What's the product?

I see there's a lot more today in various places about the 'use of the racing product'.

Alan Jones's comments at the ARC are reported, for example, and then, most interestingly (and in my opinion disingenuously, given that he must know perfectly well that we are paying race fields around the country), Victorian Racing Minister Rod Hulls has issued a press release calling "on the Federal Government to give consideration to introducing national legislation to prevent ‘free riding’ by corporate bookmakers and betting exchanges which is undermining the viability of Australia’s racing industry." He says that racing is "presently facing serious challenges in dealing with ‘free riding’ by corporate bookmakers and betting exchanges that seem to think they can build a business on the free supply of raw materials."

Now, I wouldn't dispute the challenges being faced, although clearly I dispute the charge of us 'free-riding'. We're even paying the 1.5% turnover charge in NSW at the moment, under duress, even though it equates to 60% of our gross profit and we are challenging the turnover basis of the charge in court.

But it once again brings me to wonder what people think they mean when they talk about 'the racing product'. As I mentioned yesterday, it seems to me that they want to charge us for our product, betting, and not theirs, racing. If we're talking about 'using the racing product', we surely need to define what that actually means.

Let me preface everything that follows by stressing that it is not an attempt to argue for freeloading. On the contrary, I believe that we (the betting industry) should pay a fair share to racing (and we (Betfair) seek to do so worldwide). This musing is merely about the basis on which payment should be made - a basis which is (currently) clear in the UK (where it's charged on the gross profit of the betting operator) but which is disputed by many in racing (who would like to see a charge levied on turnover). So, there's no debate from me that something should be paid. I want to get closer to nailing down what is meant by 'paying for the racing product', and how, in my view, that is best done.

It seems to me that what racing wants to do is, somehow, monetise punters. Of the two sets of people who put money into the industry, the contribution by Owners is in paying for the horses, and to quote Peter Savill from yesterday, Punters then make a contribution on the other side of the ledger. (It's another debate as to whether owning racehorses should be a cost like a golf club membership, but let's for the moment accept that the ownership of horses delivers a public service of creating a sport and an industry which is then paid for in part by another section of the public, and punters are the ones who step up to the plate.)

Those jurisdictions which have betting run by racing can monetise the punters easily, because the punters are their customers. That is the reason that so many in racing lament the passing of the tote monopoly run by racing. But the fact is that it has passed (in the UK and Australia, at least), and today, in those jurisdictions, the punter is not racing's customer at all, but the betting shop's customer, being offered a smorgasbord of bets from which to choose.

Tradition has it that racing, which was at least in part created for betting, derives a financial return from betting; but if the sport were created today, that would probably not be the case. Betting is a peripheral industry that has developed on the back of racing, just as lobbying is a peripheral industry that has developed on the back of legislatures around the world. However, the tradition is there, and the racing industry would collapse without it. So we need to find a way to derive an economic return which makes the whole show sustainable.

Thus far, I think nothing is in dispute (not from any sensible operators, at any rate). But this brings home the fact that the sticking point is that, while it charges betting operators, racing actually wants to derive money from their (the betting operators’) customers, the punters.

In other words, when racing talks about charging for the 'racing product', what it means is that it wants to charge all those who use the racing product. It says it wants to charge only those who use it is a business capacity - hence the argument advanced by the BHA that there are business users on Betfair who ought to be charged - and traditionally (i.e. before the BHA argument about Betfair customers muddied the waters) that was deemed to mean betting operators. But in fact, if racing wants to charge for 'use of the product' on the basis of turnover, then it doesn't want to charge the operators, but the punters.

This will be obvious to all those who remember the days prior to 2001 when customers of UK bookmakers paid General Betting Duty on their bets. In other words, there was no debate that it was the punter, not the bookmaker, who was paying.

Moving to a Gross Profits Tax made clear that it was the commercial organisation which paid the fee. It (the organisation) derived a commercial benefit of its own (betting revenue) from being able to offer its product (betting) on an underlying commodity (racing) provided by someone else. Without the underlying product (racing), it couldn't create its own business (offering bets). Because of the traditional and historic reliance of racing on betting revenue, a fee of some sort made sense.

But the trouble we have today is that most people accept that the people who derive an economic benefit which should be paid for (that is, the people who have customers as a result of the racing industry “putting on the show”) are the bookmaking firms, and so they are the ones who are charged – despite the fact that it is generally accepted that it’s Punters who balance out the Owners’ ledger. Although when I say 'the trouble', it isn't (let me stress again) because I have a problem with that, but because it raises the question of when the product is being bought, and what happens to it afterwards.

Take the analogy I have heard being advanced by some Racing leaders that paying for the Racing Product is like buying Coca Cola.

The price of a can of Coke is set, and the argument advanced is that you have to pay for every can. It's no use saying that a can of Coke costs £1 and you only have 50p, because 50p doesn't buy you a can of Coke. You can see the point that is being made, and Peter V’Landys makes it repeatedly. But I think it is flawed.

The reason for that - or the question that is interesting - is what happens after I've bought the can of Coke.

What happens, for example, if I don't drink it as neat Coke, to get one drink out of it, but mix it with rum? Or what happens if, instead of pouring it all into one glass, straight from the fridge, I fill three glasses with ice, and hand drinks round to more people? I have still only bought one can of Coke. But, much like the analogy I advanced yesterday about buying petrol, I make my can of Coke go further. I do not expect to pay for the can of Coke on the basis of how many glasses I get out of it or how many people I serve it to; nor does the person from whom I bought the Coke gets his knickers in a twist about the margin I charge the people I serve my mixed drinks, because I have paid him already for his product and the amount that I purchased. I bought the Coke, not the glasses of drinks I subsequently handed out.

Surely the equivalent in racing of a can of Coca Cola - the product made by the organisation - is a race: the actual, physical race - the show that is being put on; the underlying product on which a betting operator then creates his business.

My business (as a buyer of Coke as a raw material) was serving drinks; my business as a buyer of racing as a raw material is offering bets. Coke is a major component of what I serve my customers, just as racing is a major part of my betting offering; but both are now a part of a variety of similar things.

(As an aside, you would never hear Coca Cola arguing that it ought to get a share of profits from the sale of other products like Orangina, even if someone comes into the bar to buy a Coke and then changes his mind. Some in British racing, in contrast, seem to believe it should get a share of FOBT revenue just because people go into the shop because there's a race on. But that's another story.)

This is where I think it gets a bit complicated, because of the lack of a physical commodity. When we were talking about consuming a physical commodity, then you know that the commodity runs out: you can't get an unlimited number of full glasses out of a single can of Coke. But in a world where you aren't actually consuming a physical product, you can: you don't actually need to consume the can you buy at all. It's almost as if your customers aren't drinking the Coke that you've bought, but just making a judgement about whether they like it. I need to have bought the can in order to be able to ask them if they like it; but once I've bought it, I can show the same can to an unlimited number of people, because each person I show it to doesn't actually diminish the amount of Coke in the can.

So, in that situation, if I buy one can of Coke and ask 100 people, of whom 50 change their minds, whether they like Coke, I don't expect to pay more for the can than someone who buys it and sells the whole thing to one person. I would think it fair to pay a fee commensurate with the economic benefit I derived from having the can available to run my business with, and I would expect the person who bought it and sold it to one customer to do the same.

Racing argues that every time someone bets, it is using the racing product. But is it? Why isn’t racing just the same as the can of Coke, without the creation, distribution and presence of which I would not have been able to ask people their view of whether it tastes good?

Put another way, if I back and lay a horse all day as a customer, whose product am I using? Personally, I don't think I am using racing's product, as the end customer. The operator has bought the racing product, and I am then using Betfair's product, which uses what Betfair bought off racing (the race fields, in the case of Australia) to create a new product which Betfair charge me for (my bet).

What this comes down to is that the only way that racing can charge for its product is to secure from those people who derive an economic benefit through having customers as a result of its existence a fee commensurate to the economic benefit those people derive from those customers. That long and complicated sentence reads: “the way to charge is through a gross profits tax on the operator”.

The only alternative is to accept that it is not the operators that racing wants to charge at all, but the end customer, even though that end customer is not actually racing's customer (unless racing wants to offer a betting product rather than a racing product), and even though the product being bought by that customer is not racing product, but betting product.

This is made trickier for racing by the changing world. To return to the Coke analogy, Coca-Cola used to sell nice, obvious, cans of Coke to traditional pubs which paid it a set fee for every can, and then in turn sold a full can on to a customer. But now it sells cans of Coke to trendy bars which dilute the Coke into multiple drinks for customers in the shape of Rum and Coke.

If Coca Cola insists on pricing being based on the 'use of its product', we need to establish whether the use of its product is predicated on the number of drinks sold which include some measure of Coke in them, or whether it is predicated on the amount of Coke sold. Because the same amount of Coke can today be used to make 100 mixed drinks as might, in earlier times, have constituted one drink sold. Does Coca-Cola own the Coke or the end drink?

All of which, finally, therefore boils down to one point which has come out of the ARC. When racing talks about 'a fair price for its product', is it refering to the sale (or use) of its own product, or the sale (or use) of someone else's?

If it argues that it needs a turnover tax, then in my view it's trying to tax something that is not its own to charge for - the end drink, not the Coca-Cola that forms its base. Its argument for a ‘fair return for use of its product’ can surely, therefore, only result in a charge based on gross profits.

I'd be interested to hear counter views.

Bet365

News that Bet365 toppled Betfair on Oddschecker over Cheltenham is likely to raise eyebrows in various places for various reasons.

Not least of the points that should be taken out from it, though, is that it ought to put to rest forever the absurd and oft-repeated notion that Betfair is the cause of falling margin in racing.

Not that falling margin is a bad thing, of course, as I have often suggested. With betting so often demonstrated by economists to be an elastic product, a fall in margin leads to a commensurate increase in turnover; and in a world where racing is paid on the basis of gross profit (the product of the two), that means the two things balance each other out (that is, 10% of 100 is the same as 5% of 200).

But the reason for falling margin, as I have said ad nauseam over the last few years, is not just Betfair, but competition. And while I am delighted to accept that Betfair is an extremely competitive operator, it isn't the only one.

The internet has made lots of operators more competitive, which would be seen as a good thing in any other industry but for some reason is a cause for a great deal of bleating in ours. I wonder whether the next time we hear a racing industry rep or a William Hill executive complaining about the pressure on their margins, we also hear them say, "it's all because of those beastly people at bet365".

I won't be holding my breath.

Dear Andrew Lyman

Dear Andrew

I thought it only polite to reply more fully to your open letter to me in Sunday's Racing Post. You asked me so many questions and made so many points which warranted a full and proper response that it unfortunately takes far too many words for the paper to be able to give me the space to do your letter justice.

May I first though just make one clarification, about the basis on which your letter was written?

When I say I'd like racing to move on from this ten-year debate (and when Betfair places adverts calling for that), that isn't actually the same as saying that we want William Hill to move on.

I can see the confusion given your recent close relationship with the BHA, but our advert was addressed to British Racing, and it is specifically British Racing that we'd like to move on because we believe it is chasing shadows and losing valuable time when it has other things which it needs to worry about.

But as far as I'm concerned, William Hill, as a competitor, can run around chasing as many shadows and wasting as much of its time as it wants. I'd even say, be my guest on that one. As I've commented before, William Hill's pursuit of this particular topic has done us a world of favours. Please don't be under any false impressions about that.

Second... I think it's only fair not to dwell at length of the ironies of your letter, but, equally, it would be perverse to leave them aside completely:

• the call for transparency, from a company which I can never dis-associate in my own mind from that iconic image of your chairman John Brown waving away the media from his front door, claiming that data protection and client privilege meant that it would be wrong to reveal any of the betting patterns behind Man Mood;

• your asking me questions about volume, when that same chairman, in 2001, was the very person who drove through (and hailed) the arrival of the Gross Profits Tax system which rendered volume completely irrelevant;

• your call for the Gambling Commission to be able to get more information from us, when until recently you worked at the Gambling Commission and will therefore know how much more information you were able to get out of us than you were from your now employer.

But as I say, let's not dwell on any of that: it speaks for itself.

Let me instead address each of your questions and comments directly.

I'm glad you like "our line about being a bookmaker and not a betting exchange".

You'll obviously agree with me on the facts that prior to the Gambling Act 2005, we were licensed as a bookmaker just like William Hill, and that since that category was removed (with the introduction of the Act) we are both licensed as betting operators. Where we differ is that I accept that things move on: your employer seems to be stuck with the idea that a bookmaker has to take risk, just because in the past, it was essential to being able to run a business; and your employer doesn't like the fact that we can manage our risk perfectly, now that technology exists which allows us to do so.

To be honest, I find this curious. It wasn't an awfully long time ago that William Hill was hailing its 'Electronic Point of Sale' software, which allows more effective risk management, as the reason why it had opened up clear blue water over Ladbrokes, which had eschewed the technology. Did William Hill become less of a bookmaker the day it started to use that?

Personally, I don't believe so. Words do shift in meaning, and industries evolve. William Hill today might still be a bookmaker, but it is a world away from the William Hill of fifty years ago, I am sure you will agree. That bookmakers previously took much more risk than they do now (when, to use William Hill's own words, they take "trading decisions") is just a function of that changing world.

A bookmaker today, whether it's us or you, facilitates the placing of bets for customers by looking at supply and demand and deciding when it wants to take risk (which we do on our multiples, and you do on most bets if you feel confident enough) and when it doesn't (which we don't on our singles, because we have the technology which allows us to service customer demand despite the fact that we are offsetting the bet; and you don't if you don't feel like it). Our trading decision is therefore different from yours by degree and by its level of consistency; but not by its basic mechanism or analysis.

Off-setting 99% of our singles risk instead of 100% of it wouldn't make us a bigger bookmaker; and on the days when you might, by chance, find your book is perfectly balanced, you don't suddenly turn into a betting exchange, even though, as we do, you would have offset your supply with your demand.

Moving to your second point: our revenues do continue to grow, you are right. And you also may be right that we are taking some of your horseracing business. This tells me that customers like our product, and long may that continue. We do our best to listen to them to make sure that we have the best all-round product in terms of value. If the day comes when we get that wrong or someone does it better, they will go and bet with someone who offers them a better package. I hope we don't bleat about it if it happens, because it will be our own fault.

I suspect you are also right, to your third point, that only a small part of the fall in GPT and levy receipts falling is due to off-shoring. I suspect a lot more of it is due to new products like FOBTs and virtual racing. What do 'the facts' you mention show about that?

British racing's loss of market share is a very real issue for it: it has gone from being 80% of our business to about 22% of it in less than ten years. This is precisely why I think racing needs to move onto a topic of relevance, and why I continue to call for that to happen. It has very real issues to address, and in my view, having customers move from a high-margin competitor to a low-margin one is not one of them. That should be no more relevant to it (or to the Treasury) than it should be to an airline regulator (or the Treasury) that airline passengers book with Easyjet rather than with British Airways. Yes, that's an issue for British Airways, just as our lower margin is an issue for William Hill. But any organisation or government department dependent in part on the profits of an industry as a whole (bookmaking, airline, or anything else) shouldn't give a fig whether the customer is being offered better value by one operator than by another. If it does, then it's looking at the wrong metrics.

Next: I'm surprised you ask how expensive our advert was in the Racing Post. Your company is one of their biggest advertisers, so I would have expected that you would know how much it costs. For the record, it cost us £7,000. Am I right in suspecting that if we did more advertising with them, we would get much better rates?

Moving on, you say that we'll always be polarised until we open our books to independent scrutiny, but you appear to have forgotten that we have already, on multiple occasions, on two sides of the world. In principle, we have no concern about doing so again if any of Treasury, HMRC, or the Gambling Commission (your chosen arbitrators) should feel the need to waste time re-visiting something they have between them spent many man-years on, so please don't misunderstand my call for racing to move on: it is not made out of fear that looking at this issue again. It is just that we keep doing it.

Shall we make a deal? If we open the books again, and again the conclusion is that we have no case to answer (as I believe it will be), you don't reply by saying we really should open the books? Equally, if it requires you to be transparent about where you make your money, you will be open to complete scrutiny as well? We're not afraid of, and we have had, an independent enquiry. But it is merely Einstein's definition of madness to believe that repeatedly doing the same thing will eventually bring a different result. Absolutely nothing has changed since the HMT review. We may have more customers, but by definition, the sort of people you fallaciously talk about as being relevant to your argument are sophisticated early-adopters of the product, which had been around for almost six years when HMT concluded its review.

You've also called for transparency of our accounts. They are published, in full, on our corporate website - something which we have no need to do as a private company, but which we have done in any case for many years. By all means go and look at them. They are audited by KPMG, if you're interested.

To your next point, I don't have a breakdown of back and lay win, but I fail to understand its relevance. It's abundantly clear that backing and laying are two sides of the same coin, and if your argument when it comes to 'who is the bookmaker' is that actually it makes a difference whether you are betting on something to happen or not to happen, I look forward to you making the case that fifty percent of the people betting on tennis, or snooker, or boxing, or Cup ties, are somehow doing something they need a licence for. I covered this in my response to Section 3 of your recently-published document entitled 'Betting on Britain'.

As regards how we categorise our customers: we don't, other than giving them a sliding scale of commission (the full details of which are published on our website), and recognising some key accounts. I suspect that is much the same as you do (in recognising your 'high rollers'); it's certainly the same as other businesses, for whom the idea of preferential rates and loyalty schemes is not unusual and certainly doesn't imply that there should be a change is the category of the customer as regards either his regulation or his tax. Personally, I'm a Gold Card holder with British Airways (lucky me!). I do sometimes fly for as short a stop as the crews do, and, remarkably, down the exact same routes. That doesn't make me an airline pilot, though, and I'm not licensed to take control of the plane. Thankfully, I also pay no tax that is not levied on the customers of other airlines in turn, and I certainly pay no taxes that are relevant to the company I choose to fly with.

As regards recreational or business users.... Yes, we have some customers who, away from us, run bookmaking businesses and use us to hedge. Any who do, and are failing to declare the profit (or indeed off-set the loss) that they make through the window onto the world that is Betfair, would be breaking the law.

The point that we keep making but you don't seem to get, though, is that we fail to see how you can run a business purely on Betfair. By restricting what you do to Betfair alone, you pay your money and you take your chance, like any other punter.

The reason for this is simple: as you know, our books do not include any margin at all (not even our own commercial margin: we add it later, and call it commission), but are the perfect reflection of the supply and demand we are seeing. Since none of our customers has a means of attracting business, the only way to get your prices taken, is to be best price. Given the perfect book, that would mean taking the book over-broke most of the time. I know your numbers haven't been great at William Hill recently, but you're surely not betting to negative margins, are you? It would be a quick way to go bust, as sports.com once proved.

You close by saying that "We would like to move on, but sadly we think that under that smooth and frankly quite likeable exterior, there hides a whole host of unanswered questions; which of course I may be too stupid to understand the answers to."

I don't believe there are any unanswered questions: on the contrary, I believe that all the relevant questions have been addressed repeatedly, both in independent enquiries and in documented form, and are collected here. In fact, I think it is precisely because those questions have been so comprehensively answered that commercial competitors continue to muddy the waters with irrelevances, pretending to be making different points when in fact they are raising the old, answered, issues, packaged slightly differently.

Which should answer your basic point: I doubt very much indeed that you, or indeed any of those vociferously arguing this bogus case, are "too stupid" to have got it.

Yours,

Mark

Quote quiz

Given the comments made today at the BHA's AGM about the impact of betting exchanges on bookmakers' margins (a comment which makes no sense for a host of reasons), I thought it worth digging out a couple of past quotes.

For five points each, who said each, when, and in relation to what? Here's a hint: Betfair launched in June 2000. (Answers below)

1. "It [Falling margin] is a serious situation and is impacting heavily on profitability.The problem is that bookmakers are getting less margin out of the fancied horses. If a favourite should be 15-8, it is starting at 9-4. In the short term, punters are getting good value, but it is not sustainable and we will have to consider how to deal with the problem."

2. "If you take the view that it is all fine and dandy, it misses the point that 10 per cent of turnover, on-course, is affecting margins on the other 90 per cent, off-course. If it continues, shops will close and bookmakers' ability to pay the Levy will be affected. It cannot be ignored."

3. "Whether it is a case of a new type of bookmaker or too many bookmakers chasing too little money, it is difficult to see how they are making a profit and we are certainly suffering the consequences. [...] From the punters' point of view, it is wonderful news, but it impacts on the industry's profitability and on its ability to meet levy demands."

Answer? All are taken from an article in the Racing Post on 12th September 1999, before Betfair was even incorporated. They relate to the debate over pitch auctions, and in turn they come from:

1. Tom Kelly, at the time Secretary-general of BOLA.

2. Chris Bell, at the time Managing Director of Ladbrokes Racing

3. John Brown, at the time Chief Executive of William Hill.