Once Bitten, Twice Shy – Now Is The Time For Reform

The Racing NSW victory on racefield fees in the High Court last week is much more than a matter of dollars. Especially as it follows a comparable High Court decision over a year ago to throw out the WA government’s attempt to ban Betfair.

Both cases had threatened to destabilise the industry, one to deny a racing authority the means to do its job, the other to over-ride the will of the people – ie racing’s customers. But, while all that is now history, the welfare of the industry demands that it consider why these events happened, and create structures which encourage progress and efficiency rather than expensive legal battles.

To do that, it’s necessary first to go back in time.

In the early 1990s, at a seminar at Randwick organised by the then “Principal Club”, the AJC (now the ATC), local bookmaker Mark Read told the audience that unless racing became more sympathetic to the needs of bookmakers he would have to go elsewhere. It didn’t and he did. He formed IASBet in Darwin, a dozen others followed him over the next decade and the rest is history.

The problem for traditional bookmakers was that it had become too hard to do business, even though they were paying stand fees to the raceclub and turnover tax to the government. Too many restrictions were in place, mostly due to laws and regulations protecting Tabcorp (then TAB Ltd). One of the bigger hassles was a ban on phone betting, later eased to heavily restricted access. Taking bets offcourse or on a non-racing day were not permitted. Incorporation was banned except within the bookies’ family. Tight licensing and advertising rules had always hampered innovation.

State governments were able to get away with this discrimination – and still are – only because agreements they cut are exempt from the provisions of the Trade Practices Act. They can opt out but they frequently don’t. Of course, you can argue that freer competition would make more people happy and contribute greater tax income for the government itself. But it won’t do you any good.

The racing establishment first ignored the emergence of the NT group, hoping they would go away (much as occurred with the illegal flow of business to betting houses in Fiji and Vanuatu, where people like the Packers and Bob Hawke had interests). But it led later to violent reactions from racing bosses. Today’s hero, Racing NSW CEO Peter V’Landys, wrongly termed them “parasites” even though they had offered to pay fees from day one – offers which were refused. RN and others tried all manner of means to stop them operating, including a desperate appeal to the Feds to block internet use, one which the Howard government smartly denied. That champion of competition and free enterprise, Gerry Harvey, even went on TV to castigate the newcomers and call for a return to the good old days.

But the underlying reason for RN’s opposition, and that of other authorities, was that someone was upsetting the applecart. Like boat arrivals, their longstanding policy was “we will decide who comes here, and the circumstances in which they come”.

In the narrow sense, that might be fine as someone has to be in charge, but they continued to ignore what was happening outside the racecourse, where huge advances in social, sporting, recreational and technological factors were in play, and free choice was a byword. When punters started flocking to the newcomers, including to Betfair, the establishment chose war instead of negotiation. But it lost – badly.

After things finally settled down a bit, NT bookies and Betfair arranged a variety of fee formulas, most of them based on gross margin, with the 20-odd Australian racing authorities and a number of major sporting organisations. “Gross Margin” or “Gross Profit” methods simply mean taking a cut of the difference between what a bookie takes in and what he pays out. Some authorities chopped and changed or had an each way bet, suggesting they were unsure or not competent to do deals, while RN was the major holdout in demanding racefield fees based on 1.5% of turnover, as the revised NSW law allowed.

Bookies and Betfair favoured the gross margin method, obviously because they saw it providing larger profits – a perfectly reasonable tactic from their viewpoint. OK, but why did racing authorities not see through that camouflage? Of course, it is always possible some small organisations did well enough under gross margin, but that could be due to bad punters and good bookies. However, in the main, bigger racing authorities, with mature betting markets, have now changed course and are welcoming the High Court decision because it will “allow prize money increases”.

Other sporting organisations lacked betting experience and might claim ignorance in accepting a gross margin pay off, particularly as they were looking a gift horse in the mouth. Still, it is galling to see football specialist Phil Gould, also a noted racegoer, asking in the Sydney Morning Herald why the ARL did not do a better deal in the first place. Why did he not speak out when it first happened?

None of this process was helped by a flawed Productivity Commission analysis. In the wagering section of its report on problem gambling it made glaring errors. First, it treated NT bookmaking as an industry in its own right, rather than assessing its worth as one of many service providers to the racing industry. The PC forgot that no racing, or less racing, would harm those bookmakers’ interests. It simply did not understand the industry well enough.

Second, the PC said NT bookmakers were more efficient even though their major advertised product is the “Best of the TABs” dividends. That is, most consumers (not all) gained little cash benefit over what they could get at the TAB, although many valued the more convenient access. Of course, NT costs were much lower as a function of what the government was charging them, relative to what happened down south, and because of their streamlined distribution system (phone and internet only). Happily, they have since ploughed back some of that inbuilt surplus into the industry via sponsorships and promotions but that has nothing to do with operating efficiency.

Third, the efficiency claimed by the PC on the basis of comparisons with TABs is plain silly. Certainly the NT bookies were doing a good job but to compare them with Tabcorp or Tatts retail operations makes no sense. The respective services are totally different. One does business electronically while the other has to set up and run retail outlets in the main street at relatively high cost, thereby satisfying a large portion of the market (a market the PC also forgot about).

Fourth, the PC claimed the gross margin fee method was superior because a terrible fate would befall NT bookies if they had to pay turnover-based fees (accepting the word of bookies’ consultants there). That this is arrant nonsense is verified by what has happened in the High Court and in later quotes from bookmakers and others – ie we will adjust and make the best of it.

Fifth, the PC effectively rubbished owners as dilettantes and playboys even though they are one of the two primary sources of funding for the industry, and even though few of them ever get their money back. The PC failed to test the sensitivity of owners’ investments under different scenarios, including the one favoured in its recommendations.

Probably the worst of all of it is that (a) the PC has refused later to qualify its conclusions and recommendations (despite my strong protests to its Chairman about factual errors), and (b) its faulty reasoning has been extensively quoted in subsequent media articles and in reports on wagering by the ACT government and the consultants preparing a report for Racing Victoria. How infection spreads!

(Interested parties are welcome to view my submissions to all these inquiries – posted on the various inquiries’ internet sites).

As for the gross margin option for fees, whatever possessed racing authorities to go down that road? There is no upside in it for the industry, although a “whichever is higher” alternative might make more sense (as in WA). Essentially, it makes the authority dependent on the bookmaker’s luck or skill, which is the opposite of charging for a defined service. In any event, bookmaking is a fragile thing with many contenders going broke every year. In short, turnover is consistent, gross margin is in the lap of the gods.

So, what we have seen over two decades is:

· Blind adherence to tradition.
· Discrimination against bookmakers, then and now.
· Refusal to negotiate, followed by public abuse.
· Dramatic falls in oncourse attendances and related betting.
· Attention devoted to operations rather than customers.
· A long term real decline in traditional wagering turnover (see ARB Fact Book).
· Poorly considered resorts to legalistic and regulatory devices.
· Faulty analysis by the PC, by many racing authorities and by their consultants.
· Some betting resurgence following the arrival of the newcomers.
· A near-total failure to consider what is going on in the real world.

The inevitable conclusion is that the structure of racing organisations has had its day. It’s broken. What worked 50 or 100 years ago cannot cope today. Major reform is the only answer but heaven knows how eight states and territories will bring that about.

Perhaps, as with Tasmania’s licensing of Betfair or the NT’s favourable treatment of bookmakers, a modernisation process might emerge if one or two of the states show courage and thereby stir the others to act.

But it is hard to see any real progress achieved unless the racing codes themselves establish skilled, independent and authoritative national organisations (the current lot are purely advisory) and a national betting pool is created to reduce the level of fragmentation – something quite a few people have already suggested. All that would require broad support from the industry and some statesmanlike moves from Racing Ministers. A big ask, but a necessary one. How else can the industry recover its lost customers and increase prosperity in the future? Do governments want steady growth in tax revenue or not?

Finally, readers might take note that most of the players in this discussion used a variety of economic or management consultants to help justify their case. And, earlier, the AJC had employed Access Economics to illustrate how the licensing of Betfair would destroy normal betting activity, harming both the club and the code. Every one of these advices has proved to be faulty or irrelevant. It would seem that the line between economics and public relations has become very blurry.

An important note: Application of the turnover fee system (at whatever level) to a betting exchange is not necessarily the only way to go. It is a totally different product and the only common ground is that it deals with the same customer group (but so do meat pie sellers). Arithmetically, it is unproductive to compare it directly with a bookmaker or a TAB. It warrants separate analysis to determine exactly what approach is needed to ensure the exchange pays it way while also being able to generate satisfied customers, preferably not by cannibalising business from other betting operators.