Corporate bookmakers have stepped up the tempo in the battle for the punter's dollar,writes Colin Kruger.
Australia is gearing up for its biggest collective punt of the year with 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 of bets to their patches of online turf.
For the Melbourne Cup itself, the status quo looks to be holding, for now. Tabcorp keenly reminded its investors this week that when it came to a punt on the big day, it effectively owned 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, Tabcorp will be processing 2000 transactions per second.
But Tabcorp needs only to speak to one of its most controversial rivals to find out how quickly the ground can shift beneath your feet.
Tom Waterhouse describes the glory days of 2008 when his business - trackside at Flemington, and over the phone lines - held more than $20 million in bets over the four big days of the spring racing carnival.
"We could get $500,000 on the favourite on derby day," he said. "Within one year it completely dried up."
The favourite on derby day 2009 attracted just $7000 in bets.
"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," Waterhouse said.
The following 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 the country every year.
"The opportunity is the TAB market," says Waterhouse. "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 since 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. So, I say to them, 'Get used to it and get with the program'," Topping said soon after acquiring the Waterhouse business.
Topping has effectively bet up to $770 million of William Hill's money on succeeding in a ferociously competitive market.
The bookies have their eye on the mass migration of customers as a point of vulnerability for the totes. In simple terms, the punters' preference 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," says RBS Morgans.
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," says CIMB's Killian Murphy.
"The offering of more product at a better price is a tested 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 is not 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 another British betting shop, Ladbrokes, says Topping's backflip on replacing its local brands with William Hill may 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," Attenborough says.
But the wagering group has not been caught napping while its traditional tote business is under threat, and has established a domination of wagering that stretches from the traditional tote to smartphones.
Tabcorp 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 half of Tabcorp's digital sales.
"We are by far the biggest bookmaker on the fixed-odds side," says Attenborough.
"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, that the likes of Tom Waterhouse could not hope to match as an independent operator, but it also brings into healthy focus 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 like 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 the bookmakers have to swallow this cost rather than passing it on to customers via betting odds.
Expansion into markets such as Australia is the only hope of regaining ground financially. It is also a good way to leverage the huge investment they have made in developing betting products, and in the technology which tailors marketing to each customer.
Attenborough says this drive for yields is evident in the financial numbers which some of William Hill's local betting shops are reporting: Sportingbet and Centrebet reported a rise in revenues but a fall 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 that someone will have to lose in a market that - despite all the hype around 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.
Tom Waterhouse, the man who created so much of the controversy, 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," he says.
Tabcorp recently put the overall wagering market's growth at 4.1 per cent over the past five years.
"You are looking at a market that is just growing north of CPI overall, and that's what you'd expect," says Attenborough.
"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 - may be at hand as the digital migration of gambling reaches its ultimate destination: smartphones.
Citigroup says mobiles will ultimately deliver the winners in this sector a larger share of the gambling wallet, much like what the industry experienced when wagering started migrating online more than a decade ago.
Citi's Michael Goltsman says mobile phones give gamblers an accessibility to wagering that is not enjoyed by casinos and poker machines.
According to Goltsman, the effect on wagering turnover will be similar to its growth during 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. When combined with personally tailored services offered via sophisticated customer-relationship management systems, it "may alleviate the pressure from the aggressive advertising by corporate bookmakers", says Citi.
The upside for operators is potentially substantial, with turnover per head in Australia 40 per cent below Britain's, according to Citi.
One of the undoubted advantages of mobiles is having access to the punter 24 hours a day, seven days a week.
"Early evidence from mobile punters suggests more impulsive decision-making, which will underpin revenues," says Citi.
Evidence of this impulsiveness is showing up elsewhere.
In a submission to the Joint Select Committee on Gambling Reform 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 recently identified as particularly problematic is the use of mobile phone apps: "The use of mobile phone applications [or 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."