On January 29, 2003, David Harding on the subject of the over-round said;

"If you track the over-round per runner over the past twelve months, you can track it from the point where Betfair and Flutter merged (December 2001). Since then, there has been a steady decline in the theoretical overround per runner. ..........Some racecourse markets now return overrounds of only 1.2 to 1.3 per cent per runner. That is not sustainable. I cannot have a price mechanism for 50% of my business being desecrated."

The profit margin built into starting prices did indeed fall from 2.07 per cent per runner in September 2000 to 1.45 per cent per runner in September 2006.

However, on 1 November 2006 a new procedure for returning Starting Prices (SPs) was introduced, following a review of the system by the Starting Price Regulatory Commission under the chairmanship of Lord Donoughue.

Whereas previously Starting Prices had been determined by taking a sample of bookmakers' prices, and taking the lowest price among the best third available "to good money" at the off; under the new system the SP is the lowest price among the top 50 per cent, including at quieter meetings, bookmakers betting each-way. There is also greater input from the on-course representatives of major off-course betting shop chains.

The first month-to-month comparison of SPs returned under both the old and new procedures revealed a rise in the profit margin of bookmakers from 1.59% per runner to 1.8%. Figures for the last twelve months show that the margin is now trending back towards 2% per runner. In five of the seventeen races run at the recent Cheltenham meeting (November 16,17 and 18)the over-round per runner was 2%.

Looking at the results for H1 2007 from William Hill, Ladbrokes and the Tote, we see the significant contribution that fixed odds betting terminals (FOBTs) and other machines, are now making to both turnover and profit.

At Ladbrokes, UK Retail operating profit, during this period, fell 11.6% to £100.9 million (H1 2006: £114.1 million), with gross win growth of 1.1%.

The company did, however, speak of a strong contribution from their 6,700 new bespoke dual screen fixed odds betting terminals (FOBTs), which were fully rolled out by 31 March 2007, with average gross win per week having increased by 19% to £651 for the period.

The company said that gross win per terminal was up 18.8% in the first half, compared to the first half in 2006; "machine gross win increased by 15.4% to £120.7 million (H1 2006: £104.6 million)." The results included a full half year of the new FOBT licence duty (AMLD) of £6.8 million (H1 2006: nil).

More recently, Ladbrokes announced that profit for the four months ended 31 October 2007 had increased by 84%, mainly driven by FOBT and high roller activity. However, the company said that profit excluding High Rollers and the cost of the company's recent controversial TV advertising campaign had decreased by 12%. And whilst total gross win increased by 33% including High Rollers (up 7% excluding High Rollers), UK Retail gross win increased by only 4%. Machine gross win increased by 25% with average weekly gross win per Gaming Machine of £586 compared to £467 for the same period in 2006. Over The Counter (OTC) gross win declined by 5%.

William Hill said that Retail channel had grown gross win by 8% to £403.1m and operating profit by 1% to £124.8m, during H1 2007.

The company siad that gross win from over the counter (OTC) had increased by 4% while FOBT/AWP (machines) gross win was up 16%.

William Hill said that the average number of machines in the estate increased to 8,357 (FY 2006: 8,218) in the period. The average net contribution per FOBT per week was £493 (FY 2006: £471). The company siad that the imposition of the Amusement Machine Licence Duty in August 2006, had adversely affected average weekly profitability of each terminal by £38 and total group profitability by £7.7m.

At the UK Tote, which is still up for sale, fixed odds betting terminals now account for 56% of turnover; with annual turnover now close to £1.4 billion.

"The tote is looking for further additional growth utilising a new generation of FOBTs, maximising machine density and capturing the best market share in areas with significant local competition."

In a recent House of Lords debate, Lord James of Blackheath, asserted that there was a rapid and tangible drift to the conversion by bookmakers of their 10,000 or so betting shops into mini-casinos. He noted that comments of a senior bookmaker who had recently said to me,

"Do you know, our betting shops are empty in the afternoon now; there’s nobody there”. “Why is that?”, I asked. He said, “Because our machines are so efficient that we have stripped all the money out by lunchtime and everybody’s had to go home. There’s no money left in anybody’s pocket."

Asked about the decline in horse racing gross win, Chris Bell of Ladbrokes recently said;

"Uk horse racing is not as relevant to our customer base as it used to be. Customers are much more interested in machines and virtual horse racing. They bet on demand now rather than spending ages studying form in the Sun in the morning."

On 28 February 2008 Ladbrokes announced its preliminary statement of results for the year ended 31 December 2007. The company said that operating profit from continuing operations had increased by 60.2% to £420.0 million (2006: £262.2 million). However, operating profit from continuing operations, excluding High Rollers, decreased by 4.4% to £241.0 million (2006: £252.0 million).

OTC gross win decreased by 3.8% to £490.9 million (2006: £510.5 million), reflecting, the company said, some substitution following the renewal of its gaming machine estate and a decline of 9.4% in horse racing amounts staked. Like for like OTC gross win fell by 4.1%.

The UK retail market is in the process of structural change, at the centre of which, we are seeing significant substitution taking place between the over the counter business and FOBTs.

However, the government, which had blindly allowed bookmakers to turn their betting shops into mini-casinos, staged another about turn, when it announced on February 20 2008 that it had asked the Gambling Commission to report into whether gambling machines, such as fixed odds betting terminals, were contributing to problem gambling.

Sports Minister Gerry Sutcliffe told Reuters at the time that the government would take a tough stance if high-stakes video roulette and blackjack machines were found to be triggering problem gambling.

"I'm concerned about the longer-term impact of the growing popularity of FOBTs (fixed-odds betting terminals) and have asked the Gambling Commission to give particular priority to work on the risks associated with high-stakes machines.....We have always said if any evidence emerges that they (FOBTs) are causing harm, then we are prepared to take action and we have the power to take action."

Some conclude that the result is a foregone conclusion, not least, when one considers that the British Gambling prevalance Survey of 2007 found that "among those who had gambled in the past year, problem gambling prevalence ranged from 1.0% for the National Lottery Draw to 14.7% for spread betting. The next highest prevalence was 11.2% for fixed odds betting terminals, followed by betting exchanges (9.8%), online gambling (7.4%) and online betting (6.0%)."

The old arguments put forward by the traditional bookmakers regarding Betfair and the over-round simply do not wash. It is the traditional bookmakers, themselves, in pursuit of a fast buck, that are single handedly responsible for cannibalising their own high margin products.

The Ladbrokes and William Hills of this world are also facing increased competition on the High Street, following the lifting of the "demand test" as part of the 2005 Gambling Act.

Rival firms, such as Betterbet, Paddy Power, Betfred and Pagebet are unveiling for a plethora of new shop opening. Pagebet Ltd, which currently has 26 shops in the North-East and the Midlands, wants to have a 100-plus estate within three years. Betterbet, which currently has 25 shops around London, wants to increase its estate to 200 shops over the next couple of years.

Betfred, the biggest of the independent operators, will open a further 80 shops this year alone, whilst Ireland's Paddy Power, which already has more than 60 shops in London, will be announcing plans to expand across the whole of the UK later this year. Sources suggest that the company has its sight set on opening 250 new shops within the next three years.

Looking ahead, we would expect to see a continuing slowdown in e-gaming for Ladbrokes and William Hill, alongside continuing pressure on over-the-counter gross win growth. Factor in increased competition on the High Street and also the fact that England did not make it to Euro 2008. Then, consider the fact that the full scale effect of the smoking ban is not yet known, and that it could actually backfire on these companies and make new longer opening hours a costly exercise. Throw in to the mix a move by the government against gaming machines, such as fixed odds betting terminals, and one can see that the traditional bookmakers lots is not a happy one.