoming remote Point of Consumption taxes through the Finance Act.

I think this is a mistake for pretty much the same reasons as those articulated in a previous blog: http://regulusp.blogspot.co.uk/2014/09/point-of-consumption-licensing-beware.html. However, there is a deeper industry issue here which needs to be addressed if it is to be listened to.

The gambling industry at various points supports two conflicting and often almost disingenuous lobbying positions:

·         We pay a lot of tax, therefore we should not be over-regulated

·         We are in a highly competitive sector so we cannot support any/more tax

There is an obvious confusion here to lawmakers and other outsiders, that one part of the industry pushes that paying taxes provides lobbying power, while another part is determined to avoid any material tax footprint. The confusion is added to when both views are expressed by the same company depending upon which division is speaking.

Businesses are not necessarily consistent and they rarely claim to be philosophers. However, in attempting to be pragmatic they open up a very significant practical problem…

In the first instance is it logical that any company has a de minimis tax footprint? Certainly it maximises profit but it is highly unfashionable among government and voters (not to say ethically questionable). If a company busily manufactures widgets, or even financial products, then it might take the view that ‘as a company like any other’; it will take its chances unless or until tax law catches up with it. From a purely corporate governance perspective, this a reasonable risk to run so long as it is disclosed and transparent.

But gambling companies are not like other companies. And not for any moral reason. Or even because they are especially esoteric. But because they are specifically regulated.

The problem for gambling companies is that the same governments that regulate gambling businesses also set the tax for them (increasingly online as well as land-based).

Like it or not, governments can, should, and do regulate gambling.

All gambling companies; black, white or ‘grey’, exist somewhere in a legal, regulatory and fiscal matrix. If they try too hard to avoid tax and regulation they will simply invite governments to ensure that they fail. If the fight becomes public, it is likely to become political. If it becomes political, there will a premium on the politicians becoming vindictive – with the blessing of the voting public.

As Professor Peter Collins put it: "Almost everywhere in the world, where gambling is not primarily an export business, gambling - like alcohol and tobacco - is subject to abnormal rates of taxation, so that government itself has a substantial economic interest in a profitable gambling industry."  

But surely taxes mustn’t be too high?

Undoubtedly, but when making this argument, gambling companies would do well to understand the tax footprint of ordinary companies, rather than assuming that paying a specialist tax gives them a special lobbying position: contrary to some industry assertions, most forms of UK gambling are not materially more heavily taxed than the wider corporate economy, and are much more lightly taxed than most ‘sin’ excises (tobacco, alcohol, fuel).

Moreover, the role of regulated gambling needs to go beyond paying tax to form an effective lobby; Collins again: “Throughout the United States and almost everywhere else in the world, the gambling industry is expected to contribute special economic benefits to the jurisdictions in which it operates. This may consist of promoting earnings from tourism, funding good causes, or paying abnormally high taxes over and above normal corporate, personal, and property taxes.”

More specifically, ‘tax lobbying’ is only logical if at least two of these four statements are true (and probably all four if anyone is to listen in a politicised environment as we currently have in the UK):

1.       Gambling taxes have a higher tax footprint than that of the ordinary consumer pound (including net VAT and factoring in heavily sin-taxed products such as tobacco and alcohol)

2.       There is a material risk that high taxes will create a significant black market which regulation cannot mitigate

3.       Sensible tax rates are driving investment, employment and providing a safe public utility

4.       The taxes generated are more valuable from an economic perspective than the social harm and/or political pressure caused by allowing the activity in the first place

The problem that the UK gambling industry faces (including its offshore remote sector) is that, on the whole, it does not score well on any of the above points, and is (very) poor at communicating when it does get it right.

More profoundly, lobbying should be designed to persuade, not to negotiate: gambling’s negotiating position with government is very weak indeed (small, limited popularity, controversial). More dangerously, overstating its negotiating position can become counterproductive.

The gambling industry needs to show that it is prepared to pull its weight both fiscally and socially if it is to have a voice with its most important stakeholder: the government of its customers. The GBGA might not be overly concerned that there is a contemporaneous review of UK gaming machine regulation in betting shops. It might be equally unmoved by the fact that next May there is a UK General Election, in which two major parties are already setting their stall in a manner not exactly friendly to gambling. But then the GBGA is not directly responsible to the UK government. Many UK-facing operators are (or soon will be), however. Those operators may look at 2014 not as some annus horribilis but as the last of the good old days and a chance to build bridges wasted… If they keep supporting attacks on the hand that feeds them they may very well deserve it. 

Getting on with Government: the Importance of Being Earnest

By Dan Waugh, Partner, Regulus Partners

"Life is never fair, and perhaps it is a good thing for most of us that it is not." Oscar Wilde

Life isn't fair. One would have thought that gambling more than any other industry might understand that fact - but sometimes you have to wonder.

Over recent years most parts of the Britain’s regulated gambling industry have felt cause to bemoan the “unfairness” of government interventions. In 2007 it was casinos (duty increase) and bingo clubs and arcades (slot machine restrictions); in 2009 it was casinos and bingo clubs (duty again). In 2014 and 2015 it’s the turn of betting shops and remote gambling (in both cases increases in duty payments and the potential for regulatory restrictions). The claim to fairness is also evoked by those seeking further regulatory relaxations (more slots, higher limits etc).

Amidst all the nickel and dime industry grumbles, one occasionally hears the call for government to set out a vision for the industry - a consistent and coherent framework that will enable us to understand the purpose of policy. For those of us in gambling, this appears entirely reasonable. Behind all the legislative detail, we reason, there must be a grand plan from government - an idea of how it perceives the role of gambling in Great Britain and how it will shape this. We form a legitimate part of the country’s leisure retail and entertainment industries and we deserve to know what the big idea is.

There are however a number of problems with this view. First, gambling is not simply another part of the leisure market - for reasons of substance and perception, society judges that gambling is different from say restaurants or cinemas. This context is important when we consider how much government feels it needs to care about us.

Second, government has expressed a vision for gambling in Great Britain. It underpins the Gambling Act 2005 and expresses a desire that gambling be conducted in a manner that is fair, transparent, free from crime and equipped with safeguards to protect the vulnerable. True - this is more an expression of what gambling should not be rather than what it should be - but it is a fairly clear articulation of principle.

Third, and crucially - it is not actually the role of government to articulate a more positive vision for gambling. It is up to the industry itself - and in recent years it has not done a particularly effective job of this.

Of course, there is no single body that is empowered to speak for gambling as a whole - but the behaviour of the main players suggests that for many senior executives the goal they are aiming for is simply to make the inherent human desire to gamble as profitable for their companies as can be. Recently this has been tempered by a re-balancing towards harm minimisation; but the over-riding image we are left with is of an industry trying to get rich quick without causing too much damage - hardly very uplifting.

We are left without any real sense that anything truly valuable (or even interesting) is being built - a process of extraction rather than construction.

There are of course exceptions. What Simon and Jimmy Thomas have built at The Hippodrome starts to reframe the question of why gambling might be an industry that government should support rather than simply control; and of course there are plenty of examples from overseas markets where governments have been able to contextualise a positive role for gambling companies within the highest levels of state policy.

We in Britain do need a vision for gambling if we are to escape the cycle of boom and bust (or liberalisation and repression) but we should not rely for this on either government or the regulator; nor does it play to the strengths of business school graduates or compliance officers. In order to carve out a better place in society, gambling needs to rediscover its entrepreneurial roots and its desire to entertain; only then will we manage to excite policy-makers to want the same things that we want.

We may find it difficult to put past injuries behind us - particularly when some of the wounds are still so fresh - but the time for lamentation and brow-beating is past. Now is the time to inspire.