Racing NSW case

The reaction to the judgment handed down in Betfair's case against Racing New South Wales is fascinating.

Some have pointed out that there are fairly technical reasons for Betfair's case being dismissed (the judge accepting that the turnover fee was discriminatory in favour of TabCorp and against Betfair, but dismissing the claim that it was protectionist), such that the eventual outcome may well change; others outline that it is not the victory for racing that it immediately appears; and others still, pointing to the Sportsbet victory the same day, show how the combined judgments will impact the future governance of racing.

Others close to racing, though, are hailing it as a 'great opportunity' for the sport.

I find racing's thinking, as exemplified on the final link, incredibly muddled. The dispute shouldn't be over the idea that racing should be able to charge. The question for me is what basis of charge is the best for the industry's future.

But consider the Racenet article referenced immediately above. In one line it says, "Racing in effect is now free to claim a percentage of every dollar wagered on its sport, no matter where in Australia it is wagered – a stunning opportunity to be sure" and a few paragraphs later it accepts that 'Huge amounts of money can churn around within the system with the same dollar going through a bookie then the tote as it’s laid off. A new turnover tax on that amounts to a double dipping."

So, which do you want it to be? A turnover tax is not a tax on punter drop, by definition. It's a tax on turnover, and turnover has nothing do with what the punter spends or what the operator makes. That's not my judgment alone: Justice Perram thought that turnover had no utility as a measure of the number of times race field information is used, and felt that as a proxy for numerical use, the fee was “hopeless”.

Aside from legal argument, though, the question has to be what is most effective in taking racing into the future, in a world with multiple product. In other words, what charge maximises take across the global marketplace, taking into account consumer behaviour, and a desire not to create something that then alters consumer behaviour in order to facilitate avoidance.

There is only one sort of tax which doesn't incentivise the person paying the tax to change their behaviour in order to reduce exposure to whatever it is that is being taxed, and that is a tax on profit. Taxing anything that has a variable need just encourages people to reduce the need for it (look at the old window tax), but reducing your profit to pay less tax is clearly cutting off your nose to spite your face. A tax on turnover clearly incentivises you to reduce your turnover, particularly given that you can do so without reducing your profitability. You just raise your margin. a 2% margin on turnover of £1000 clearly generates the identical profit to a 4% margin on £500.

So, a turnover tax, by definition, incentivises the operator to keep prices high, in order to keep turnover low. Keeping prices high means being less competitive; being less competitive means reducing innovation; reducing innovation means opening a gap between what punters want in their regulated market and what they are being offered; and opening up a gap creates demand for a black market.

The thing is, even people who argue what a 'great opportunity' this is, seem to recognise that. Take that Racenet article again. it says: "Turnover needs to be maximised, markets need to be competitive."

So, how do you maximise turnover by taxing it? And if you want racing to be competitive, why tax it in a way which encourages higher prices?

Why turnover is an irrelevant metric

Ralph Topping, whose latest diatribe I blogged about earlier today, is not the first person to have quoted Betfair's "turnover" in arguing, bogusly, about Betfair's relative tax or levy payments. The whole of the gambling industry is taxed (and levied) on gross profit; and gross profit = margin x turnover. Therefore, an operator with a turnover of 200 and a margin of 10 will be taxed on the profit of 20; just as an operator with a turnover of 1000 and a margin of 2 will also be taxed on the profit of 20.

However, because it comes up so often, and is still being wheeled out for current debates, I thought some might be interested in learning more about what our 'turnover' number actually means. For those who don't want the long version below, the short version is "not a lot".

Q. How does Betfair measure turnover?

A. The most commonly used metric for turnover is the ‘total matched’ amount which can be found on the site for every market. This figure represents the sum total of the backers’ stakes, doubled. A back bet of £100 makes £200 in total matched turnover, irrespective of the odds.

At even money (decimal odds of 2.0), it is therefore the case that the stated turnover is the same as the amount being wagered by each party, but where odds are extreme, this far from the case: if the odds are 10/1 (11.0 in decimals), then a punter wishing to win £1,000 need only bet £100, and turnover would still be expressed as £200 – double the backer’s stake. If the odds are 1/10 (1.10 in decimals), then a backer wishing to win £1,000 would have to bet £10,000 – making the turnover for the same win figure £20,000.

Applying this turnover metric to an individual user, that user’s total matched turnover on a given bet will be the backer’s stake doubled, irrespective of whether the user in question is the backer or the layer.

Q. What makes Betfair’s (and its users’) numbers so big?

A. Betfair charges its users a margin (commission) based on a user’s net profit per event. In contrast, a traditional bookmaker builds his margin into the prices he offers the punter. This means that a punter is paying the bookmaker’s margin on each and every bet he places with that bookmaker.

Therefore a Betfair punter can make several bets on a market, but will only pay a margin on his overall net profit position on the market in question. This encourages the Betfair punter to make multiple bets on a single market.

A punter with £100 in his account could lay a horse at odds of 6.0 for £20, thus taking up all the funds in his account. However he can now lay another horse in the market for the same odds and same stake, because he is allowed to keep betting as long as his exposure on the market has not gone over the £100 he has in his account. In this instance he is increasing the turnover on the exchange but doesn’t have to use more funds to do so. In contrast, every bet with a traditional bookmaker not only incurs a margin for the punter, but also requires him to fund each bet separately.

Separately, the ability to back for and against (or ‘lay’) every outcome, means that an exchange punter can bet on the movement in a price (so called ‘trading’). On the limited occasions that the ability to back for or against an outcome is available with a traditional bookmaker, the punter again pays a margin on each bet (this is also the case with spread betting) which makes ‘trading’ a price less attractive.

Betting on the movement in the price of an outcome allows a user to generate a large turnover, whilst taking very little risk. We once had a situation where a customer 'turned over' £246,000 on a rugby match without ever having more than £400 at risk. He ended up winning £150, which would have been roughly what he'd have got if he had placed a single bet on the right team to win.

Q. What relationship does this total matched turnover amount have to Betfair’s profits?

A. Betfair’s profit on an event is generally a very small percentage of this turnover figure, but it varies depending on the nature of the event. Two extremes are: a 5 day test cricket match which will typically generate significant turnover, but a very small yield for Betfair; and a 30 second greyhound race which will give a much higher yield based on a much lower turnover amount. The cricket match by its nature allows users to move in and out of positions as the game gradually develops, whereas the market on a typical greyhound race will only form in the minutes before the race and the race, will not be covered ‘in-running’.

Q: Is any metric of turnover on an exchange comparable with what a traditional bookmaker would consider to be his ‘turnover’?

A. Not really. A traditional bookmaker’s turnover is the sum total of all the back bets (whether backing for or backing against an outcome) that he accepts. The respective pricing mechanisms of the traditional and exchange platforms (punters being charged on a per bet versus per market basis), together with activity on an exchange which could not be done through a traditional bookmaker, means that any comparison between a turnover figure from a traditional bookmaker and an exchange, is like comparing apples and oranges.

Q. Does an analysis of turnover in some form have any benefits?

A. It is difficult to see any. The arbitrary nature of betting exchange turnover, and the flaws in treating it as a meaningful number are highlighted by the following:

1. Different exchanges calculate the ‘total matched amount’ differently. As described above, Betfair doubles the backer’s stake. However, Betdaq takes the sum of the backer’s and layer’s stakes. £100 bet at digital odds of 11.0 gives £200 of turnover on Betfair, but £1,100 of turnover with Betdaq.

2. A small punter can generate huge turnover with just a nominal amount in his account. A Betfair punter needs to collateralise his maximum liability on a market. However, if he never puts himself in a position where this liability is more than say, £10, then irrespective of the number of bets he places and the turnover he generates, he needs no more than £10 of funds in his account.

3. If a user wants to cancel an unmatched bet on Betfair he can do one of two things: he can click the ‘cancel’ button; or he could self-match – i.e. he could accept his own offer, giving him no exposure on the market and freeing up the original funds which had until then been unmatched. Cancelling his bet obviously results in no turnover, but self-matching will cause a total matched turnover of double the punter’s back stakes. Logically a punter will cancel rather than self-match, but the fact that an alternative which achieves the same result can have such a radically different impact on the turnover number, further undermines that relevance of that number.

Turnover, however defined, only generates profit for the operator if it provides punter loss. Betfair believes that the best way to maximise this over the lifetime value of the customer is to offer a low margin offering which does not penalize the punter for making multiple bets on a market, or otherwise increasing the range of betting opportunities for the punter.

The only meaningful metric is total punter loss. This provides the bookmaker’s (exchange or traditional) profits, and as a consequence the betting duty yield.