A race to the bottom?

The UK sportsbook industry finds itself in a curious place at the end of 2016, squeezed on all sides by regulatory, tax and competitive pressures. But you could argue it’s doing much of the squeezing itself.

The pending introduction of a horseracing levy, a potential ban on daytime advertising, the on-going blunt force of the PoC tax and current CMA investigation all have very real consequences for bottom line in the sector. A worst case with no TV advertising around racing and some form of intervention from the government over account closures would be a hammer blow.

Money, money, money

Even a best case scenario with limited TV advertising and less freedom for promotions, allied to increased tax on racing, is going to hurt a little bit. So it’s not particularly surprising to see everyone trying to make hay while the sun shines and we look poised for a potential war on common sense as operators fall over themselves to get punters through the doors before any changes occur.

The trouble is the bar has already been set very high. Best odds guaranteed, which was until fairly recently seen as a generous offer, is now considered standard. It’s the “minimum price of being competitive”, according to one senior executive at a major UK operator. So operators are having to be ever more generous.

Ladbrokes’ launch of best odds guaranteed plus, with punters paid out above the SP if odds moved in their favour, was quickly copied by bet365, although none of the other firms have yet followed. Bet365, meanwhile, is also often flattered by imitation, with similar offers to its free bets on winning racing bets over 4/1 and matched in-play offers appearing on various sites around major events.

Alarm bells ringing

What should perhaps start the alarm bells is the news that William Hill has gaily entered the fray with the launch of its High Five offer for racing customers. Punters placing a bet on any horse wining by five lengths or more will get a 25% bonus, while those with a second placed horse losing by a similar distance get a 25% refund.

For years Hills was the most reluctant of the major firms to head down this path, going so far as offering only four places on the Grand National. This was then thrown out of the window for the 2016 Cheltenham Festival where it went best price on every horse and issued a profit warning a week later. This isn’t a price war it can afford to hide from though.

Punters have learned to expect more from their betting site and Sky Bet is perhaps the best example of the value customers have come to consider normal. Enhanced offers on every football game, weekly free bets to customers staking £25 a week and flash promos such as a £50 bet365-style matched in-play bet are just part of doing business nowadays.

Crunching the numbers

Clearly there has been some number crunching behind the scenes and most of these offers have been carefully calibrated against acquisition targets, LTVs and retention metrics. Ladbrokes claims its BOG+ offer is profitable, and Sky Bet’s enhanced offers are clearly working for it. But some of these offers have an element of loss leader about them and bet365 frequently mentions its eight figure losses on its £50 in-play offer.

With the data-analysis and modelling that has become an integral part of any online bookmaker’s operation so embedded, the idea of the industry becoming engaged in a carefree race to the bottom that destroys profitability seems somewhat fanciful.

There is method to the madness here and it’s clear who is in an aggressive acquisition phase simply by casting a glance over the current offers on Oddschecker. But the big question for the industry though is how easily these type of things can be turned off when, and if, they no longer become profitable.

Margins are tight right now and are only going to get tighter with regulation, tax demands and competition only moving in one direction. The genie is out of the bottle and it will be very hard to get it back in.