The stakes are high in bookmaking's staying test, writes Colin Kruger.
Australia is gearing up for its biggest collective punt of the year on Tuesday's Melbourne Cup, but the biggest bets have already been laid on the other side of the table.
British betting shops have splashed out a small fortune on local bookmakers such as Sportsbet, Centrebet and Tom Waterhouse, wagering that the creative destruction of the digital revolution will drive billions of dollars in bets to their patch of online turf.
As for the Melbourne Cup itself, the status quo appears to be holding, for now. Tabcorp keenly reminded its investors this week that when it comes to a punt on the big day, it effectively owns the race.
"Melbourne Cup day really showcases Tabcorp's leadership in Australian wagering," chairman Paula Dwyer told investors.
Its research shows that 74 per cent of people who bet on the cup in NSW and Victoria do so with the company. As the betting frenzy hits its peak on Tuesday, the gambling group will process 2000 transactions a second.
But Tabcorp only needs to speak to one of its most controversial rivals to learn how quickly the ground can shift. Tom Waterhouse describes the glory days of 2008 when his business - trackside at Flemington, and over the phone lines - held bets worth more than $20 million over the four big days of Victoria's spring racing carnival.
"We could get $500,000 on the favourite on Derby day," he told Fairfax Media.
The favourite on Derby day 2009 attracted bets worth $7000. .
"Within one year it completely dried up," he says. "When that happened it was very clear there was a shift to online, and the advertising laws changed, and the market dynamics changed. A lot of overseas entrants came into the market."
The next year tomwaterhouse.com launched an aggressive marketing campaign that eventually triggered community and political opposition and led to curbs on betting promotions during sports broadcasts.
Waterhouse's business plan stuck to the template for online bookmakers; what had happened to his traditional bookie business would soon happen to the traditional state TAB businesses run by Tatts and Tabcorp. The online bookies were planning to rip the soft underbelly out of these traditional totes, which still account for $16 billion of the $23 billion wagered in this country every year.
"The opportunity is the TAB market," Waterhouse says. "From an online betting perspective we can offer far better pricing, and better technology and ease of use, and a better customer experience, and that was the opportunity."
Waterhouse is now an employee of British bookmaker William Hill following the acquisition of his company in August. His new boss at William Hill, the colourful Ralph Topping, has also made it clear he sees the TABs as ripe for the picking.
"Unless these guys wise up they are going to lose," Topping said soon after acquiring the Waterhouse business. "So I say to them, 'Get used to it and get with the program'."
Topping has effectively bet up to $770 million of William Hill's money on succeeding in a ferociously competitive market.
The bookies are targeting the mass migration of customers as a point of vulnerability for the totes. In simple terms, punters' preferences for both channel and product are changing rapidly.
"In terms of channel-mix shift, retail continues to lose share to digital, while in product, fixed-odds betting is growing as tote betting declines further," RBS Morgans says.
RBS is not the only analyst predicting a harsh future for the traditional totes due to this change in channel and product mix, along with the arrival of sophisticated digital competition.
"I think 2014 and 2015 will be big years for the wagering sector - I suspect the shift to corporate bookmakers will be faster and more aggressive than people assume," CIMB's Killian Murphy says. "The offering of more product at a better price is a tried strategy that catapulted a small Irish bookmaker with no brand recognition in the UK to a market-leading position in the UK market in a few years - this not is a hypothetical theory of how to win market share, it's a proven strategy."
The small Irish bookmaker was Paddy Power and its acquisition of Sportsbet for $340 million makes it one of the biggest online bookies in Australia. It recently signed a deal to replace Tom Waterhouse as the betting face of Nine's NRL coverage for a reported $40 million over four years.
Tabcorp chief executive David Attenborough, who understands the British threat well having cut his teeth with Ladbrokes, says Topping's reversal over replacing its local brands with William Hill could be a recognition of the tough fight ahead.
"I think that's an indication of how competitive this market is, and how difficult it would be to build a new brand in this market," he says.
Tabcorp enjoys a domination in wagering that stretches from the traditional tote to smartphones. The wagering group has 55 per cent of the wagering market, and a third of the smartphone business, from which it generates $3 billion in turnover. Smartphones now account for more than 50 per cent of Tabcorp's digital sales.
"We are by far the biggest bookmaker on the fixed-odds side," Attenborough says."We are absolutely focused at getting better and better at what we do digitally, because that is where the pointy end is, that is where the challenges are coming from.
"The world is moving very fast and companies that don't move will become digital road kill."
The takeover of the independent bookies by large British operators will give these betting shops a depth of product, and service sophistication, but it also brings a healthy focus on the need for a return on their investments.
The British bookmakers are not just being driven here by the view that Australia's gambling market is such a great opportunity. A foothold in a well-developed and well-regulated market such as that of Australia is a harsh necessity for these operators, which face a 15 per cent point-of-consumption tax on their operations at home. The level of competition means this cost has to be swallowed rather than passed on to customers via betting odds.
Expansion into markets such as Australia's is the only hope of regaining ground financially. It is also a good way to leverage the massive investment they have made in developing betting products and technology that tailors marketing to each customer.
Attenborough says this drive for yields is evident in the numbers from some of William Hill's local betting shops, Sportingbet and Centrebet, which reported a rise in revenues but falls in betting turnover as the bookies avoided riskier bets. "We now see ourselves competing against very rational competitors who have been in the game a long time," he says.
While the competition is becoming more rational, there is no doubt someone will have to lose in a market that - despite all the hype about sports betting - is not growing at a rate that much faster than inflation.
"There's very little evidence to suggest the wagering population is growing, all we are really talking about is a channel shift [from offline to online]," says Sportsbet marketing director Barni Evans.
Waterhouse concurs: "In Australia, it's not that sport is not the focus of a lot of people .. but the problem in terms of wagering operators is that there is far more product in racing. Every day you've got 40 races in Australia, you've got dogs, trots, and overseas racing. If you follow AFL, for eight months of the year you've got eight games, 10 games a week. There isn't the quantity of product."
Tabcorp recently put the growth of the overall wagering market at 4.1 per cent over the last five years.
"You are looking at a market that is just growing north of CPI overall, and that's what you'd expect," Attenborough says. "This is a discretionary-spend market and it grows with discretionary spend, unless there is a fundamental shift from one [gambling] market to another."
Such a shift in gambling spend - away from other products to wagering - might be at hand as the digital migration of gambling reaches its ultimate destination, smartphones. Citi says mobiles will ultimately deliver the winners in this sector a larger share of the gambling wallet, much as the industry experienced when wagering started migrating online more than a decade ago.
Citi analyst Michael Goltsman says mobiles give gamblers an accessibility to wagering casinos and pokies do not enjoy. According to Goltsman, the effect on wagering turnover will be similar to its growth in the early stages of internet adoption, which lifted wagering's share of the gambling wallet from 12 per cent in 2001 to 15 per cent in 2012.
Mobiles also make customers stickier to their favoured operators. Citi says that when combined with personally tailored services offered via sophisticated systems, it "may alleviate the pressure from the aggressive advertising by corporate bookmakers".
The upside for operators is potentially substantial, with turnover per head in Australia 40 per cent below that of Britain, according to Citi.
One of the undoubted advantages of mobiles is having access to the punter 24 hours a day, seven days a week, whenever the gambling itch needs to be scratched.
"Early evidence from mobile punters suggests more impulsive decision-making which will underpin revenues," Citi says.
Evidence of this impulsiveness is showing up elsewhere. In a submission to the parliamentary inquiry into advertising and promotion of gambling services in sport, the University of Sydney Gambling Treatment Clinic said: "Sports betting clients are continuing to constitute a minority of our clients, but they are a fast growing minority."
One issue identified as being particularly problematic in recent times is the use of mobile phone applications: "The use of mobile phone applications [apps] is another area of concern that has grown dramatically since our previous submission," the clinic says. "Clients are able to place bets at any time in any location ... clients also report that given the ease with which they are able to place bets via this method without having to re-enter their credit card details, means that it is often difficult to keep track of their current losses, increasing the likelihood of larger debts being created."