Illegal Gambling: A $500 Billion Problem

|

Longitude LLC’s Tom Ascher was one of the presenters Tuesday at the ARC | Lucas Marquardt

By Lucas Marquardt

Opportunities and obstacles in the wagering landscape were the focus of the first panel at the Asian Racing Conference, which kicked off three days of presentations and discussions Tuesday in Mumbai. The Hong Kong Jockey Club’s CEO Winfried Engelbrecht-Bresges set a pragmatic tone in his opening address.

“The global economy is facing very strong headwinds, and the general prevailing conditions will make it very challenging for the wagering business in the future,” said Engelbrecht-Bresges.

Among those challenges, he said, are general stagnation among the Top 6 betting markets, the gains made by sports betting in recent years, a shift to fixed-odds gambling in some places, and, for Asian racing in particular, the spectacular size of the illegal betting markets in the region.

“Illegal gambling has always existed, but what we are facing now is a fundamentally new threat,” he said. “The illegal markets have gone from local markets to international markets. The major change is now the global consolidation of illegal betting on internet platforms. The illegal operators are exploiting technology to grow their business. The astronomic scale and multi-jurisdictional character of illegal gambling is now such that it is one of the greatest challenges facing racing and other sports.”

How big a chunk does illegal gambling take?

Engelbrecht-Bresges gave some sobering figures from a Hong Kong Jockey Club analysis. The HKJC estimates the global share of the illegal betting market, including racing and other sports, at $500 billion annually, with $350 billion of that coming from Asia. The problem in Hong Kong is acute, with an estimated $12.8 billion bet illegally on Hong Kong racing in the region. That’s approaches the $13.8 billion bet on Hong Kong racing legally.

“That shows the massive dimension” of the problem, said Engelbrecht-Bresges. “And there’s another trend, where they’re not just bookmakers. They’re starting exchanges, which is less risky. The don’t take any risk positions, or very limited. There’s one illegal exchange called Citybet, which is the major illegal exchange, and we have pretty reliable information that they handle $7.8 billion [on Hong Kong racing]. We then worked with our Australian colleagues to estimate the effect there, which was nearly $1 billion, which is practically 8% of Australian turnover. On one exchange. And there are many others. These exchanges are a threat not only on the wagering side, but also to the integrity of the sport.”

Engelbrecht-Bresges also pointed to the growth of fixed-odds betting in markets like Australia as negative to those providing the product.

“The bookmaking bet returns about 2.5% to 2.7% [to the track], while the pari-mutuel bet is around 5%,” he said. “You have to look at your pari-mutuel turnover and how you can increase it, how you can make it more attractive, because pari-mutuel turnover is definitely a much higher revenue for the racing industry.”

Engelbrecht-Bresges put forth a five-point plan to confront these problems and others.

“As an industry, we must do the following things,” he said. “1) embrace technology to connect directly with customers and create relevant offerings; 2) develop new tote technology which supports a better customer experience; 3) advance the development of a new tote protocol for commingling, leveraging our strength in exotic bet types; 4) make concerted efforts to create and protect our intellectual property rights nationally and internationally; and 5) do the same within the Asian Racing Federation and International Federation of Horseracing Authorities to fight illegal and unregulated betting.”

Some Ideas On Wagering Technologies…

Build pools with substantial liquidity, don’t make new customers learn a new language, and give handicappers a huge amount of data–including odds on exotic bets. Those were some of the takeaways from Thomas Ascher, speaking about wagering technologies, at yesterday’s first forum at the Asian Racing Conference. Ascher is the CEO of Longitude LLC, which invented and distributes an Enhanced Pari-Mutuel System that facilitates wagering into merged pools (rather than a single betting pool for each wager). This, according to its site, offers both, “a wider range of bet types [and] a richer display of odds data.” Longitude works with, among others, the Hong Kong Jockey Club.

Ascher spoke both about the concept of merged pools. “People talk about the win pool, the place pool…it defines the industry. But you can’t have a successful pool if no one else is interested in your bet,” said Ascher. “You could be prepared to bet $1 million on a particularly interesting superfecta, but if there’s no one else in the pool, you’re swimming alone. You’re betting against yourself. Allowing that equation to be broken opens things up. Deconstructing an event into all its possible outcomes and then reconstructing back into recognized bet types, and doing it seamlessly, that’s fundamental.”

Longitude has worked with the HKJC to relaunch the “quartet” wager (a straight superfecta in U.S. parlance), which, when it combined with the “first four” (a superfecta box) pool, created the world’s first merged pool. “You had this bet type [the quartet] that was basically shelved for 25 years, and another bet type that, in Hong Kong terms, just wasn’t that important, now constituting meaningful liquidity,” said Ascher.

Ascher pointed out five lessons he’s learned.

1) Information is King – “Show punters the odds. Don’t make them guess. It becomes actuality, and they will bet on it. Information is tantalizing. They want it, they will use it. You can give someone too much information if you just put up a wall of meaningless numbers, but there are elegant ways to display things and let people find what they’re looking for. There was a quartet bet at the close of last season at Hong Kong that–with odds shown–paid out HK$2.99 million for a HK$10 bet. Odds of 299,000-1 tend to get people’s attention. To be able to show someone that’s possible IS possible today, but the protocol that allows all of you to communicate does not support bet-by-bet wagering or exotics. That’s attainable.

2) Aggregating bet types build liquidity.

3) Innovation is local – “I would argue that [Longitude’s] greatest contribution to the Hong Kong Jockey Club is to serve as a foundation for innovation, a vehicle to realize a vision.”

4) Customization is crucial – “You can’t wake up in the morning and just hope that if there’s a triple dead heat for fourth, and you’re calculating all the first four bets, that everything works. It has to be coded with crucial attention to detail to local rules.”

5) Agility – “A recognition that circumstances vary from location to location. What works in Hong Kong will, in all probability, need to be adjusted somewhere else. Local circumstances have to be reflected.”

Ascher said, at the heart of the matter, it’s all about, “allowing customers to bet on their own terms,” he said. “Don’t make people learn a new, esoteric language. Free new customers from doing that. Give them the chance to express their opinion like they do in all other walks of life. Make the experience comparable to, and competitive with, other sports and leisure entertainment. This is a growing market, whether you’re talking fantasy sports or fixed-odds betting. We all have to operate in that larger context and compete aggressively.”

Goss: Open World to South African Horses…

Mick Goss, owner of Summerhill Stud, one of the top stallion operations in South Africa, made a earnest plea for travel restrictions on South African horses to be eased. Goss, imploring the international community at large, spoke at the second panel yesterday at the Arc, “Breeding.”

At the heart of the matter are the stiff restrictions in most major racing jurisdictions that guard against African Horse Sickness (AHS), a highly infectious and deadly viral disease.

A trip to Dubai to race at the prestigious Carnival there can include a 6-month quarantine for horses coming from South Africa, Goss noted. And yet, he said, South African horses have excelled there, particularly on World Cup night.

“[Our wins] include six UAE Derbys, four Group 1 sprints, three Duty Frees or Dubai Turfs, and three Godolphin Miles,” he said. “By any standard, that compares with the best anywhere, and you’d have to say our horses have earned their stripes. Our fellows have also won Group 1’s in the United States, United Kingdom, Hong Kong, Singapore and Australia. And just last year, Variety Club (SAf) was ranked as one of the Top 3 horses in the world.”

Goss said these results were remarkable not only because of export difficulties, but also in light of South Africa’s shrinking Thoroughbred industry.

“When I first came here in 1995 to speak at the ARC, South Africa had 145 breeders, 158 stallions, a foal crop north of 5,000, and I had a mop of blond hair,” he said. “In 2014, there were 148 breeders, 103 stallions, the foal crop was at 3,400. And I have very little hair to speak of. It seems that while there’s been a reduction in our numbers, there has been a concentration in the quality of our horses. It is true the attrition in South Africa has partly been due to the global financial meltdown, but much of it has to do with our frustration with our exports.”

Despite this, said Goss, South African horsemen have been “loyal and conspicuous supporters” of international sales venues in the U.S., Ireland, Britain, France and Australia.

“For 40 years, South Africans were the biggest buyers of yearlings in the Argentine, and we’ve been staunch supporters of New Zealand,” he added.

The message was clear: we support you, now we need your support. For Goss, the severity of travel restrictions because of AHS isn’t in line with the risks of South African horses transmitting the disease.

“It’s worth mentioning that during the first and second World Wars, and the British Empire wars that preceded those, we exported more than 450,000 horses to those without ever affecting the recipient countries,” he said. “Since then, we’ve continued to export a couple of hundred horses a year to all our disciplines, and we have never, ever exported the virus anywhere. It’s puzzling to me, a Zulu farmer, that despite the technological age and the vast investment we’ve committed to our export facilities, that it’s no more problematic than it’s every been to get a horse out of South Africa.”

The issue will be addressed again during Wednesday’s second session of the ARC when Dr. Evan Sergeant presents, “African Horse Sickness & South African Exports.”

An 80% Decline in UK Levy Contribution? It’s Possible, Says Jay…

Purse funding in the UK is at serious risk in the coming years. That isn’t breaking news, but Patrick Jay, an expert on sports betting, highlighted some particularly disturbing trends as regards levy contributions during the “Wagering Landscape” panel yesterday at the ARC.

Jay’s in a good position to identify those trends. As a global sports consultant, he has worked with the World Lotteries Association, the European Sports Security Association, Interpol, and FIFA. (Quipped moderator David Eades, “I’m assuming you didn’t work for Interpol and FIFA at the same time?”)

In light of racing’s ever-shrinking marketshare in the UK, Jay asked, “How bad can the problem really get?”

In a worst-case scenario, pretty bad. Jay pointed to a shift in the way the British wager, moving from brick-and-mortar betting shops to online betting, including off-shore betting sites not subject to British law.

“This will be the first year that online betting will surpass retail betting shops,” said Jay. “And this is a problem because it represents a structural decline in the retail betting market.”

The issue stems from the fact that retail shops pay a 10.75% levy on gross win bets. That levy, however, isn’t collected from offshore sites.

“So as the bookmakers move their businesses to Gibraltar and other places offshore, not one of these bets is captured for the purpose of prize money for UK horse racing,” said Jay. “Consequently, funding for the industry is at serious risk.”

In 2014, the Horserace Betting Levy Board (HBLB)—which collects levies from on- and off-track sources, including British-based wagering sites–took in about £57 million.

“Now, if all that remote business–William Hill, Coral, etc.–that was transacted offshore was captured and taxed at the current rate, that would bring £22 million back into the fund up to £79 million,” said Jay. “But of course, we’re not getting that.”

Jay says that things get tricky when you start removing, for hypothetical reasons, the voluntary contributions paid by some firms. Betfair and Bet365–“Acting as good citizens,” said Jay–give approximately £12 million to the Fund each year. Other firms contribute another £5 million per year. If you removed those, said Jay, that original £57 million figured drops to £40 million.

“Now if you apply the 5% decline we’ve seen in retail [betting shops] year-on-year, you get down to £24 million by 2020,” said Jay. “If it’s as significant as a 10% decline in retail year-on-year, you fall to £12 million by 2020. That’s a roughly 80% reduction in prize money since 2014. Want to know how bad it can get? An 80% reduction–that’s how bad.”

Jay said there were several things in the works to combat the problem, including legislation that would introduce a “Racing Right” to ensure tracks are paid for their product. But it could be years before any legislation is adopted, “And the government would really rather that racing and the bookmakers come to an agreement themselves,” said Jay. “This is not something the secretary of state is particularly keen on having to deal with.”

Jay said racing’s best opportunity lies with coming together to operate the UK Tote, currently run by Betfred in an exclusivity deal that expires in 2018. He said the Tote, which offers pari-mutuel betting, needs to embrace new technologies and, rather than competing with the betting shops for win and place money, offer “low stake, high reward” exotic bets.

“But it has to be one Tote–representative of all the racecourses,” said Jay. “You can’t have different tracks offering their own Tote. Liquidity drives liquidity. This is where the opportunity lies. This is a market [pari-mutuel betting through the Tote] that is about 3%, but it could be 6%, it could be 9% of the entire betting market if we can get this right. We don’t want to compete with betting shops on their core produce because we want to use their distribution channels to leverage the business going forward. And we’ve discovered that when we take the products around the bookmakers, they’ve been very keen. But we have a very, very long way to go. We have to establish a racecourse collective, we have to get bookmakers signed up, we have to agree on products. But the point in all of this is that if racing doesn’t do this, someone else will: private equity, venture capital, another bookmaker. Racing can capture this value and use the money for prizes.”

NEWS AND NOTES: Nasser Sherida Al Kaabi, representing Qatar during a panel profiling select members of the Asian Racing Federation, said the country aims to develop a strong domestic industry–both racing and breeding–while still maintaining strong ties with its international partners. “I think both are important,” he said, noting the success of different Qatari racing operations in Great Britain, France, and beyond, as well as the sponsorship partnerships with Goodwood and the Prix de l’Arc de Triomphe program. “But we would like to elevate Qatar racing,” he said. Al Kaabi added that ownership interest in Qatar is high. “I want people to feel how important racing is in Qatar, and I think we have a good strategy.” … European bloodstock agent and consultant Jocelyn de Moubray cautioned that the European market could be headed for a correction. In the past 15 years, the European yearling market has overtaken the U.S. market in aggregate and average in inflation-adjusted dollars, and is close to an all-time high, said de Moubray.

Not a subscriber? Click here to sign up for the daily PDF or alerts.