Opinion: Sportsbook consolidation is not the answer

The betting industry has been inundated with consolidation talks from Ladbrokes/Coral, to Betfair and Paddy Power and bwin.party merging with GVC; it seems to make sense from the perspective of Wall Street and the City.

The reasoning is simple: cut costs by merging marketing prowess and streamline operations and IT, which consequently improves the bottom line and the combined share prices rise.

Or, so the thinking goes. It’s a working formula for many markets like airlines, pharmaceuticals, and manufacturing at large, for example.

These are big, mature industries with lots of capital costs and impetus to improve margins. Betting can be looked at similarly: the concept of gambling is thousands of years old and is weighed down by thousands of capital intensive high street retail locations. Marketing is also a costly, legal minefield of a process.

When considering the Ladbrokes/Coral merger from this angle, a consolidation strategy seems like a no brainer. Both Coral and the Ladbrokes board seem to feel the same way.

But consolidation implies the industry has matured to a point where the only way to increase margins, growth, and ultimately improve stock price is to merge with another company.

This would be ignoring something larger afoot in the market and alarm bells should start ringing. Betting has not matured. In fact, I would argue betting has a long way to go before it’s ready for cost cutting consolidation.

The market is transitioning through one of the largest upheavals in its history. Growth in the UK is up x%, compared to y% globally. New, regulated markets are opening up almost every month, so why consolidate?

I argue the merger is put down to something much more obvious: lack of innovation.

Staying the pace

Failing to keep pace is something gaming has struggled with throughout its history. Citing Ladbrokes origins, the lack of will to innovate from a specialised betting syndicate forced the original founders to sell for £100,000.

Most recently, from the 90s onwards, online gaming took a huge percentage of market share out of the high street retail locations, while Ladbrokes was busy running hotels.

And by innovation, I don’t mean building some horseracing virtual reality PR stunt on top of Google’s latest open-source API. I’m talking about customer-driven, truly improved innovation.

There are three ways for these companies to achieve this:

1) In-house their technology

Every betting company in the world uses third-party agencies to build their betting technology. They don’t even have their own. It’s not hard. We build our own. They don’t because third parties are easier.

As everybody knows, technology moves rapidly. There’s no better way to be uncompetitive than by letting somebody else create your technology (and licence the same technology to your competitors). And with technology, sportsbooks can have more control over their risk.

2) Compete on odds – it’s what you’re selling

Speaking of risk, bettors are getting a raw deal. The house edge in many betting markets is around 10%. The crazier the bet, the worse the odds. Why do bookies charge this much? Because they need to. If they were to reduce spending on marketing and licensing technology, they could be creating new technology to improve the customer odds.

3) Act like a bookmaker

Bookmakers will close your account if you win too much. Name a bookie, and every day they severely limit or ban someone for winning. They have to do this as the technology they have to monitor risk is primitive. It is illogical that with a 10% margin, bookmakers can’t accommodate winners, but they just can’t.

Instead of paying bankers or spending corporate effort on short-term stock gains, these big betting companies would be better off addressing the needs of customers and preparing for the next generation of betting. That is a winning formula for long-term shareholder value for investors in the market.