How the United States can learn from the evolution of wagering and sports betting in Australia04 March 2019 Topics: Capital markets, Franchising, Corporate and commercial
The 2018 decision of the Supreme Court in Murphy v NCAA returns to each of the (American) States the power to regulate sports betting.
Given the size of the sports betting market in the United States, this presents a generational opportunity for the States and sporting administrators to introduce vast new revenue streams, benefit from the introduction of new technology for fans to watch and interact with sporting broadcasts, increase fan engagement, and to work with other businesses to improve the ways in which the sports (and lotteries products) are marketed. While the importation of United States’ business ideas into Australia has proven to be a successful business model for Australian entrepreneurs, the wagering and sports betting market is a unique example of where Australian expertise and the Australian experience can inform and benefit United States decision makers.
Considerations for decision-makers
States and regulators that facilitate sports betting or the sale of lottery licences can benefit from the receipt of significant licence fees and wagering taxes that can be used to fund important community projects. The development of this industry can also support new employment and economic activity. However, these opportunities also come with significant business and technology issues that if managed poorly, will limit any upside.
The commercial, legal, product, and integrity issues are complex and are paramount to the success and social acceptance of new gambling and lotteries products.
It is incumbent on the people charged with making the decisions around wagering, gambling or lotteries licences to:
- Run effective tender or sale processes for sports betting licences which maximise returns, appoint the right operator or mix of operators, and provide long-term security for the sporting codes;
- Introduce product fee arrangements for sports administrations which strike the right balance between maximising returns and incentivising the promotion of the sport to new audiences;
- Prepare and introduce suitable integrity structures to protect the sports on which gambling is conducted;
- Introduce measures that address community concerns and allow for harm minimisation programs;
- Assess international developments and plan appropriately (for example, how the licensing approach adopted by one State could impact on the gambling regime in another); and
- Take steps to curb the operations of unregulated offshore operators.
From the perspective of Government, decision makers will have regard to:
- the arguments in favour and against the privatisation or sale of licences;
- the merits of granting exclusive vs non-exclusive licences;
- retail vs on-line considerations;
- the impacts of different taxation options;
- options for the creation of regulatory bodies to have oversight of sports betting industries;
- the form of laws and regulations to protect the sports betting and lotteries landscape;
- harm minimisation programs, including their relative merits and success factors;
- policy positions adopted by different governments and how these have responded to issues of community concern (including offshore betting, advertising, taxation and inducements); and
- programs and strategies that enhance participant welfare (animal and human participants).
Governments will also need to adopt stringent probity measures to eradicate the prospect of any impropriety.
For sporting administrators, consideration of the following factors is vital:
- Designing integrity structures for participants and wagering services providers, including rules for adoption by sporting bodies that regulate the wagering activities of participants;
- Negotiating product fee arrangements with sports betting companies that distribute revenue to the sporting code and which requires the sports betting companies to share information that helps to manage integrity risks;
- Developing strategies to increase the new revenue stream that sports betting provides and which maximises the value of media rights;
- Using the information provided from sports betting companies as an additional tool to measure fan engagement; and
- Determining whether to allow sponsorships from sports betting companies and if so, to what extent.
Why look to Australia?
Despite the relatively small size of the Australian economy, Australia is a highly sophisticated market and an early adopter of gambling innovation and products. Australians have the highest rates of wagering per capita in the world (it is estimated that over 80% of Australians engage in gambling of some kind).
- On-line wagering on racing and sports is available in all Australian jurisdictions.
- Retail wagering and lotteries purchases are available in all Australian jurisdictions.
- Casinos are present in all Australian jurisdictions.
- On-line casinos are banned under federal laws. The Interactive Gambling Act 2002 bans businesses (Australian and international) from providing interactive gambling services to customers in Australia.
- On-line in-play betting during the course of a sporting event is banned.
Some other factors worth noting include:
- Like the United States, Australia operates under a government structure which endows the federal government with certain powers and empowers the individual States to make decisions in other fields. It is the domain of each Australian State to issue licences in their jurisdiction for the sale of sports betting and lotteries products. Australian States are also empowered to impose taxation on a wagering or lotteries company (in addition to federal taxes that are payable), as well as determining the licence fee payable by the purchaser of a licence, whether the licences are exclusive or non-exclusive, and whether the authorities allow retail and /or on-line business to be transacted.
- Sporting bodies determine the fee that authorised wagering operators must pay to accept wagers on the sport. These fees are set centrally for sports that operate under a national administration (such as cricket and football codes) – and by state-based bodies where administration is dealt with along Australian State lines (all of the racing codes – thoroughbreds, harness and greyhound racing).
- The relative accessibility of Australian wagering laws has combined with a gambling friendly culture and high levels of technological adoption to produce an exceptionally competitive online betting marketplace. The fierce competition among businesses seeking to grow their market share has led to the development of intuitive apps, promotions and advertising saturation. This evolution provides valuable insight into how the American experience may develop.
- Australia has been a useful and valuable market for operators to trial different apps and promotional activities to attract and retain customers. In response, governments have sought to be proactive in minimising harm from gambling. This has led to the adoption of policy positions (which vary between the different Australian States) to prohibit certain types of advertising and to ban inducements to place a bet or open a betting account.
Recent Australian developments
Corporate activity: The Australian wagering landscape continues to experience significant M&A activity as key participants consolidate their businesses. The market cycle has evolved from high growth and a land grab for new customers to one of consolidation. In 2017, the two largest wagering companies (Tatts and Tabcorp) merged. Other major businesses operating in the Australian market include Sportsbet (owned by listed UK company PaddyPower), Ladbrokes (owned by listed UK company GVC Holdings) and Bet Easy (formerly Crownbet and the recent purchaser of the Australian operations of UK company William Hill – the $300m purchase was completed in partnership with Canadian gaming company The Stars Group).
Live in-play betting: The Australian Government has banned wagering companies from accepting bets on-line after the commencement of a sporting event. Customers wishing to place a bet on a sporting event after it has commenced have the option of doing so in a retail shop or over the telephone.
Licensing approaches: Most States in Australia adopt the position of providing an exclusive retail wagering
licence to one provider. The same approach applies for the sale of lotteries licences in a retail setting. One Australian jurisdiction (the Northern Territory) has taken a different approach and has introduced a structural framework that is favourable to on-line only operators as a way of attracting business activity and local employment. For a relatively small fee, operators can buy a licence which then authorises them to do business throughout Australia. Under Australian law, it is unlawful under the Australian Constitution to treat businesses differently because of their base of operations. The consequence of this is that certain operators, once they have entered the market via the more favourable licensing conditions available in certain jurisdictions, may then seek to disrupt the high value licences in the other Australian markets. An example of this is the Australian operations of Lottoland.
Lottoland: Lottoland is a technology company which obtained a bookmaking licence in the Northern Territory and provided customers with a chance to ‘bet’ on the outcome of a lotteries draw (as opposed to purchasing a ticket in the draw). It was set up to look like a regular lotteries operation – payouts were initially tied to the prizes for the actual draw. Lottoland also offered customers the chance to participate in overseas lotteries, which were otherwise not available to Australian customers. In Australia, most lotteries tickets are sold in retail outlets (circa 80%) – typically in newsagencies. In June 2018, the Australian parliament passed legislation to ban betting on lotto draws – with the changes coming into effect in early 2019.
Norfolk Island: Norfolk Island, an Australian territory, was another jurisdiction that created a gaming authority to licence sports betting operators (the Norfolk Island Gaming Authority). Like the Northern Territory, Norfolk Island operated in a way which was beneficial to on-line operators. However, the Authority came under scrutiny for granting a licence to Bet HQ, an affiliate of the world’s largest illegal betting operation (Citibet). A review was commissioned by the Australian Government which concluded that:
- There were inadequate internal controls in the Authority – leading to risks of fraud and corruption;
- There was a lack of transparency in the Authority’s operations;
- The Authority was grossly under-resourced (lacking basic control elements such as governance and reporting structures, a risk register, contracts with key personnel, controls to prevent conflicts of interest, and staff remuneration processes);
- The Authority was more concerned about raising revenue from gaming licences than having due regard for its regulatory functions;
- The Authority in its then current form was barely viable; and
- It was recommended to discontinue the Authority’s operations.
The Norfolk Island Gaming Authority was ultimately shut down. This experience highlighted the significant risks which can occur when one jurisdiction, with very little checks and balances and a different strategic prerogative, has the ability to grant licences which must then be recognised by the rest of the country. Point of consumption tax (POC): Under Australian state-based systems, there are a number of different taxes paid by operators:
- Goods and services tax (GST): a federally based consumption tax levied on most goods and services in Australia (including wagering and lotteries);
- Wagering tax: a state-based tax, which varies by Australian State;
- Payroll tax: a state-based tax, paid on businesses that employee above a certain threshold of employees;
- Company tax: federally administered tax on profits generated by Australian companies; and
- Product fees: the fees paid to sporting codes for each wager placed on that sport.
Many of the Australian States have recently introduced a point-of-consumption tax, which requires operators to pay a tax based on any wagering activities by a resident of a State. This addresses the issue of one jurisdiction (Northern Territory in Australia) licensing the majority of sports betting operators and therefore collecting most of the taxes derived from those operators.
Product fee models: A variety of product fee models have been adopted in Australia, including:
- Payments based on a percentage of wagering turnover (which tends to suit more established operators with established databases of customers);
- Payments based on a share of revenue (which suits businesses such as start-ups seeking growth that are looking to attract new customers by operating on lower margins) or;
- A combination of the two (higher of turnover floor or a percentage of gross revenue).
Sports and racing administrations have tended to adjust their fees depending on the quality or popularity of the product. Smaller sports in quieter times can adopt lower fee structures to incentivise operators to run promotions targeted at encouraging their database to wager on those events. Conversely, the most popular sports and events adopt premium pricing models. The competition among operators ensures that even with premium pricing, the best events still attract significant promotional support from operators.
Integrity structures: In Australia, integrity structures for racing and sports bodies are typically administered as a department of the central administering authority. The continual challenge with this framework is that administrators need to find the appropriate balance of how much to invest in integrity as opposed to other parts of the business. In some Australian States, governments have established (and in some cases funded) dedicated integrity agencies. This has been important for sports involving animal participants, where the separate integrity structure also has oversight of ensuring appropriate animal welfare standards are being met.
Minimum bets: One common criticism of on-line only wagering operators is that they are quick to close the
accounts of successful punters. Once an account has been opened and funded, the betting activities of the customer are easy to track. This provides advantages from an integrity perspective (any cheating can be tracked), however an operator can also flag customers that are too successful and take action to limit their betting activities. This is an opportunity not available to retail (cash only) operators. In response, racing bodies in Australia have introduced rules which require wagering operators to accept bets up to certain levels from customers (minimum bets).
The Australian experience can inform United States decision-makers about:
• The most impactful integrity structures adopted by sporting administrators and government bodies;
• The most successful strategies adopted by sports betting businesses;
• The issues that have caused the most community concern and political blowback; and
• How sporting bodies can leverage sports betting as a way of growing revenue and engaging with fans.
In time, some of the leading United States operations may be based on the Australian experiences.
If you would like more information about this issue, please contact Sam Adams on +61 7 3231 2552.