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.

The Big Debate

It lasted two hours; it went round in circles as these things often do; and, for a conference of international horseracing federations it spent too long on the parochial issue of the court case in New South Wales about whether Racing NSW has the right to charge on the basis of turnover.

But today's 'Big Debate' at the Asian Racing Conference in Sydney did at least do what it said in the programme. The discussion about wagering brought to the ARC what has previously been a taboo subject. Whether we are any further advanced is moot; but the audience's view of life was made clear by the single intra-debate round of applause that it gave, which came in response to the call from former BHB Chairman Peter Savill for racing to return to a funding model based on turnover.

On that basis, it was a bit depressing. In my view, a return to a turnover-based model would, at a stroke, remove all competition from the industry, and with it all innovation. In a competitive world, that would be a death knell for the racing industry, and I find it a shame that so many people in charge of racing in the audience around me continued to scoff when these points were all made by Edward Wray, co-founder and Chairman, as he put the Betfair view of the world.

But there were also reasons to be cheerful.

Followers of my career will know that rare are the occasions when I have agreed with Savill, but today I thought he made more sense than not.

I would dispute his turnover call, and his lauding of French legislation - praise for which was echoed by others on the panel (more of which another time, perhaps); and I think that his continued belief that the Betfair model is damaging for racing's integrity is mis-judged.

But he made the sensible point that of the sin taxes paid around the world - alcohol, cigarettes, petrol, and gambling - gambling stands alone as having no underlying commodity; and as such, it is easily avoided in an internet world. And if his solution - to legislate for IP rights to allow racing to set its product fee - has been tried (by him) without success, I still thought he put his case well. He certainly seemed more relaxed than I've heard him before. Perhaps retirement has mellowed him!

Equally, credit to Nic Coward, for the second day in a row, for what I thought was a measured and well-put position.

Inevitably, his oft-repeated and in my view nonsense line that there are bookmakers evading levy on Betfair made an appearance, but even more so than was true of Savill, I felt that more of what he said today suggested common ground than didn't.

He believes that both government and opposition are committed to replacing the levy for a commercial mechanism, which I am less confident about than he is; and he is convinced that if they do so, the amount of money that comes into racing will go up, which I fear he will end up being disappointed by (because I believe the product is worth less to the betting industry than he thinks it is). But that's a commercial negotiation, and I wouldn't quibble with him making his case. He did it well.

Ed, who spoke alongside bookmakers Alan Eskander and Con Kafataris (both of whom impressed), made all the points you would expect from our side. He pointed out that racing's share of the wagering market has plummeted in ten years, from more than 70 to less than 40% (in retail outlets, not to mention online); and he lamented the lack of punter representation in a debate which he said was too focused on the cost of racing for owners.

He underlined that a conference that has heard so much about how to attract "customers" should understand that "customers" means "punters", and attracting them means giving them the product they want to buy, and not the product you want to sell them; while in a similar vein, Eskander pointed out that monopoly totes return 80-84% to punters; bookies around 94%; sports bookies around 96%; and online casinos and poker around 99%; so racing needs to be wary of its competition.

Indeed, nothing from any of Ed, Alan or Con will have surprised any regular readers of this blog.

It could be argued, I suppose, that nothing in connection with this debate should surprise readers of this blog at all; but even a battle-worn veteran like me (told once that I could roll out the Queen if I wanted to - I just wasn't wanted in Australia) was surprised by the approach taken by the Chief Executive of Racing New South Wales, Peter V'Landys, alongside whom the rest of the panel could look relaxed without difficulty.

V'Landys' opening statement was that it would be good to take the emotion out of this debate, and with that, I agreed.

His second statement then did the opposite, although that is not the only reason that from then on, I didn't agree with anything else. I didn't agree with everything that was said by Coward or Savill, either, but where it would be impossible not to credit them both with being on top of their briefs and expressing their positions in a measured way, V'Landys seemed to me, in contrast, to struggle with some of the basic building-blocks of his argument.

Twice - I honestly thought the first time that I must have misunderstood him - he said that the argument that gambling is an elastic product had been proved to be wrong by the following piece of evidence: turnover had gone up by 36% this year, but revenue had only gone up by 8%. Ergo, the product wasn't elastic.

Now, I'm no economist. But surely anyone running a business needs to know that by "elasticity", people mean the relationship between turnover and margin, and their combined effect on revenue. So, turnover of 100 on margin of 10% makes revenue of 10. If margin is cut to 5% and turnover increases to 200, revenue remains 10; and the product being sold is deemed to have perfect elasticity (or, to be strictly accurate, elasticity of -1).

So, if turnover has gone up by 36%, then the big question is how much of that turnover has been the result of a fall in margin, and how much of it is new money coming in from other places. Given the fall in racing's market share, and the economic situation worldwide, it would seem likely that the revenue growth is driven by the margin cut. But if we speculate that it's unlikely that margin has gone down by more than 36%, wouldn't the figures presented make exactly the case that it was being suggested had been knocked down?

V'Landys' didn't mention margin other than saying 'but our margin has gone down'. This means that unfortunately we're none the wiser; but also, which seems to me to be key, it suggests that he didn't understand the point he was trying to make. Given that he has predicated his entire strategy as CEO on it, that must be worrying for supporters of Racing NSW's stance.

That aside, it was another much-repeated phase during the debate that got me thinking most. That phrase was, "racing must be allowed to set the price of its product".

I think this is an interesting one. On the face of it, I agree. But it seems to me that racing is not trying to set the price of its product, but the price of ours.

Racing's product is racing, whereas our product is betting. But what racing wants to do, to Peter Savill's call, is to set the price of racing on the back of betting turnover. Savill even stated that 'racing must be paid every time its product is used and not just when bookmakers make money'.

So, when is the racing product used? I would argue that it is used when someone makes a judgment on the fair value of a horse, having assessed the runners and riders, the going, the form, and the weather. That judgment is made, and then bets are placed. And betting turnover is predicated on - well, the cost of bets. It's not predicated on further use of the racing product at all.

An analogy which might resonate with Peter V'Landys would be this: V'Landys always argues that bookmakers paying a turnover fee is like people buying petrol, and the garage should be allowed to set its price.

OK, so the garage sets its price. You rock up in a big gas-guzzling car, and buy 50 litres of petrol. At the same moment, I arrive and fill up a series of tanks, also taking 50 litres. We pay the same price: 50 litres bought at the cost set by the garage.

But when I get home, it becomes apparent that I'm using my 50 litres differently from how you are using yours. Why not? I've paid for my 50 litres, and I can now do anything I want with it.

If I use half of it in my fuel-efficient Mini, a bit more of it in my lawn-mower, and the remainder in my scooter, such that I get 1000 miles out of my 50 litres of fuel to your 200, the garage doesn't suddenly get a mileage bonus. The point at which it stopped being the garage's product was the moment of sale.

So I'm interested by how this debate will end up panning out. Racing has a right to charge for its product - on that, I think we are all agreed. Where we differ is the basis on which it can charge, in order not to discriminate against different users.

And in my view, understanding exactly what the product is that it is selling is key to the debate. Because one thing is for certain: it isn't selling bets. We are.

Asian Racing Conference

The ARC kicked off today in Sydney, with the stand-out speaker being an Australian called Peter Sheahan.

He talked about how to engage Generation Y, and challenged the racing folk present to attract youth in order to make racing 'cool', citing brands such as Burberry and Mambo as organisations which had successfully recruited both young and old by targeting the former and getting the latter as a consequence.

Nic Coward briefly presented Racing for Change, and he came a creditable second place in the line of speakers - no disgrace given that Sheahan was outstandingly good, but also not difficult given what I thought were disappointing performances from the other speakers.

He (NC) was relaxed and authoritative, and spoke, in my view, better than I have heard him for a long time. His voice was pitched notably lower than recent occasions when I've been present, which probably has a lot to do with the fact that he wasn't ranting about us. He probably heads the (reasonably long) list of people who are effective and talented communicators on a range of subjects, but suddenly and inexplicably lose the plot when getting onto the subject of Betfair.

He said he fully supported Sheahan's views, which brought me back to the thoughts I had in January about how I think British racing talks about wanting to embrace the Facebook generation, without necessarily understanding that that means doing so on their (the FB generation's) terms, rather than their own (racing's). We'll see.

Tomorrow's schedule includes the 'Big Debate' on wagering, when our chairman and co-founder Edward Wray joins a panel which will include Peter Savill, the former Chairman of the BHB, and Peter V'Landys, the CEO of Racing NSW (and indeed Nic Coward). Ralph Topping was due to be on the panel, but hasn't made it. One can only assume that he's stuck somewhere.

No cheap jokes, please, given that I managed to avoid one myself.