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By any measure, Australians love to gamble. A 2016 Government report found that we clock up $24bn a year in betting losses, or roughly $1,300 per person. Australians lose more per capita than any other country in the world; the losses are double those of the United States. So much for being the lucky country.
At the heart of the Australian wagering landscape sit two companies – recently merged Tatts/Tabcorp (ASX: TAH) and Sportsbet, owned by Irish bookmaker Paddy Power Betfair.
Online gambling is far and away the industry’s biggest growth driver – retail stores and on-track totes have been in decline for a decade. The merger of Tatts and Tabcorp gives the company a monopoly over retail outlets, but the online wagering industry is still split among a dozen or so competitors. Tabcorp and Sportsbet, however, have the lion’s share of the market, accounting for 25% and 22% of betting turnover respectively.
Recent regulatory changes and other government proposals suggest that these slices are going to get a lot bigger in the next few years.
The first shot was fired mid last year by South Australia, which introduced a point of consumption tax for gambling operators. At 15% of gross revenue, the tax is no small matter. Western Australia has committed to introducing a similar tax in January 2019. Sportsbet and Tabcorp have indicated that a federal or all state point of consumption tax is likely.
What’s more, amendments to the Interactive Gambling Act (2001) late last year introduced a host of new regulations, including the need for all operators to have an Australian licence, a ban on ‘click to call’ in-play betting, and new enforcement tools for the regulator, including civil penalties. Other initiatives include a national self-exclusion register for online wagering, a voluntary opt-out pre-commitment scheme, and a ban on credit being offered to gamblers by wagering providers.
Then there’s the recent changes to marketing standards. In March, the Government introduced a ‘siren-to-siren’ ban on betting ads during live daytime sports events.
Combined, the new taxes, consumer protection measures, and advertising bans are going to be a ten-ton anchor on the profitability of wagering operators.
But here’s the kicker – all of those measures should make Tabcorp and Sportsbet stronger than ever, at least in the long term.
As wagering has moved online, the importance of being big has increased. In analyst jargon, online wagering is far more ‘scalable’ than retail outlets or on-track bookmaking. Investing in a shiny new app and algorithm is a fixed cost, so every incremental dollar of revenue from a new user quickly turns to profit.
The operator with the most users is usually the most profitable, and those extra profits can then be reinvested into better odds or financial promotions that attract more users.
Tabcorp doesn’t separate the profitability of its digital and retail operations, but we can see this trend among its competitors. Sportsbet has triple the revenue of the next largest player, William Hill, which itself has almost 30% more than Ladbrokes in fourth place. As for EBITDA margins, you can probably guess how the podium looks: 33% for Sportsbet, followed by 17% for William Hill and 7% for Ladbrokes. Smaller operators, such as Crownbet and Bet365, are either loss-making or barely profitable.
Such wild differences in profitability is relevant because a tax on revenue and the advertising and regulatory burdens mentioned above will disproportionately affect the small, less well-funded wagering operators. If the small fish can’t afford to keep up with the latest regulations and technology, they have two options: die a slow death, or merge, just as William Hill and Crownbet announced in March. We expect more takeovers to follow as the year unfolds.
While the online wagering industry seems to be cascading towards a supermarket-style duopoly, shareholders could still end up empty-handed. If the recent regulatory changes teach us anything, it’s that the Government seems hell-bent on curbing Australia’s gambling addiction. The cows are getting fatter, but they stand on a shrinking pasture.
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