Totalisators - Institutional rigidity hinders development of decentralised betting hub.
It is estimated that over 80 per cent of global betting, is still conducted through Totalisator systems. Tote or Parimutuel betting (from the French language: pari mutuel, mutual betting) is a betting system in which all bets of a particular type are placed together in a pool; taxes and a house take are removed, and payoff odds are calculated by sharing the pool among all placed bets.
Consider a hypothetical eight horse horse race, the bettingmarket.com Stakes, run in a country betting to decimal odds. Each outcome has a certain amount of money wagered on it, as follows:
Horse 1 -
Horse 2 -
Horse 3 -
Horse 4 -
Horse 5 -
Horse 6 -
Horse 7 -
Horse 8 -
Total Pool -
The total pool of money on the event is £525; with no bets accepted after the off. The race is run and the winner is Horse 4 with £58.00 invested. The payout is then calculated. First the commission for the totalisator company is deducted from the pool, for example with a commission rate of 14.25% the calculation is: £525 - 0.12.25 * £525 = £460.68. The remaining amount in the pool is now distributed to those who invested in Outcome 4: £460.68 /£58 = £7.94 per £1.00 invested.
In Britain the Tote deduct roughly 16% from the on-course win pool, their equivalent of the bookmakers' percentage profit over-round. In France the PMU take out a fat 28% from the pool. By way of comparison, Betfair, the radical upstart, dusruptively innovative betting exchange, charges a commission rate of between 2 and 5 per cent.
The UK Tote, now rebranded Totesport has travelled far from its original position as a provider of tote pool betting, such that this activity now accounts for only 11% of the company's turnover.
The company's website allows punters to bet directly into UK, Irish, and some International Tote pools; whilst also offering up an array of fixed odds betting opportunities on a wide variety of sporting events, alongside online poker and casino games. The company also now operates 540 high street betting shops and recently, it announced that after an absence of twenty five years, it would be returning to the on-course betting ring, with pitches on the rails at forty eight racecourses across the United Kingdom.
Under the Horserace Betting and Olympic Lottery Bill 2003, introduced into the House of Commons on 2 December 2003,the UK government affirmed its manifesto commitment to sell the Tote to a Racing Trust "in a way that is fair both to racing and the taxpayer".
In March 2006, it was reported that the European Commission was set to block the government's sell off attempt, because the European Competition Commissioner, Neelie Kroes believed that the price at which it was to have been sold (£150 million), would have amounted to substantial state aid to the sport. The government then had the Tote valued by PricewaterhouseCoopers, who reportedly came up with a figure in excess of 400 million pounds.
A commercial consortium, comprising the publicly quoted Arena Leisure; the Racecourse Holdings Trust (a subsidiary of the Jockey Club); and the Racehorse Owners Association, then entered the fray as the most likely acquirer of the Tote.
In its annual report and accounts for the year ended 31st March 2007, the UK Tote stated that they had seen a quadrupling in turnover over the last six years. In the year just past they had seen growth of 12.1% and EBIT growth, before exceptional items, of 13.6% year on year.
The company also noted another year of strong fixed odds betting terminals (FOBTs)performance both in turnover and gross profit. Fixed odds betting terminals now account for 56% of total group turnover, contributing somewhere in the region of £1.4 billion. The Tote noted that it was looking for further additional growth in this area, through utilising a new generation of FOBTs; and maximising machine density. It also said that it had recently negotiated a new agreement with its FOBT machine supplier, which would deliver to the company an improved profit share, whilst helping to underpin the profitability of the machines into the future.
Having previously tabled a £400m bid for the business, a consortium, comprising Tote management and staff, the Racecourse Association and the Racehorse Owners Association made a revised proposal of £315m. Whilst the Tote's performance is believed to be ahead of last year, the reduced offer stems from the fact that Lloyds, which was going to provide £330m of debt, has said that it can now only provide £240m. In the table below we look at the turnover of the UK Tote by channel, comparing 2005 with 2006.
Telephone and Internet
Interestingly, the Tote's results contained the following statement; The Board has taken advantage of the exemption contained within paragraph 6 of SSAP 25 and
elected not to publish detailed segmental information, as this could be seriously prejudicial to the interests of the Board.
Whilst total turnover, including acquisitions, climbed 17% in 2006, for the second year in succession the company's profit, before its contribution to racing, declined.
Turnover UK Tote 2002 - 2006 (£ Million)
* = Profit before contribution to racing.
Changes to the Horse Racing Act in 1930 to allow off-course betting, gave rise to the Pari-Mutuel-Urbain (PMU), an economic interest group that includes amongst its members France Galop (flat racing) and Societe du Cheval Francais (trotting). The PMU's monopoly operation is regulated by the French Treasury and the Ministry of Agriculture.
The PMU's 2005 annual report openly celebrates new product launches, the opening of new distribution channels, and, the healthy growth rates achieved by exisiting product's within the company's portfolio;
"The major event of 2005 was the launch of the New Quinté+. This flagship bet is popular among punters as it allows them to win more money, more often. Its success reflects that of the company as a whole. Other marking factors are the healthy growth of the Multi, the dynamism of the Pariez spOt and the fusion of the Couplé/Jumelé and Trio/Trio Hippodrome bets.
Turnover through the PMU's internet channel grew by 75% in 2005 to 250 million euros, with the number of active players increasing by 50% to 120000. In the PMU's own words the internet channel "attracts new customers, allured by the ease of use...."
In the financial year ending December 2004 the PMU spent 23.1 million euros on "Publicite" ; in the year to December 2005, this figure had risen to 28.2 million euros, an increase of 22%. And, it was obviously money well spent, for of the 6.5 million bettors the PMU attracted over the last 3 years, 1.5 million were first time customers.
The PMU's 2005 annual report also celebrates a significant milestone achieved in terms of turnover, salutes promotional efforts and heralds the launch of a mobile betting service;
"The activity of the PMU continued to progress in 2005..... Betting turnover reached the new psychological threshold of 8 billion euros, an increase of 6 % compared with 2004.....The promotion of the PMU brand was reinforced through our promotional participation in many major events; le Tour de France, Roland-Garros, la Foire de Paris.....Towards the end of 2005 the PMU signed a contract to become the offical partner of the French Rugby league for three years, ensuring publicity at all 429 league matches."
A notable incident at this year's Tour de France saw the Australian sprinter Robbie McEwen openly criticise the dangers of giant green cardboard hands, bearing the PMU logo, that were being waved from the crowd.
Turnover of PMU 2001 - 2005 (Million)
Tote Ireland is a subsidiary of Horse Racing Ireland (HRI) and, as such, contributes to the revenue generated by HRI in suppport of the Irish horse racing industry. An estimated 80 per cent of Tote Ireland's business is still conducted on-course, with no equivalent of the UK's Tote Direct system in operation in Ireland.
Tote Ireland takes an astonishing 20 per cent from win and place pools and 25 per cent from the Jackpot and Placepot pools.
The company launched its internet betting service on 15th Dercember 2005, with account holders having access to the UK Tote's Jackpot, Placepot and Scoop 6 alongside the ability to bet into some International pools. There is no fixed odds betting service on offer, no online games, poker or casinos.
Whilst turnover was up by 2.8 per cent to ?21.4million for the first half of 2006, the Tote is believed to have seen a fall off in turnover at some of the big Summer horse racing festivals. It would be fair to say that the company has not made the best use of its asset base; moreover, things are unlikely to get better unless the take out is reduced and the level of customer service on the race course is significantly improved!
Turnover of Tote Ireland 2001 - 2005 (Million)
Hong Kong Jockey Club
Founded in 1884, the Hong Kong Jockey Club oversees the administration of horse racing and betting in Hong Kong, including the operation of two racecourses, Happy Valley in Hong Kong and Sha Tin in the New Territories. The Club is a not-for-profit organisation, donating its surplus funds to community and charitable projects.
Of all the global Tote bodies, it is the Jockey Club that has been the most innovative, both in terms of embracing new technology and employing savvy marketing techniques to attract and retain new punters. Its website stands as a lesson to all other Totalisator operators, as to how things could and should be done.
The Hong Kong Jockey Club recently announced that its total turnover from all operations for the 2006/07 racing season had passed HK$100 billion for the first time. The Club's racing activities showed a 6.6% increase in turnover to HK$64.00 billion and a 2.0% increase in attendance to 1.92 million, reversing a trend of 10 years' steady decline since 1997.
A new Gambling Act entered into force in Hong Kong on 1 September 2006, introducing a tax system based upon gross profits after dividends and rebates rather than a tax based on betting volume. The duty is being set at 72.5 percent for the first HK$11 billion (US$1.4 billion) in gross profit, increasing by steps of 0.5 percentage points for every subsequent HK$1 billion until the 75 percent that will also apply to the remainder exceeding the HK$15 billion (US$1.9 billion) tier.
At the 41st IFHA Conference in Paris on the 8 October 2007, Bobby Chang, in a paper entitled "Impact of Takeout Rate on Revenue" said that the lowering of the effective takeout rate from 17.5% to 15.7% had increased revenue in 2006 from HK$49B (US$6.3B) to HK$53B (US$6.8B).
The Hong Kong Jockey Club also recently introduced a cash rebate scheme of 10% for losing bets over HK$10,000. Officials hope that the measure, which is comparable with one offered by illegal bookmakers, will help the club recoup between HK$5 billion and HK$12 billion annually from underground pools.
In July 2007 an application by the Jockey Club to allow American racing fans to bet directly in Hong Kong racing pools was approved by the government. The American bets will be channeled into the more simple pools such as win, place and quinella, gradually expanding to include exotic bets like the triple trio. Early projections are that the American bets could amount to between HK$10 million and HK$20 million each raceday, adding about HK$1.2 billion to total season turnover.
Turnover Hong Kong Jockey Club 2002 - 2006 (HK$M)
As things stand, protectionist state legislation, designed to protect government owned TABs from competition, prevents Australia's bookmakers from directly competing against the privately owned Tabcorp. Moreover, Tabcorp continues to exercise an outright monopoly on betting agency outlets in the states of Victoria and New South Wales, alongside tight control of Sky Channel, a national horse racing television network and radio outlets.
Turnover of Tabcorp 2001 - 2006 ($ Aus Million)
Nonetheless, change is afoot, and the stranglehold which Tabcorp has long had on the Australian betting market is under threat. Three events in particular, are acting as catalysts for change; firstly, the granting of an Australian betting licence to the world's largest online betting exchange Betfair by the state of Tasmania, secondly, the completion of the merger between Unitab and Tattersalls, and finally, the abolishment of Rule of Racing 175B by the Australian Racing Board; a rule which had blocked the useage of betting exchanges on racecourses and prevented licensed persons from opening a betting exchange account.
In November 2005 the Tasmanian government announced a deal to licence Betfair in the state. The deal will see Tasmania receive AU$5 million up front and is projected to pay Tasmania about $40 million per year. On July 6 in a ground breaking move Racing Victoria approved the use of Victorian race fields by the world's largest betting exchange Betfair.
Interestingly, the Norfolk Island based Australian TAB, AusTOTE, operates to a commission rate of between 2 and 5% and allows its customers to lay favourites in particular races. As a totalisators licensed by a state or territory government, it is also permitted to operate on races run in other states, without paying taxes or product fees outside of its own state and is free from the advertising restrictions placed on bookmakers and other wagering operators in Australia. In August 2005, Aus Tote was acquired by leading bookmaker Mark Read, through his betting company International All Sports (IAS);
Under the agreement, signed with PH Holdings Ltd and Austote Pty Ltd, IAS will provide an initial sum of $250 000 and a further amount of $250 000 after twelve (12) months in exchange for no less than 76% of the shares of Austote Pty Ltd. Further IAS will have an option to acquire the balance of the shares in Austote within three years, at a valuation to be determined at the date of acquisition.
Stateside, the three big players in parimutuel wagering are AmTote, owned by the racetrack conglomerate Magna Entertainment Corp; United Tote, owned by the Nasdaq listed Youbet.com and Scientific Games. The backdrop to the future of the tote business in the US is the Wagering Transmission Protocol, which, created by a consortium of racing associations and industry trade groups is designed to provide a model for tote transactions, efficiencies, and related security.
Youbet.com, Inc recently reported second quarter net income of $2.2 million for the period ended June 30, 2006, compared with net income of $1.3 million for the same period in 2005. Financial results for the 2006 second quarter include a $0.2 million charge attributable to share-based compensation expense. Youbet's total revenue for the period increased by 69% to $39.6 million compared with $23.5 million in the same period in 2005. The second quarter included operating results and revenue growth from the somewhat contentious offshore based International Racing Group, acquired in June 2005, and from United Tote Company, acquired in February 2006.
By way of comparison to traditional totalisators, a betting exchange such as the market leader Betfair charges its users a commission based on a user's net profit per event. A Betfair punter can make several bets on a horse race, but he will only pay a margin on his overall net profit position on the race in question. Moreover, betting exchanges through allowing punters to back for and against every outcome, allow them to hedge their overall risk. Betting exchanges also allow punters to bet in-running on almost every sporting event. In theory, a reduction in transaction costs feeds into an improvement in market liquidity, and leads to greater price discovery. Opposition against betting exchanges, includes the notion, that through allowing people to bet against a horse winning, one encourages corruption.
Financial Summary Betfair 2002 - 2007(£M)
Profit before Tax
Source = Betfair annual reports and accounts/.
In 2005, Greg Avioli, then acting chief executive of the National Thoroughbred Racing Association and Breeders' Cup Ltd suggested that the global horse racing industry and the US wagering companies should pool their resources and develop a single online wagering hub;
There's iTunes for everyone's music needs, so why can't there by iHorse, Avioli said. We only need one site. One site would get more visits than multiple sites combined.... Imagine if we had something like I-Horse in the same vein as the popular I-Tunes music download Web site, where every racetrack would send its content and the tracks would compete for the customer dollar based on the quality of their races.
Avioli was of course right. In a world that contains a revolutionary betting platform, such as that utilsed by Betfair, the case for digital reinvention is a no brainer.
The localised totalisator pool betting system is an anachronism that has been kept in place by antiquated monopolistic protectionist minset. It has and is continuing to fail both the horse racing industry at large and those that bet on the sport. A global, decentralised betting pool based upon betting exchange technology is the only way forward, but one suspects that the development of such will be held back by a combination of myopia, self-interest and inertia. Expect to hear lots of talk of legal, fiscal and technological barriers; and expect to see little action.
To cite this article: Niall O'ConnorTotalisators - Monopolistic protectionism preventing development of decentralised betting market. (Published on Bettingmarket.com 2006. All Rights Reserved.)
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