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.