Proposal for - Australian Wagering Council

Transcription

Optimal Product Fee Models
for Australian Sporting
Bodies
July 2012
Optimal Product Fee Models for Australian Sporting Bodies
© 2012 Deloitte Touche Tohmatsu
2
Contents
Definitions and Acronyms
4
Executive Summary
5
1
High Court Decision – a catalyst for change?
2
Sports betting: an emerging ‘two-sided’, global market
11
2.1 Sports betting: an emerging market
11
2.2 A competitive global market
15
2.3 A ‘two-sided’ market
18
2.4 Issues of integrity in a ‘two-sided’ market
19
The economics of sports betting
21
3.1 Sports betting revenue and cost structure
21
3.2 Implications of a marginally profitable, substitutable product
25
Optimising outcomes for the sporting codes: a game-theoretic analysis
27
4.1 Framework for analysis: a game theory approach
27
4.2 Expectations for NRL wagering growth and payoffs under the
status quo fee model
29
4.3 Expectations for NRL wagering growth and payoffs under a
turnover-based fee model
30
4.4 Game equilibrium and implications for product fee model
negotiations
33
Conclusions
35
3
4
5
9
Appendix A: Overview of Industry Growth Modelling Methodology
37
3
Definitions and Acronyms
AFL
Australian Football League
Betting in the run
Wagering on a sporting event after the
event has commenced
DBCDE
Commonwealth Department of
Broadband, Communications and the
Digital Economy
Direct costs
Includes both direct variable costs - –
including the GST and product fees - and
– and direct fixed costs, – including staff
costs and other non-variable items
Gross Win, GW, or Revenue
Represents total amounts wagered by
consumers less amounts won by
consumers
High Court
High Court of Australia
IGA
Interactive Gambling Act 2001
NRL
National Rugby League
Sporting bodies or sporting codes
For the purpose of this analysis, the NRL
and AFL as the context requires
TAB
Totalisator Agency Board
Terminal Value
The present value, at a future point in
time, of all future cash flows based on a
stable future growth rate
Turnover (T/O)
Represents total amounts wagered by
consumers
Wagering operators
Licensed Australian corporate
bookmaker, totaliser or betting exchange
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Executive Summary
This report, commissioned by Sportsbet Pty Limited (Sportsbet), considers alternative
product fee arrangements for sporting bodies in Australia and the elements of an optimal
agreement which provides mutual upside to both the sporting bodies and the wagering
operators.
On 30 March 2012, the High Court of Australia handed down its judgements in the cases
between Sportsbet and Racing New South Wales (Racing NSW), and Betfair Pty Limited
and Racing NSW. In both cases, the High Court found in favour of Racing NSW, and
effectively ruled that they were able to charge authorised wagering operators a fee of 1.5 per
cent of wagering turnover to reproduce NSW race fields’ information.
These rulings were widely anticipated by wagering industry participants in Australia and, as a
result, a number of racing and sporting bodies have reviewed or are reviewing the product
fee models for their sporting code.
Scope of this report
This report considers the business models and economics of alternative fee models for the
Australian Football League (AFL) and the National Rugby League (NRL) sporting codes, as
they are the two most prominent sporting codes in Australia. It focuses specifically on the
NRL in an analysis of the potential impact of product fees on wagering turnover and product
fee revenues (to the NRL) because on 24 April 2012 the NRL announced that it was
considering its position with regards to product fees following the High Court case, and they
may seek to enact legislation which replicated that of Racing NSW in order to maximise its
product fee revenues.
Specifically, the report considers:

alternative models for charging product fees, that is, whether to levy a fee based on
a percentage of wagering turnover or a percentage of wagering gross win (revenue);

the quantum of the product fee charged and how this affects the marginal profitability
of a wagering product; and

the impact that product fees can have on the ability of a sporting body to protect the
integrity of its sport.
The analysis utilised confidential information obtained from Sportsbet, information obtained
from interviews with industry participants, publicly available information and other sources as
referenced.
Using the NRL as a case study, the analysis demonstrates:

the significant impact that the product fee model can have on wagering turnover;

the impact the product fee model can have on wagering operators’ contributions to
the league and its clubs directly, through product fees and sponsorships, and
indirectly by influencing the demand for media spend on the sport and the
corresponding impact on the value of media rights; and

that sporting codes also benefit from wagering operators promoting wagering
products on the sport.
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Key findings
The report finds that sports wagering is a clear ‘two-sided’ market, where it is in the interests
of both the Australian licensed wagering operators and the sporting codes to maintain a
competitive, innovative wagering product that will maximise returns to both sides. Doing so
will prevent consumers from migrating to unregulated and unlicensed offshore wagering
operators, and protect the integrity and long term financial viability of product fees and other
contributions from Australian licensed wagering operators.
Specifically, findings outlined in the report include:

Total turnover on sports wagering continues to grow in excess of 13 per cent per
annum driven by strong growth in online sports wagering of 28 per cent, however the
total market remains significantly smaller than racing ($3.3 billion compared to $20
billion);

NRL and AFL wagering represent the two largest wagering sports, representing
approximately 50 per cent of all sports wagering in Australia and 7 per cent of total
wagering in Australia (NRL: $750 million, AFL: $900 million);

Sports wagering turnover is expected by industry participants to continue to grow in
excess of 13 per cent per annum, with NRL/AFL wagering turnover estimated to
double in five years under the current gross win based product fee model (NRL: $1.5
billion, AFL: $1.8 billion);

Australian wagering operators generated an estimated $81.5 million gross win
revenue from NRL and AFL wagering (NRL: $36.5 million, AFL: $45 million) in 2011,
which represents approximately 4.5 per cent of the total gross win revenues
generated by Australian wagering operators on racing;

Wagering operators also contribute approximately $45 million per year to NRL and
AFL related products through sponsorship and advertising expenditure;

After marketing expenditure and other direct costs (including product fees), wagering
operators are estimated to earn a margin of $13.4 million on NRL wagering under
the current 5 per cent gross win based product fee model (AFL: $15.5 million);

If adopted, a 1.5 per cent turnover product fee model would significantly reduce the
profitability of NRL wagering products, such that, after overheads, the product
category would effectively be loss making for wagering operators;

Wagering operators are therefore likely to take action to preserve profitability,
including significantly reducing or reallocating marketing expenditure, and reducing
odds offered to consumers;

These actions, in the long run, would significantly reduce NRL wagering turnover
and therefore product fees paid to the NRL, such that on a net present value basis,
the NRL would be an estimated $11 million worse off under a 1.5 per cent turnover
based product fee model; and

In addition to the financial implications, this also represents a significant risk to the
integrity of the sporting codes as consumers will migrate to offshore wagering
operators who do not have integrity agreements in place with the sporting bodies
and do not pay product fees;

The ‘winners’ under all potential scenarios if the NRL were to adopt a 1.5 per cent
turnover based product fee model would likely by the AFL, NSW racing and offshore
wagering operators, which would be expected to gain some of the market share that
would have otherwise been wagered on NRL products.
6
The report concludes that there is an optimal form of agreement between sporting codes and
Australian licensed wagering operators which provides mutual upside to both parties. This
theoretical optimal agreement would be a product fee arrangement which:

would be charged on a gross win basis;

would potentially represent an increase on the current arrangements of 5 per cent of
gross win, but not to a level that would require wagering operators to take steps to
preserve profitability, as this would have a significant detrimental impact on the
wagering turnover growth rates currently achieved; and

would provide financial upside to both sides of the ‘two-sided’ market by ensuring
ongoing competition and innovation amongst Australian licensed wagering operators
whilst protecting the integrity of the sporting codes in Australia.
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1 High Court Decision – a
catalyst for change?
This section provides a high level summary of the High Court judgements and the potential
implications for sports betting in Australia. Any changes to the product fee model by other
sporting codes may significantly change the sports betting landscape in Australia, which is
analysed in subsequent sections of this report.
The High Court judgements and implications for sports betting
On 30 March 2012, the High Court of Australia dismissed appeals by Sportsbet and Betfair
in the cases of Sportsbet Pty Limited v State of New South Wales and Betfair Pty Limited v
Racing New South Wales, which effectively upheld Racing NSW’s right to charge wagering
operators a fee of 1.5 per cent of turnover to reproduce NSW race fields’ information.
Although the judgements of the High Court are only in respect of the NSW race fields’
legislation, in light of the decision it is likely that Australian racing bodies will re-evaluate their
race field’s regimes and give consideration to amending the basis for the calculation of
product fees such that they are calculated by reference to turnover. Racing Victoria has
already indicated that it will move to a turnover-based product fee regime and explore a
similar model to that of Racing NSW over a 12 month trial period, upon expiration in 2012 of
existing agreements with authorised wagering operators, and subject to amendments that
may be required to Victorian legislation.
It is likely that there will now be considerable pressure for the product fees payable to all
sporting bodies to be reviewed. However, any decision regarding a proposed fee model
needs to be balanced by the potential impact that it may have on the business models for
wagering products offered by licensed Australian wagering operators, and in turn, wagering
turnover market growth and the integrity of the sporting code. The most significant wagering
operators in Australia are either entities listed on the Australian Securities Exchange (ASX)
or are significant subsidiaries of entities listed on overseas exchanges. If product fees were
to increase materially, inevitably these businesses, in order to continue to maintain
profitability and meet shareholder expectations, would be expected to review the prices at
which they offer betting products. Accordingly, their capacity to continue to invest in market
growth (through sponsorship, promotion, advertising and other contributions to sporting
codes and their clubs) would be expected to diminish.
Objectives and Structure of this report
Media reports have speculated that the NRL has an interest in advocating to government for
product fee legislation similar to existing legislation in NSW for payment of product fees by
wagering operators which reproduce NSW race fields’ information. If this was to become a
reality, it would effectively replace the current commercial agreements in place between the
sporting bodies and wagering operators. This speculation, following on from the High Court
decisions, has prompted a review of the wagering industry’s growth prospects under the
current product fee regime, the implications of alternative fee models on these growth
expectations, and the optimal long-term product fee model.
Deloitte was engaged by Sportsbet to consider alternative product fee arrangements for
sporting bodies in Australia and the elements of an optimal agreement which provides
mutual upside to both the sporting bodies and the wagering operators. Our analysis utilised
confidential information obtained from Sportsbet, information obtained from interviews with
industry participants, publicly available information and other sources as referenced.
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This report considers each of these elements:

Section 2 provides a summary of the growth potential and competitive dynamics of
the sports betting industry, independent of the potential product fee changes, and
considers the issues of integrity in a ‘two-sided’ market;

Section 3 analyses the profitability of sports betting products under the current
product fee regime and the implications of a 1.5 per cent turnover-based product fee
for market participants given the current level of maturity and consumer price
elasticity profile; and

Section 4 presents a game theoretic analysis of the potential fee models that could
be applied in the sports betting industry, and our analysis of potential payoffs to the
sporting bodies and wagering operators utilising industry turnover growth projections
prepared by Sportsbet and discussed in interviews with other industry participants.
The report concludes that, given the likely significant negative impact of a 1.5 per cent
turnover based product fee on the viability of the sports betting business model and the twosided nature of the market, it is in the interests of the sporting codes, from both a financial
and integrity perspective, to work with wagering operators to identify and implement an
optimal model and quantum of product fees (“the optimal agreement”).
A key characteristic of such an optimal agreement is that the product fee charged by the
sporting codes would:

provide long term protection of the integrity of the sporting code by ensuring there is
a strong incentive for consumers to wager with Australian licensed wagering
operators with whom the sporting bodies currently have integrity agreements in
place; and

maximise financial returns to the sporting codes from product fees, sponsorships
and media licensing deals.
The objectives can be achieved by setting a fee which ensures:

Australian licenced wagering operators can set odds which are competitive with
those being offered by offshore wagering operators which offer markets on local
sporting events - these offshore operators do not contribute product fees to, and do
not have integrity agreements in place with, the sporting codes;

wagering operators earn a reasonable profit margin such that they are incentivised
to undertake ongoing marketing and promotional activity - the high levels of
marketing and promotional expenditure by wagering operators not only drive
increased wagering spend but also increase the profile of the sporting code and
therefore inherently enhances the value of sponsorship and media rights
agreements; and

competition among the wagering operators in Australia is maximised, resulting in
ongoing innovation and industry development - competition will be maximised by a
product fee which taxes all wagering operators on an equal economic basis.
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2 Sports betting: an emerging
‘two-sided’, global market
This section outlines the market for wagering operators in Australia, including a summary of
domestic providers, international competitors, industry growth expectations and the
relationship between sports betting and the sporting codes.
2.1 Sports betting: an emerging market
The wagering industry is comprised of both traditional wagering on racing (thoroughbred,
harness or greyhounds) and the less mature, but rapidly growing, area of sports betting.1
While wagering on racing is a well-established and mature betting market, sports betting is
an emerging market which has experienced considerable growth in recent times and offers
strong ongoing growth potential in the medium term. The growth in sports betting has been
closely linked to increased access to advances in technology, such as broadband internet
and smart phones, and has been associated with the growth of corporate bookmakers.
Although sports betting shares some common features with wagering on races, betting is
generally a secondary reason for a consumer to follow sporting events. By contrast,
wagering is typically the primary reason for a consumer to follow racing. Racing is a
gambling-based activity and the industry is heavily reliant on betting proceeds for its
existence.
As an emerging market, sports betting turnover has increased significantly in recent years,
contrasting with the limited growth in the mature market for wagering on racing. From 2004
to 2011, sports betting experienced a Compound Annual Growth Rate (CAGR) in wagering
turnover of over 13 per cent. This figure greatly exceeds the equivalent figure of 4 per cent
growth in racing wagering, which is broadly in line with recent growth in household
disposable income.
Figure 1: Wagering turnover, 2004 to 2011, Australia
Source: Australian Racing Board (2011), Australian Racing Factbook, A Guide to the Racing Industry in Australia 2010-2011
1
Some bookmakers also offer betting products in relation to events such as elections or reality television, though this remains
a very small part of the entire wagering market.
11
These contrasting growth rates are depicted in Figure 1 above, although it is important to
note that in absolute terms, with a total turnover of some $20 billion in 2011, the total
estimated market size for racing wagering remains significantly larger than for sports betting
at $3.3 billion.
Industry players generally expect growth in demand for sports betting to remain high for the
medium term. Provided product offerings, market pricing and the regulatory environment are
not significantly altered, the nominal growth rate in turnover is expected by industry
participants to remain at least consistent with the current CAGR of 13 per cent, if not higher
given the online growth. This growth would be consistent with the growth profile for sports
betting previously experienced in a number of overseas markets that have now matured.
Much of the growth in sports betting is aligned with growth in online gambling. As shown in
Figure 2, internet gambling has grown strongly around the world over recent years, with a
CAGR of 18 per cent between 2003 and 2010, and is projected to continue that growth
trend.
This growth has been driven, at least in part, by consumers switching from traditional forms
of wagering such as phone, on-course and in retail outlets to internet-based forms of
wagering.
Figure 2: Gross Win, Internet gambling, 2003-2015, globally (actual and projected)
Source: H2 Gambling Capital, eGaming Data Set, February 2012
Growth in online gambling has also been strong in the Australian market, growing at 17 per
cent per annum over the period 2004-11. As shown in Figure 3, both sports betting and
wagering on racing have experienced strong growth in online betting. In absolute terms, this
growth has been largest for racing; however, the rate of growth for online sports betting has
been particularly strong, with a CAGR of 28 per cent compared to 16 per cent for racing.
Anticipated continued growth in online wagering is likely to remain an important factor
supporting the ongoing growth of sports betting in Australia.
12
Figure 3: Turnover for racing wagering and sports betting and corresponding percentage of total racing
and sports betting turnover, 2004-11, Australia
Represents
27% of total
racing turnover
Represents
47% of total
sports betting
turnover
Source: Australian Racing Factbook, 2011
Along with the shift away from telephone, on-course and in retail outlet wagering, the
significant growth in online wagering in Australia has coincided with an overall decline, since
2008, in the amount of wagering estimated to be offshore, as outlined in Figure 4. The
‘opening’ of the advertising market, following the Betfair2 case in 2008, significantly
increased competition amongst Australian licensed wagering operators, which has resulted
in new products, markets and prices for the consumer and has created a notable shift back
onshore as consumers have sought to take advantage of the significant competition in the
local marketplace.
Figure 4: Percentage of Wagering Turnover estimated to be offshore 2003-11, Australia
Source: H2 Gambling Capital, eGaming Data Set, February 2012
2
Betfair Pty Limited v Western Australia (2008) HCA 11 (27 March 2008)
13
The significant growth in sports betting and online wagering has been achieved in the
absence of wagering operators being able to offer online ‘betting in the run’ on live sporting
events. The Interactive Gambling Act 2001 (IGA) currently does not allow ‘betting in the run’
online, although such bets can be placed over the phone or at TAB retail outlets. On 29 May
2012, the DBCDE released their interim report following a review of the IGA, and among
other things, recommended that the IGA be amended to dovetail its provisions regarding
sports wagering with the provisions currently being developed by the Minister for Sport to
deal with integrity in sports and match fixing. Such an amendment would effectively mean
that ‘betting in the run’ (whether online or over the phone) would be allowed provided that the
bet types are authorised by the relevant State/Territory regulatory authority and the relevant
sports controlling body, if applicable. The recommendation, if adopted, would correct the
current inconsistency between online and telephone ‘betting in the run’ and create platform
neutrality. While the responsible Minister, the Minister for Broadband, Communications and
the Digital Economy, Senator the Hon. Stephen Conroy has noted that the Commonwealth
Government has not yet made any decisions in relation to the review of the IGA, he has also
3
publicly acknowledged the inconsistency of ‘betting in the run’.
Industry participants expect such an amendment to significantly increase sports betting
turnover with Australian licensed wagering operators, above current rates of 13 per cent
CAGR growth, which would be consistent with other international markets.
2.1.1 AFL and NRL wagering
This report uses the AFL and NRL sporting codes as case studies because they are the two
most prominent sporting codes in Australia. Although specific information is not publicly
available, given the prominence of the sporting codes, it is expected that wagering on AFL
and NRL matches represents a significant portion of sports betting in Australia. Based on an
analysis of confidential data obtained from Sportsbet, interviews with other industry
participants, and analysis of publicly disclosed information, Deloitte has estimated that in
2011 sports betting on the AFL and NRL generated turnover of approximately $900 million
and $750 million, respectively. These figures imply that wagering on these sporting codes
jointly accounts for over 50 per cent of all sports betting in Australia and, based on wagering
figures in the Australian Racing Factbook 2011, represents approximately 7 per cent of all
wagering in Australia.4
As with wagering markets more broadly, most sports betting on the AFL and NRL is
conducted through TAB organisations, which consist of several different registered operators
across Australia.5 In 2011, across all TAB organisations, we have estimated sports betting
on the AFL and the NRL to be $500 million and $425 million – respectively accounting for
approximately 56 per cent of all sports betting for each these codes.
The remainder of AFL and NRL sports betting is shared between the various corporate
bookmakers and the betting exchange, Betfair. These wagering operators have enjoyed
increasing market share since their establishment in the mid-1990s. Over the period 200411 bookmakers have experienced a CAGR of 9 per cent compared to an approximate 4 per
6
cent growth experienced across TAB organisations.
The bookmaking market is characterised by a diverse array of providers as reflected in
Figure 5 below.
3
The Australian, 24 May 2012, interview on Nine Network, 23 May 2012
Australian Racing Factbook, 2011
5
Includes Tabcorp in Victoria and NSW, Tatts in Queensland, South Australia, the Northern Territory and Tasmania, and the
TAB in WA and the ACT.
6
4
14
Figure 5: Estimated sports betting turnover by corporate bookmaker and Sporting Code, 2011
500.00
450.00
400.00
AFL NRL
AFL
NRL
350.00
$ Millions
300.00
250.00
200.00
150.00
100.00
50.00
-
Source: Deloitte analysis of Sportsbet data and interviews with industry participants. Betfair is not included above
due to the different basis on which turnover is measured compared to traditional corporate bookmakers.
As explored further in the following section, the diversity of wagering operators and the
importance of online betting contributes significantly to creating a highly competitive sports
betting market in Australia.
2.2 A competitive global market
The sports betting market in Australia is highly competitive, characterised by a large number
of wagering operators and a highly price sensitive customer base. This is particularly the
case for sports betting on the AFL and NRL, which as noted above, is estimated to represent
over 50 per cent of total sports betting turnover. The competitiveness of sports betting for
these codes is driven by two key factors:

Fierce competitive rivalry — The large number of sports betting service providers,
both in Australia and overseas, creates a wide range of betting options for
consumers.

Strong buyer power — Sports betting consumers tend to have lower brand loyalty
and be more price-sensitive across wagering channels, compared with traditional
racing consumers.7 The large and growing online market segment, in particular, is
characterised by high consumer price elasticity, given low switching costs between
both domestic and international wagering providers.
These factors contribute to a market in which consumers are highly sensitive to price (i.e. the
value of the odds on offer), creating an environment in which the margins for wagering
operators face significant and ongoing constraint.
7
Based on consumer surveys conducted by Sportsbet and interviews with industry participants
15
2.2.1 Competitive rivalry: Overview of domestic and international sports
betting providers operating in Australia
In 2011 TAB operators had approximately 50 per cent of total market turnover in the sports
betting market, with the remainder shared by domestic corporate bookmakers and offshore
8
operators. The large number of domestic corporate bookmakers ensures a level of
competitiveness which constrains margins and limits the profitability of any individual
operator. The significant presence of online offshore wagering operators in the Australian
sports betting market imposes further competitive pressure on domestic wagering operators.
Notably, the offshore wagering operators can offer online in play betting or ‘betting in the run’
and therefore have a distinct competitive advantage over domestic wagering operators.
Where there is a greater variety of products (i.e. online ‘betting in the run’), and odds
provided by offshore wagering operators offer better value than those provided by domestic
wagering operators, offshore wagering operators would be well placed to take an even
greater percentage of the domestic market.
Although there are currently no regulations that prevent Australian consumers from
establishing a betting account with offshore wagering operators, there are restrictions on
international providers advertising to Australian consumers. Additionally, the IGA makes it
an offence to offer online ‘betting in the run’ to Australian residents, although there does not
appear to be any restrictions in place to prevent Australian residents from betting with these
offshore wagering operators, nor does there appear to be any instances of prosecution of
such operators for breaches of the IGA. Most industry participants believe that online
‘betting in the run’ comprises the majority of the offshore wagering operators’ turnover
generated from Australian residents.
The websites of a number of offshore wagering operators were monitored during the writing
of this report. UK corporate bookmakers, Ladbrokes and William Hill offered multiple
markets on weekly NRL and AFL matches. The websites of Victor Chandler and Stan
James offered multiple markets on weekly NRL and AFL matches and also included online
‘betting in the run’ markets on multiple NRL and AFL games each week along with other
sports. The markets on Australian sporting codes offered by offshore wagering operators
are potentially undermining the scope of the sporting codes to receive payment for their
products and putting the integrity of Australian sporting codes at risk.
2.2.2 Sources of buyer power: online sports betting
The online component of sports betting is particularly competitive and represents a
significant portion of the overall market for sports betting. As presented in Figure 3 above,
measured by turnover, approximately half of all sports betting is conducted online, almost
twice the share of online wagering for the racing industry.
The competitiveness of online sports betting is affected by a number of factors that ultimately
provide the consumer with a significant amount of choice, the proliferation of smartphone
technologies and various web applications that result in low switching costs and allow
consumers to seamlessly move between different wagering operators.
The proliferation of technologies, such as smartphones, allows easy access to a wide range
of wagering operators at any time and in any location, which creates pressure for wagering
operators to continually update odds, markets and the betting interface to meet consumer
demands. In 2011, smartphone penetration in Australia was estimated at 39 per cent and is
expected to increase to 77 per cent by 2015 (representing approximately 88 per cent of total
mobile phone users). Further, competition is also evolving in the tablet market, with
9
penetration of tablets expected to reach 55 per cent by 2015 . The availability of online
8
Deloitte analysis of Sportsbet data and interviews with industry participants. Estimates for the share of overseas wagering
operators are based on data from H2 Gambling Capital, eGambling Data Set, February 2012
9
Telesyte Australian Smartphone Study 2012
16
betting applications on these devices will continue to increase the competitiveness of this
market and place significant power in the hands of the consumer.
In addition to improved technologies, the development and growth of online bookmakers and
odds comparison websites and software gives the consumer the ability to obtain the best
odds and markets at all times. These websites, such as ‘way2bet.com.au’,
‘oddschecker.com’, and ‘top100bookmakers.com’, allow online customers to easily compare
the odds offered by domestic and international wagering operators, creating a market in
which consumers are able to seek out and obtain the best odds available and easily identify
offshore wagering operators that allow online ‘betting in the run’. Together, these factors
lower the transaction costs faced by consumers as they seek the best odds and regularly
switch between different wagering operators, including overseas operators.
Compared to consumers of land-based wagering operators, online customers are also likely
to have less loyalty to particular wagering operators given the ease of switching between
operators. Lower loyalty means consumers are more likely to switch between wagering
operators on the basis of convenience and the value they offer.
Marketing studies undertaken by Kantar, on behalf of Sportsbet, indicate that the sports
betting consumer base is highly price elastic, with 47 per cent of respondents indicating the
main reason for switching between wagering providers was the odds on offer. The second
most important reason for switching, noted by 27 per cent of respondents, was lack of
promotions and/or other offers.
2.2.3 Implications for consumer price elasticity
There are a number of factors which allow customers to be highly price sensitive when
selecting the wagering operator with which to place a bet:

low brand loyalty;

large number of competitive wagering operators;

low barriers to switching between domestic and overseas wagering providers; and

access to improved and convenient technologies such as smart phones and tablet
PCs.
The impact of the price sensitivity of sports betting consumers has been observed in
overseas markets where regulatory changes (high taxes) have ultimately influenced the odds
offered to consumers (Box 1) as wagering operators could not absorb the tax. Within
Australia, the sensitivity of consumers is currently reflected in comparatively low margins for
sports betting compared with racing products, as explored further in the following section.
17
Box 1: International example of sports betting consumer price elasticity
France
In May 2010, the French government chose to regulate the gambling sector by enacting Law
2010-476, which among other things, imposed a turnover based tax of 8.5 per cent on sports
betting and 7.4 per cent on racing. Additionally, the legislation limited payout ratios to 85 per
cent. As a result of the increased tax and limited payout ratios, wagering operators offered
lower odds to customers in order to preserve their margins. This highlighted the price
differential with other providers not based in France and customers followed the odds, which
resulted in a 24 per cent quarter on quarter reduction in gross win generated from sports
betting in 2011. A simple example below highlights the relative profitability of a regulated
local operator and an offshore operator in France under this regime, which highlights that
offshore operators can offer a higher payout ratio and therefore better odds to consumers,
yet all else being equal, maintain the same profitability as local operators.
Local Operator Offshore Operator
Turnover
Payout Ratio
Gross Win
Tax
Profit after Tax
100
85.0%
15.00
(8.50)
6.50
100
93.5%
6.50
6.50
To maintain profitability, wagering operators reduced their media advertising budgets by 58
per cent in 2011, which was further exacerbated by the fact that the majority of this
marketing expenditure was based on bonuses and sponsorship allocations.
As a result of the regulatory regime and the resulting declining margins, a number of
wagering operators incurred losses which forced a number of participants to exit the market,
including William Hill and Ladbrokes. It is widely speculated by industry participants that
wagering operators in France have still not found a sustainable operating model in order to
break-even, and it would therefore appear likely that further decline in the regulated
wagering industry will continue in France for the foreseeable future.
2.3 A ‘two-sided’ market
Two-sided markets emerge where the operations of one entity provide financial opportunities
for another entity. In this context, both entities have an interest in increasing the overall size
of the market.
Whilst historically, interest in sporting events has been independent of wagering, growth in
sports betting is inevitably likely to increase interest in viewing sporting events. To this end,
a clear two-sided market is emerging, which can already be observed in the racing industry:

Sporting codes will increasingly benefit from wagering as it increases viewing of
sports and potentially the rates they can charge sponsors of their events (by virtue of
both increased viewership of the sporting event and the demand created from the
wagering operators for advertising during relevant content programming), as well as
generating direct revenues to the sporting bodies through the levying of product
fees, which form part of the integrity agreements the sporting bodies have signed
with Australian licensed wagering operators (Refer Section 2.4).

Wagering operators in turn benefit from increased sports viewing because of its
impact on demand for wagering related to the event.
18
Demand for sports betting is highest for those sporting codes that attract significant public
interest and have a large spectator following, which in Australia is dominated by AFL and
NRL. The co-dependency of the wagering industry and the sporting event is, however,
unlikely to ever be as strong as that observed in the racing sector. As noted previously,
although sports betting shares some common features with racing wagering, betting is
generally a secondary reason for a person to follow sporting events, whereas wagering is
typically the primary reason for a person to follow racing. Racing is a gambling-based
activity and the industry is heavily reliant on betting proceeds for its existence.
Nevertheless, Australian licensed wagering operators have a strong interest in promoting the
sporting codes on which they offer betting markets. Reflecting this interest, wagering
operators provide significant financial support to the sporting codes. By supporting the
sporting codes with direct sponsorships, stadium contracts and fees to controlling bodies,
Australian licensed wagering operators contribute to the finances of the sporting codes and
their clubs. Additionally, significant volumes of advertising dollars are spent annually on
relevant content programming for the sporting codes in television, radio, print and online
media (Refer Section 3). In contrast, overseas wagering operators do not pay product fees
to the sporting codes and also do not advertise on relevant content programming or
otherwise support the sporting codes.
Equally, the sporting bodies have a strong interest in ensuring that regulated Australian
wagering continues to grow, so that it can continue to collect revenues from Australian
licensed wagering operators and charge higher fees to other event sponsors due to
increased interest and competition for advertising space and increased viewership of the
sporting event.
The sporting bodies also have a vested interest in ensuring that the continued growth in
sports betting stays with Australian licensed wagering operators to continue to protect the
integrity of the sporting code. This is explored in greater detail in Section 2.4, and continues
to be a high priority for all Australian sporting codes.
2.4 Issues of integrity in a ‘two-sided’ market
As a two-sided market, weaknesses in either sports betting or the sporting codes can have
significant negative implications for both sides of the market. For instance, the presence of
unregulated or unlicensed wagering operators, which operate with limited transparency or
oversight, can contribute to a context in which match-fixing is prevalent. This means that a
lack of integrity in sports betting can also contribute to a lack of integrity in associated
sporting codes.
A lack of integrity poses dangers for sporting codes, particularly if spectators come to believe
that outcomes are fixed, leading to a decline in spectator interest and numbers. In this
context, sporting codes are faced with both the additional costs of ‘policing’ their games and
10
the potential for a decline in sponsorships. The dangers for sporting codes caused by
unregulated sports betting providers is reflected in the challenges experienced most
prominently in cricket, as experienced recently in the Indian Premier League. In response to
concerns regarding match-fixing and sports integrity, on 10 June 2011, all Australian sports
ministers endorsed on behalf of their governments a National Policy on Match-Fixing in
Sport, with the aim of protecting the integrity of Australian sport. Whilst both the AFL and
NRL appear to already have strong integrity measures in place, which include integrity
agreements with Australia licensed wagering operators, there remains a substantial cost of
keeping such measures in place.
10
Altoona B (2011) ‘The effects of corruption on the Olympic Ideals and Sponsorship programmes’
19
Even ignoring the financial implications outlined in this report, there also remains a
substantial risk of losing the effectiveness of such integrity measures if betting is transferred
to unregulated offshore providers. The sporting codes would lose the transparency that is
currently available to them under the integrity agreements with Australian licensed wagering
operators, which allow investigation into irregular betting activity, betting accounts, and to
restrict certain bet types offered by wagering operators. Whilst a number of the offshore
wagering operators are large multinational businesses and are regulated and licensed in
other jurisdictions (eg. UK), if regulatory change spawns growth in offshore wagering, it could
be expected that unregulated offshore operators would increase in number, which would
have further negative implications for both consumers and the sporting codes.
Notwithstanding the integrity measures in place, both the AFL and NRL have experienced
their own challenges in relation to betting ‘plunges’ and wagers placed by players, which has
resulted in suspensions in both sporting codes. The CEO’s of both sporting codes have
made numerous public statements on the importance of protecting integrity in the sport, and
have taken a strong stance against breaches by players, coaches and officials. Most
recently, on 12 June 2012, the Coalition of Major Professional and Participation Sports
hosted a luncheon, with the CEOs of Australia’s major sporting codes also acknowledging
the risks posed by unregulated offshore wagering and the need to maintain an appropriate
integrity framework.
It would therefore appear to be in the sporting bodies’ interests to adopt a fee model that
would encourage consumers to place their bets through Australian licensed wagering
operators so as to protect and strengthen the integrity measures that are currently in place.
20
3 The economics of sports betting
This section analyses the revenues, related costs and marginal profits of wagering operators
in the sports betting sector. The analysis shows that sports betting is currently a very low
margin product even under the gross win based product fee model. If a turnover-based
product fee was introduced, the marginal profitability would be substantially reduced, which
is likely to trigger a review of the odds provided to consumers or a reduction in the costs of
providing the service. Given the elastic nature of demand for sports betting (with low
transaction costs for substitute products), the viability of a domestic product is likely to come
under short, medium and long-term threat.
3.1 Sports betting revenue and cost structure
The revenue and cost structures of providing a market for wagering on sports vary across
wagering operators and there is limited publicly available information specific to sports
betting. It is, however, widely accepted in the industry that the revenue (gross win) achieved
in sports betting is less, as a percentage of turnover, than that achieved on racing wagers.
3.1.1 Components of revenue and cost
The average revenue margin achieved varies across wagering operators depending on the
nature of the customer base and the markets offered. The cost structure will also vary,
depending on the markets offered, the focus on market growth (marketing and promotion
expenditures), the betting platform used, as well as fixed overhead costs.
For the purpose of our analysis, we have assumed that the average gross win margin
achieved on sports betting is approximately 5 per cent of total turnover, which is at the higher
end of what many wagering providers may be currently achieving (based on observable
public pricing of binary outcome markets). Consultations with industry participants have
indicated that smaller wagering operators are likely to be operating on a revenue or gross
win margin of less than 5 per cent.
The basic cost structure of a wagering provider is broken down as follows:

direct variable costs – vary in direct proportion to the turnover or revenue (gross win)
of the business, and include GST of 10 per cent of revenue, product fees (currently 5
per cent of gross win for sporting codes such as the NRL and AFL) and other direct
variable costs;

direct fixed costs – staff (traders) required to continually monitor and update the
available markets and fixed betting platform/IT costs;

other direct costs – predominantly discretionary expenditure but which has a direct
impact on revenues, such as advertising and promotional expenditure, and product
development and innovation; and

fixed overhead costs – includes the basic overhead costs required to operate a
wagering business including occupancy costs, staffing costs across the typical
corporate functions of finance, legal, risk, IT, call centre and general marketing/sales
and other costs such as utilities, licensing and webhosting.
For the purposes of our analysis, we have ignored the fixed overhead costs in order to focus
on the marginal profitability of sports wagering.
21
3.1.2 Alternative Product fee models
Looking to the racing industry for precedent fee models reveals that a variety of approaches
11
are in operation, depending on the jurisdiction and product. Whilst there is diversity in the
rates applied, there are two base fee models in operation:
 Fees based on Gross Win – The gross win model is based on taking a percentage of
the value to the wagering operator of the total amount of bets taken (turnover) less
winnings of the consumer. This is the current model applied by the majority of the
sporting codes (5 per cent of gross win) and is still being applied by some of the
racing bodies. Consistent with the findings of the Victorian Thoroughbred Wagering
Review, May 2011 and the Productivity Commission Inquiry Report, 26 February
2010, the advantage of this approach is not imposing high costs on low margin
operators, which has the benefit of:
o continuing to drive competition and therefore growth in the ‘two sided
market’;
o allowing domestic licensed wagering operators to remain competitive with
offshore operators;
o fostering product innovation, improved product delivery and customer
service; and
o favourable pricing outcomes for the consumer.
The wagering operators expect to make a profit under this fee model into the
foreseeable future without having to make significant changes to the existing
business model or cost structure.
 Fees based on Turnover – A turnover-based model is based on taking a percentage
of the value of all bets received by wagering operators. The advantage of the
turnover-based model is that there can be relatively greater certainty of outcome
(and generally higher revenues) to the sporting codes where the event and
associated wagering market is mature. This is the case, for example, in the racing
sector. The turnover-based approach, however, has a large negative impact on
wagering operators that take large volumes of bets at a low margin. This is one of
the models which may be considered by the NRL (1.5 per cent of turnover). As is
outlined further in Figure 6 below, a turnover-based product fee of 1.5 per cent of
turnover would exert a disproportionate impact on the relative margins of NRL
wagering compared to other sporting codes and racing (11 per cent vs. 52 per cent).
These two broad base models can be refined in terms of the rates applied such that there
are potentially an infinite number of agreements that could eventually be reached between
the NRL and wagering operators.
3.1.3 Profitability of sports wagering vs. wagering on racing
This section sets out a high level analysis of the profitability of wagering on sports for
wagering operators, compared to that of racing. The NRL is used as a case study sporting
body and corporate bookmakers as the case study wagering operator (as opposed to the
TAB or a betting exchange).
Figure 6 provides an estimate of the marginal revenue and cost structure from NRL wagering
services offered domestically in 2011, with two different estimates of product fees and net
margin depending on whether product fees are based on 5 per cent of gross win or 1.5 per
cent of turnover.
As shown in Figure 6, total gross win from NRL wagering services offered domestically has
been estimated at approximately $37 million in 2011 (total turnover is estimated at $750
million). Over the same period, NRL wagering operators incurred approximately $21 million
11
Refer to Victorian Thoroughbred Wagering Review, May 2011 for a detailed breakdown
22
in total direct costs and $2 million in product fees, thus leaving them with a net margin before
overheads of around $13 million, or 37 per cent of gross win. Under a scenario where
product fees are levied based on 1.5 per cent of total turnover, NRL wagering operators
would have faced much higher product fees of approximately $11 million, leaving them with
a net margin before overheads of only $4 million.
Figure 6: Total gross win and cost structure – NRL wagering (2011, $m)
Notes: CM = Contribution Margin
Source: Deloitte analysis of confidential Sportsbet data and interviews with industry participants
Under a turnover-based product fee regime, the wagering operators would achieve an
approximate 11 per cent contribution margin on gross win (revenue) before overheads
(compared to 52 per cent on racing, as estimated in Figure 7). Any reasonable allocation of
overheads, which has not been included in either scenario, would show that the NRL product
category would effectively be loss-making under a turnover-based product fee of 1.5 per
cent, and the marginal profitability relative to racing and other sports would be significantly
reduced.
23
Figure 7: Total revenue and cost structure – Race wagering (2010-11, $m)
Notes: CM = Contribution Margin before overheads
Source: Deloitte analysis of confidential information provided by Sportsbet and information contained within
As outlined in Figure 7, revenue from domestic race wagering services has been estimated
at approximately $1.8 billion in 2011. Although not shown in the figure, turnover during the
same period was $20.2 billion as reported by the Australian Racing Factbook, 2011.
Wagering operators incurred an estimated $568 million in total direct costs and $303 million
in product fees, leaving them with a net margin before overheads of $944 million, or 52 per
cent of revenue. When compared with NRL, wagering operators earn a much higher net
margin on racing, even under a turnover-based product fee regime, which is reflective of the
nature of bet types offered, the multiple outcomes on racing wagering (which inherently
increases margins) and the size of the industry overall.
A turnover-based product fee of 1.5 per cent on NRL wagering would reduce the marginal
profitability of the wagering operators to such a level that they could be expected to take
action in order to maintain their overall profitability, whether via a reduction in costs or
modifying the odds to achieve a greater initial margin. This is driven by the relatively small
size of NRL wagering, the lower win margins achieved on sports betting generally, and the
investment made by wagering operators in continuing to develop the emerging two sided
market. This suggests that it may not be appropriate to apply a product fee model applied in
the racing industry to the less mature sports betting industry.
In Section 3.2 we explore in greater detail how the wagering operators could be expected to
respond to an increased product fee based on turnover in light of the substitutability of the
NRL wagering product.
3.1.4 Profitability of AFL versus NRL sports betting
This section sets out a brief analysis of the profitability of wagering on AFL and NRL, as
highly substitutable wagering products, for wagering operators. Figure 8 provides a
comparison between the sporting codes of net margin before overheads under a gross win
and a turnover-based product fee regime. Given the broadly similar size of the AFL
wagering market, the relative profitability of AFL wagering is likely to be favoured by the
wagering operators and would be expected to be more heavily promoted, if a turnover-based
product fee regime were adopted by the NRL.
24
Figure 8: Estimated contribution margin before overheads by sporting code (2010-11, $m)
18
Contribution Margin ($ million)
16
14
12
10
8
Status Quo
17.0
1.5% Turnover
13.4
6
4
5.8
2
3.9
0
AFL
NRL
Source: Deloitte analysis of confidential information provided by Sportsbet and interviews with industry participants
Notably, in the above analysis, a product fee of 1.5 per cent of turnover would result in a
product fee 5 times greater than that based on the current model of 5 per cent of gross win
(for both AFL and NRL), and would result in a contribution margin of approximately 25 per
cent of that under the current product fee regime.
3.2 Implications of a marginally profitable,
substitutable product
The impact of a marginally profitable and substitutable product will inevitably trigger a range
of possible actions by the wagering operators, all of which, in different ways, will stagnate the
current rapid growth in the industry, and is likely to have a longer term detrimental effect on
the revenues generated by the sporting codes. As noted earlier, an overtaxed regime in
France, implemented in May 2010, triggered a range of responses by wagering operators
including a reduction in advertising expenditure by 58 per cent year-on-year, a number of
participants leaving the market altogether, and customers shifting to operators outside of
France. Taken together, these actions in response to the change in product fee models,
reduced quarter-on-quarter revenue by 24 per cent, with the full effect yet to be seen, as
wagering operators are still struggling to find an optimal operating model under the current
regime.
Given the relative profitability metrics, a shift to a 1.5 per cent turnover-based product fee in
the Australian sports betting market is likely to generate similar responses from the wagering
operators, which could include:

reducing controllable costs, such as advertising and promotion expenditure, which
comprises approximately 75 per cent of controllable expenditure or investments in
product development / innovation, diverting such expenditure to promoting wagering
on other sports and racing whether there are no product fees paid to the Australian
sporting bodies;

passing on the incremental cost to the customer via reduced odds, which as outlined
in Section 2.2 would be expected to have a detrimental impact on industry growth
given the high degree of consumer price elasticity;



absorbing the cost increases (i.e. ‘doing nothing’);
exiting the product category altogether; or
some combination of the above.
25
3.2.1 Overview of Marketing Expenditure
Our estimates, as outlined in Figure 9, indicate that investment from wagering operators on
AFL and NRL-related product was approximately $40 million, which includes direct
sponsorship of the relevant sporting body, its clubs and its stadiums; and television, radio,
print and other media promotional and advertising spend during relevant content
programming. Inclusive of product fees paid under the current regime of 5 per cent of gross
win, which is estimated at $4 million to $5 million across both sporting codes, we have
estimated that wagering operators in aggregate contribute close to $45 million annually to
specific AFL and NRL-related products. These estimates do not include the indirect impact
which the demand by wagering operators for advertising time inevitably has on the value of
media rights deals negotiated by the sporting codes.
Based on media reports and interviews with industry participants, we have estimated the
above amounts include direct sponsorship of the AFL and its clubs of approximately $3.5
million to $4 million and NRL-related bodies of approximately $2.5 million to $3 million.
Sportingbet and Centrebet have already publicly announced that they would have to
reconsider their respective sponsorship contracts in the event that a turnover-based product
fee was adopted.
Figure 9: Estimate of marketing expenditure, by type (2011, $m)
Source: Deloitte analysis of confidential information provided by Sportsbet, interviews with industry participants, and
publicly available information
Figure 9 provides a breakdown of marketing (advertising, promotional and sponsorship)
expenditure among all domestic sports betting providers, by promotion/sponsorship type. As
indicated, the majority of AFL and NRL-related promotions/sponsorships by domestic sports
betting operators relate to television, followed by mixed media campaigns and radio.
Whilst sponsorship contracts could potentially be replaced by third parties, the withdrawal of
sponsorship support by wagering operators is likely to significantly reduce the rates obtained
given the reduced overall competition for the sponsorship expenditure. No other industry
has such a strongly correlated ‘two sided’ market with the sporting codes and therefore it is
likely that the current rates achieved would not be obtained in the future, which would reduce
sponsorship dollars available to the clubs and the sporting codes themselves.
Further, a significant proportion of the relevant expenditure is also dedicated to television,
radio, print and online promotion and advertising on relevant content programming, which is
likely also to be replaced. However, as with the direct sponsorship, the withdrawal of
significant advertising expenditure by the wagering operators will significantly reduce
demand and may therefore potentially have longer term implications on the value of
broadcast and other associated rights not directly considered in our analysis.
26
4 Optimising outcomes for the
sporting codes: a gametheoretic analysis
This section presents a game-theoretic framework for analysing potential negotiations
between the NRL and the wagering operators in relation to the appropriate product fee
regime. We have analysed the options available using a game-theoretic framework because
of the nature of the ‘two-sided’ market that is present in sports betting. The analysis
indicates that both the NRL and wagering operators can achieve the maximum gain by
working together to reach a solution that does not require the wagering operators to either
significantly reduce costs or modify betting odds. This will in turn preserve the longer term
integrity of the industry by supporting the growth of Australian licensed wagering operators.
4.1 Framework for analysis: a game theory
approach
The recent High Court decisions have brought forward discussions between wagering
operators and the relevant sporting codes regarding the optimal long-term fee model
associated with wagering on the sporting event. This analysis considers the specific issues
in relation to NRL wagering.
With the NRL signalling that it is reviewing the fee model applied to wagering on its code, the
wagering operators and the NRL have inevitably found themselves in a bargaining situation,
which can be analysed using a simple game theoretic framework to determine the optimal
‘moves’ for each ‘player’ in the game.
All bargaining situations have two things in common:

Surplus Value to be gained — The total payoff the parties to the negotiation are
capable of creating and enjoying is greater than the sum of the individual payoffs
they could achieve separately. Without this excess value, or surplus, the negotiation
would be pointless. The division of the excess surplus between the parties is the
bargaining space. In this report, the surplus value to be shared among the NRL and
wagering operators is the growth in sports betting profit.

Not a Zero Sum Game — When a surplus exists, the negotiation is over how to
divide it between the parties. Each participant tries to get more for themselves and
leave less for others. This may appear to be zero-sum, but behind the negotiations
lies the risk that if an agreement is not reached, no one will get any surplus at all. In
this report, if the wagering operators or NRL do not reach an agreement that
supports the industry’s growth, both the NRL and wagering operators can expect to
be worse off.
This is the very essence of a two-sided market: by acting together there are gains to be
shared; but conversely, without coordination, the gains may be wholly lost to both players.
27
In the bargaining situation, each player pursues a set of actions, given their expectations of
the other player’s likely response actions and payoffs. This, in turn, results in an outcome to
the game, or what is referred to in game theory as ‘equilibrium’.
In this report, we have defined two fee models that could be potential ‘moves’ by the NRL;
these are:

The Status Quo — Maintain the current fee model based on 5 per cent of gross win

1.5% Turnover — Implement the proposed fee model of 1.5 per cent of turnover.
In response to these actions by the NRL, the wagering operators
12
can choose to:

Do nothing — that is, maintain current odds and levels of promotional expenditure
and absorb the implemented fee model

Reduce the odds offered to consumers — to reflect the higher fees charged by
sporting codes

Reallocate marketing expenditure – that is, from NRL wagering products to other
more profitable sports betting products, such as AFL wagering and racing (which is
likely in the case of NRL wagering consumers to be racing in NSW)

Do both —reduce the odds offered to consumers and reduce controllable costs

Exit the industry – that is, not offer NRL wagering product
The payoffs to each player are based on the present value of future cash flow outcomes over
a 5 year-horizon plus a Terminal Value estimate based on projected long term growth rates
(which for the purpose of this analysis is represented as projected growth in household
disposable income).

For the NRL, this is the present value of product fee revenues. In the Status Quo
fee model, this would be based on 5 per cent of gross in revenue. In the turnover
based product fee model this is based on 1.5 per cent of turnover.

For wagering operators, the payoff is the present value of contribution margins
across all sports betting products, with a specific focus on AFL as the primary
substitutable product. Accordingly, the analysis below highlights the total payoff to
wagering operators across both the NRL and AFL.
The estimates of payoffs presented in this section are based on Deloitte analysis of
modelling undertaken by Sportsbet and industry participants under alternative fee model
scenarios (refer Attachment A).
Game theory indicates that a rational player, in this case the NRL, in considering the optimal
product fee model, will evaluate the payoffs they can receive given the likely responses of
the wagering industry to a particular proposed fee model. Importantly, the NRL does not
have the ability to simply select the option which maximises their payoff because their payoff
is dependent upon the response from the wagering operators. The wagering operators are
likely to respond in such a manner that maximises their total payoff across both the NRL and
AFL products, which may not necessarily be the option that maximises their payoff on NRL
products. The NRL will therefore select a fee model that maximises their payoff but having
regard to the likely responses of the wagering industry.
12
The wagering industry is comprised of a range of companies, each with their own levels of profitability and
corporate strategy. It is therefore likely that there will be a range of responses by different wagering providers; they
won’t all necessarily do the same thing, because they can potentially gain from acting in the market against each
other as well. The industry would likely go through a phase of consolidation, and intra-industry developments over
time would be complex. This analysis has simplified these individual players into a single ‘player’ for the purpose of
evaluating the macro outcomes for the sporting codes and the wagering operators, as in the short term we would
generally expect that the parties act on a similar basis to maintain profitability.
28
4.2 Expectations for NRL wagering growth and
payoffs under the status quo fee model
Recent data shows that NRL wagering has grown above the CAGR for the wider sports
betting industry, at a CAGR of 20 per cent compared with the sports betting industry average
of 13 per cent over the last seven years as noted in Figure 1 earlier in this report. Consistent
with global industry trends, it would be expected a growth rate of at least 13 per cent, if not
higher given the strong online growth rates, would continue into the medium term, delivering
a positive stream of profits to the wagering operators under the current status quo (gross
win) fee model if there were no change to the odds offered or marketing expenditure.
High level analysis of future turnover and revenue growth developed by Sportsbet and
industry participants (refer Appendix A for further details on methodology) indicates that if the
industry continues with the existing product fee model, and maintains current levels of
marketing spend and odds, and all other factors are equal, total turnover would be expected
to grow from roughly $750 million today to almost $1.5 billion in 5 years’ time.
$ Millions
Figure 10: NRL wagering turnover projections - status quo fee model (5% gross win)
1,600
1,400
1,200
1,000
800
600
400
200
2012
2013
2014
2015
2016
Source: Deloitte analysis of Sportsbet industry modelling and interviews with industry participants
Table 1: Payoff Outcome summary – status quo fee model (5% gross win)
Wagering Operator Response
Do
Nothing
Reallocate
marketing
Reduce
odds
Do Both
Total Payoff to Wagering Operators (NPV10% )*
$960m
N/A
N/A
N/A
Payoff to NRL/AFL (NPV10% )
$89m
N/A
N/A
N/A
Payoff to Wagering Operators – NRL only (NPV10% )
$455m
N/A
N/A
N/A
Payoff to NRL (NPV10% )
$40m
N/A
N/A
N/A
*Represents total potential payoff across both the AFL (as the primary substitutable product) and NRL
Source: Deloitte analysis of Sportsbet industry modelling
Industry modelling shows that if the wagering providers were to “Change Odds”, “Reallocate
Marketing” or “Do Both” in the status quo fee model, that they would reduce their total
payoffs compared with “Do Nothing”. Therefore if the NRL maintains the status quo fee
model, it would be expected that the wagering providers would respond by “Doing Nothing”’
in order to maximise their own payoff, therefore all other ‘options’, for simplicity, are shown in
Table 1 as N/A. The maximum payoff to the NRL under would therefore be expected to be
$40 million in present value terms.
29
4.3 Expectations for NRL wagering growth and
payoffs under a turnover-based fee model
If a turnover-based product fee of 1.5 per cent is applied, it is expected that the NRL
wagering product would become a significantly less profitable or even unprofitable product
(Refer Section 3). Wagering providers would seek to redress the situation using the actions
outlined above in order to preserve profitability, which would contribute to a significant
decline in turnover compared with the status quo fee model (Refer Appendix A for
assumptions in industry modelling under different product fee scenarios). Expectations for
future turnover growth under the “Change Odds”, “Reallocate Marketing” and “Do Both”
scenarios are shown in Figure 11, which also provides a comparison against projected
industry growth under a status quo fee model (on the basis that “Do Nothing” under a 1.5 per
cent turnover-based product fee model is not considered a viable alternative as outlined
further below). The reductions in turnover would also translate into lower gross win
revenues and margins to the wagering operators.
Figure 11: NRL wagering turnover projections – 1.5% turnover based fee model
$ Millions
1,600
1,400
1,200
1,000
800
600
400
200
2012
Do Nothing
2013
Reallocate Marketing
2014
Reduce Odds
2015
2016
Do Both
Source: Deloitte analysis of Sportsbet industry modelling and interviews with industry participants.
Note: “Do Nothing” represents turnover projected under a gross win based model for comparison only
In light of the reductions in turnover and gross win revenue under a 1.5 per cent turnover
based product fee regime, the wagering operators will be incentivised to pursue the option
that will maximise their total payoff across all relevant substitutable products. As outlined in
Table 2 on the following page, the total payoff to wagering operators is maximised under a
“Do Both” scenario, where marketing expenditure is reallocated and where odds are
reduced. We would expect that the wagering operators would always take some form of
action, because given the marginal profitability of the NRL product, taking no corrective
action is clearly not going to maximise their own payoff. Accordingly, the option of ‘Do
Nothing’ is shown in Table 2 as N/A. The other theoretical payoffs to the NRL (‘Reallocate
marketing’ and ‘Reduce odds’), which are included in the shaded boxes have been shown
for comparison purposes, but importantly, the NRL does not have the ability to simply select
the option which maximises their payoff because their payoff is dependent upon the
response from the wagering operators. The wagering operators are likely to respond in a
manner that maximises their total payoff, which is shown in Table 2 and explored in further
detail below.
30
Table 2: Payoff Outcome summary – 1.5% turnover based fee model
Do
Nothing
Reallocate
marketing
Reduce
odds
Do Both
N/A
$654m
$686m
$887m
N/A
$139m
$117m
$107m
N/A
$68m
$23m
$72m
N/A
$74m
$59m
$29m
The following sections detail the drivers of industry growth trends under alternative
responses to a proposed 1.5 per cent turnover-based product fee. The modelling suggests
that the ‘winners’ under all three of the scenarios would likely by the AFL, NSW racing and
offshore providers, which would be expected to gain some of the market share that would
have otherwise been wagered on NRL products (but which is not necessarily due to the
relative reduction in the appeal of wagering on the NRL). Due to the relatively high
substitutability of AFL and NSW racing wagers for NRL wagers (Sportsbet data indicates that
of those who wager on NRL, 60 per cent also wager on AFL and 78 per cent wager on NSW
racing), and competition from offshore wagering providers, demand that would have been
captured by NRL products would likely migrate to AFL products and/or offshore providers.
Growth in AFL wagering, in particular, is expected by industry participants to be in excess of
$2.5 billion in 5 years’ time, if the NRL were to adopt a 1.5 per cent turnover based product
fee. This would represent a growth rate of 24 per cent, which is significantly in excess of the
13 per cent growth rate for sports betting overall, reflecting the shift in wagering activity away
from the NRL to the AFL.
4.3.1 Wagering Operator Response: “Reallocate marketing”
Industry modelling estimates that reducing marketing expenditure on NRL (and transferring
the expenditure to promote AFL or racing) product categories would drive an increase in
customer churn and a loss of 'less sophisticated' customers. More sophisticated consumers
that gamble regularly and place bets based on price are unlikely to be as affected by
reductions in advertising and promotion. Overall, this would be expected to lead to reduced
turnover and significantly declining gross win margins as the churn continues over time.
From the wagering providers’ perspective, whilst turnover from NRL products would be
expected to decline, turnover for AFL wagering would be expected to increase (although the
modelling assumes there would be limits to the growth potential for AFL wagering in
response to increased advertising spend). The potential payoff to wagering providers,
therefore, across both sporting codes would be $654 million in present value terms. This
would not represent the profit maximising alternative, so wagering operators are not likely to
pursue this course of action on a stand-alone basis. The theoretical payoff to the NRL under
this scenario would be $74 million in present value terms.
4.3.2 Wagering Operator Response: “Reduce odds”
Reducing the odds offered to customers would be a strategy to pass on the cost of higher
fees associated with the turnover-based model. The model predicts that this strategy would
drive a similar increase in customer churn and significantly less new customer ‘acquisitions’
as the “reallocate marketing” scenario. Because the cost of the product to customers has
increased, however, the customers that are churning away would also include the regular
31
gamblers that are more price-sensitive. Accordingly, turnover is expected to fall faster than
in the “reallocate marketing” scenario. A significant portion of these price-sensitive
consumers would be expected to migrate to offshore wagering operators who do not pay any
product fees.
From the wagering providers’ perspective, turnover from NRL wagering would be expected
to slow significantly as a significant proportion of customers would migrate to AFL wagering,
other products (such as NSW racing) and/or move to offshore providers. The wagering
providers would receive a potential payoff of $686 million in present value terms if they
pursued this strategy. However, this would still not represent the profit maximising
alternative, so wagering operators are also not likely to pursue this course of action on a
stand-alone basis. The theoretical payoff to the NRL is therefore estimated at $59 million in
present value terms, reflecting a reduction from the “reallocate marketing” scenario due to
the strong price sensitivity of consumers in the sports betting market.
4.3.3 Wagering Operator Response: “Do Both”
The combination of the above two strategies would result in the highest rates of customer
churn, and greatest reductions in turnover (driven by reducing bet size and frequency),
leading to overall fastest decline in industry turnover. If the wagering providers pursued this
strategy, this would yield a total potential payoff of $887 million in present value terms to the
wagering providers. Turnover from NRL wagering would be expected to decline the greatest
in this scenario, but the net effect of growth in AFL wagering and reduced marketing
expenditure maximises the net total return available to the wagering operators. The payoff
to the NRL is projected to be $29 million in present value terms, reflecting the compound
effect, on turnover, of reduced marketing expenditure and reduced odds.
Comparing the payoffs across the three potential actions in response to the application of a
turnover-based product fee model indicates that the “Do Both” strategy represents the profit
maximising option for the wagering operators and is therefore considered the most likely
course of action to be adopted. From the NRL’s perspective, this would be a significantly
worse payoff than would be projected under the status quo scenario, where industry turnover
(and gross win) is expected to grow significantly, also increasing product fees.
4.3.4 Implications on NRL product fees
Figure 12 shows the projected product fee revenues to the NRL under both a status quo
(gross win) fee model and a turnover-based product fee model given the most likely selected
potential industry actions that could occur. The wagering operators maximise their payoffs in
the “Do Both” scenario, which as shown in Figure 12, results in significantly reduced product
fee revenues over time, as turnover continues to decline.
$ Millions
Figure 12: 5 year product fee projections under selected fee model and most likely industry response
$10
$9
$8
$7
$6
$5
$4
$3
$2
$1
$0
Status Quo - Do Nothing
1.5% Turnover - Do Both
2012
2013
2014
2015
2016
Source: Deloitte analysis of Sportsbet industry modelling and interviews with industry participants
32
As a result of the declining product fees over time, as highlighted in Figure 12, and as
highlighted in Table 2 earlier in this report, the payoff in present value terms in the “Do Both”
scenario would be significantly less than the payoff in a “Status Quo/Do Nothing” scenario.
The payoff to the NRL therefore, if a 1.5 per cent turnover-based product fee model were
adopted would be $29 million in present value terms, compared with a payoff of $40 million
in present value terms if the status quo fee model were maintained. The $11 million
differential is driven predominantly by significantly reduced product fees in future years.
4.4 Game equilibrium and implications for
product fee model negotiations
The analysis suggests that if a turnover-based product fee model is introduced the industry
will respond by both changing odds and reallocating marketing expenditure to substitutable
and more profitable products (“Do Both”). Therefore the NRL’s best option given the
expected industry response to the alternative fee models, would be to either maintain the
current fee model (the status quo) or seek to negotiate a compromise agreement with the
wagering operators that would not result in a change to the odds on offer or marketing
expenditure, thereby maintaining and maximising current levels of industry growth.
As shown in Table 3, under a status quo fee model, the NRL is projected to receive payoffs
of $40 million in present value terms, compared with payoffs of $29 million in present value
terms under a 1.5 per cent turnover-based fee model (given expected industry response).
The other theoretical payoffs to the NRL (‘Reallocate marketing’ and ‘Reduce odds’), which
are included in the shaded boxes have been shown for comparison purposes, but
importantly, the NRL does not have the ability to simply select the option which maximises
their payoff because their payoff is dependent upon the response from the wagering
operators. The wagering operators are likely to respond in a manner that maximises their
total payoff, which is the ‘Do Both’ scenario.
Table 3: Payoff Outcome summary
Do
Nothing
Reallocate
marketing
Reduce
odds
Do Both
$960m
N/A
N/A
N/A
$89m
N/A
N/A
N/A
$455m
N/A
N/A
N/A
$40m
N/A
N/A
N/A
N/A
$654m
$686m
$887m
N/A
$139m
$117m
$107m
N/A
$68m
$23m
$72m
N/A
$74m
$59m
$29m
Fee Model adopted by NRL
Status Quo (5% Gross Win)
1.5% Turnover
33
The above analysis demonstrates that it is in the financial interest of the NRL to consider
alternative fee models to the suggested 1.5 per cent turnover-based product fee that would
not trigger the wagering operators to modify the odds on offer or reduce mutually beneficial
marketing expenditure.
If an alternative agreement were negotiated, the wagering providers clearly have a
preference for a gross win based model, as it enables the industry to mature and continue
the current growth patterns being exhibited. Wagering providers are continually incentivised
to develop and support new products and markets which would be expected to drive
continued rapid growth in the industry and would continue to benefit both the sporting codes
and the wagering operators.
Moreover, given the immaturity of the sports betting industry (relative to racing), the
preferred base model over the longer term is a gross win based model as opposed to a
turnover-based model. A gross win based fee model would continue to encourage
innovation and industry development, which would be expected to drive revenue growth in
the medium term and would maintain the integrity of the sporting codes.
Additionally, if legislative amendments were made to the IGA that allowed online ‘betting in
the run’, it would be expected that turnover of the wagering operators would increase even
more significantly, although margins may decline accordingly. The modelling prepared for
this analysis do not consider the incremental revenue impact from online ‘betting in the run’,
which would be expected to further increase revenue opportunities available to both the
sporting codes and the wagering operators. Under such a change in legislation, a turnoverbased product fee regime would result in an even higher disproportionate product fee being
paid.
34
5 Conclusions
Whilst a turnover-based model has now been adopted in NSW and at least temporarily in
Victoria in the racing industry, the margins and costs on racing products are significantly
different from those of the NRL, as is the total size of the market. Adopting a turnover-based
model on NRL products is likely to trigger reactions from the wagering operators that would
stagnate growth in NRL wagering as more profitable, substitutable products are promoted.
This may also have broader implications for the value of broadcast licences and advertising
rates as the competitive forces (and viewership) may be reduced as wagering growth
stagnates (which is not considered in this report).
Such a response would also naturally push a significant amount of NRL wagering to offshore
operators. To the extent consumers migrate to overseas wagering operators, this represents
not only a significant risk to the integrity of the relevant sporting codes, but also a significant
financial risk, as the overseas wagering operators do not contribute to product fees or taxes.
Moreover, having regard to the analysis and commentary contained in this paper, we
therefore believe that it is in the NRL’s interest to preserve a gross win based product fee
model with the wagering operators. Given the competitive forces at play, we believe the
percentage applied would be expected to be higher than the current status quo; however, it
should be set at such a rate that would not necessitate corrective action from the wagering
operators to maintain profitability.
The analysis suggests that it is in the interests of both the Australian licensed wagering
operators and the sporting codes to maintain a competitive, innovative wagering product that
will maximise returns to both sides, prevent consumers from migrating to unregulated
offshore wagering operators, whilst protecting the integrity and long term financial viability of
product fees and other revenue streams contributed by Australian licensed wagering
operators.
A gross win based product fee regime would also be consistent with regimes adopted in a
number of jurisdictions globally where sports betting and the related ‘two sided’ markets
have continued to thrive, is consistent with the recommendations of the Productivity
Commission, and notwithstanding the differences between racing wagering, is consistent
with comments made by the CEO of Racing Victoria, Rob Hines, who recently indicated that,
“We still believe that the best result for thoroughbred racing nationally is a gross revenue
model”. He also commented that, “…the corporates and Betfair would probably have
abandoned focussing on racing in NSW and focussed on racing in Victoria”, which is
consistent with the courses of action suggested in our analysis in relation to sports betting.
35
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36
Appendix A: Overview of
Industry Growth Modelling
Methodology
High level modelling was undertaken by the Sportsbet to evaluate the likely trends in
turnover growth under alternative levels of promotional spend and odds offerings for both
NRL and AFL product categories for the purpose of payoff analysis undertaken by Deloitte.
Figure 13 shows a schematic of the modelling methodology, which is comprised of three
modules: an NRL module, an AFL module and an off-shore wagering operator module.
Based on industry data since 2008, when advertising restrictions on Australian licensed
wagering operators were lifted, the model projects turnover by product category, gross win,
cost and profit expectations over a 5-year period and incorporates a terminal value estimate
based on long term market expectations from Year 5, which are broadly projected to flatten
out to be consistent with annual increases in household disposable income. Critically, the
model assumes, based on available industry data, the relationship between demand
(turnover and gross win) for NRL wagering, AFL wagering, and offshore wagering providers
is directly related marketing expenditure and odds offered to consumers.
Figure 13: High level modelling overview
37
Changing the level of marketing spend, odds offered or both, however, is projected to
diminish growth in demand for NRL wagering. Due to the high substitutability of AFL wagers
for NRL wagers, and competition from off-shore wagering providers, demand that would
have been captured by NRL products would likely migrate to AFL products and/or offshore
providers.

Reallocating marketing expenditure on NRL (and transferring into AFL product
categories) has the following key impacts on the modelling:

Drives an increase in NRL customer churn, and loss of 'less sophisticated'
customers. More sophisticated customers that gamble regularly and place
bets based on price are unlikely to be as affected by reductions in
advertising and promotion.

Overall, this would be expected to lead to:

a higher average NRL bet size,

lower NRL bet frequency, and

significantly declining NRL gross win margins,
which have been incorporated into the model and result in significantly
reduced turnover.


The model also assumes there is a saturation point for growth in the AFL
market, however; as a consequence there are diminishing returns from
increased marketing expenditure over time.
Reducing odds on NRL products has the following key impacts on the modelling:

Drives a similar increase in customer churn and loss of new acquisitions as
in the ‘reallocate marketing’ scenario, but because the cost of the product to
customers has increased. The customers that are churning away, however,
would also include the regular gamblers that are more price sensitive.

Overall, this would be expected to lead to:

a reduced average bet size (in contrast to the reduced marketing
scenario where there would continue to be some demand from the
more sophisticated punter customer segment), and

a reduction in the bet frequency.
Together, total turnover would be expected to fall faster than in a reduced
marketing scenario, but still with a high cost base -- which means the
product would operate at near to zero profitability or possibly a continued
loss-making position.

Reducing both odds and marketing expenditure on NRL products (and reallocating
into AFL product categories) has the following key impacts on the modelling:

Highest rates of customer churn reflecting the compounding effect of the
above options, driven by reduced bet size and frequency

As above, the major winner would be the AFL and off-shore providers, which
would be expected to pick up some of the market share that would have
gone to the NRL. The model does assume, however, that there is a
saturation point for growth in the AFL market and as a consequence there
are diminishing returns from increased marketing expenditure over time.
38
39
Statement of Responsibility
This report was prepared for Sportsbet Pty Limited to analyse alternative product fee models for Australian sporting bodies.
In preparing this report we have relied on the accuracy and completeness of the information provided to us by Sportsbet, provided in
interviews with other industry participants, and from publicly available sources. We have not audited or otherwise verified the
accuracy or completeness of the information.
No party, other than Sportsbet, is entitled to rely on this report for any purpose. We do not accept or assume any responsibility to
anyone other than Sportsbet in respect of our work or this report.
About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of
member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed
description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.
Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With
a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality
service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s approximately
195,000 professionals are committed to becoming the standard of excellence.
About Deloitte Australia
In Australia, the member firm is the Australian partnership of Deloitte Touche Tohmatsu. As one of Australia’s leading professional
services firms, Deloitte Touche Tohmatsu and its affiliates provide audit, tax, consulting, and financial advisory services through
approximately 6,000 people across the country. Focused on the creation of value and growth, and known as an employer of choice
for innovative human resources programs, we are dedicated to helping our clients and our people excel. For more information,
please visit Deloitte’s web site at www.deloitte.com.au.
Liability limited by a scheme approved under Professional Standards Legislation.
Member of Deloitte Touche Tohmatsu Limited

Proposal for - Australian Wagering Council

Transcription

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