Significant Issues Facing Wagering Industry

[Chief Stipe]

TopSport boss Q+A: ‘Significant concerns' for wagering industry

 

 

By Adam Dobbin
11:59am • 04 March 2024

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In the first of a series of interviews, TopSport's CEO Tristan Merlehan answers a range of questions about the current state of the Australian wagering industry.

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AD: As a bookmaker you understand the racing ecosystem as well as anyone, in your words, what is the biggest issue facing the industry at present?

TM: Currently our biggest issue is the various taxation models which have been ratcheted up over the last 5-10 years, which have got to the point where TopSport has completely had to overhaul our Business Model.

Previously we were comfortable, and built a strong reputation in the marketplace as being a low margin, high turnover operator where we attempted to manage all types of customers, and operate like the ‘good old days' on course and let everyone on, hoping to eke out a small prize at the end of the day.

However with Point of Consumption Tax, Racefields Tax, GST, Employee Tax, and if you are lucky enough to make a profit at year end, Income Tax, all in play, this model is now impossible to administer in Australia to any significant level.

The repercussions of these tax hikes extend beyond financial implications. They force customers towards higher-margin events or products, accelerating the rate at which they lose their funds. This trend raises significant concerns regarding responsible gambling practices and threatens the welfare of customers.

The changes operators have had to implement to be viable have in some sense turned the industry into a poker machine, where some customers are conditioned to lose at 15-20% on turnover, which is a sizeable problem for the long-term sustainability of the industry.

AD: The general theme doing the rounds is that turnover has levelled out to just above pre-covid levels but down 17-20 per cent across the board from the pandemic levels. That is a sizeable shift?

TM: Turnover has dropped significantly, and I think most participants could see that coming off the artificial highs of Covid. We have been forced to overhaul our model completely which has seen our turnover drop from $1.2 billion in FY 2022 to a projected $375 million in 2024.

While our own decrease in turnover may be more pronounced, the broader market decline can be attributed to various factors, including the impact of taxes, rising living costs, and operators passing on these expenses to customers. Additionally, legislative changes, though mostly positive for the industry, have contributed to this downward trend.

This confluence of factors creates significant downward pressure on turnover, a trend likely to persist unless measures are taken to stimulate growth in the coming years.

AD: It must draw into question as to whether the explosion of returns to industry we've witnessed in more recent times is sustainable?

TM: It's imperative for the industry to carefully model returns over the next few years and assess potential strategies to foster sustainable growth. Operators must explore various levers to incentivise increased turnover, ensuring mutual benefit.

Sustainability must be a top priority, and this entails making prudent decisions and implementing strategies that ensure long-term viability, otherwise a number of cost cuts will need to be implemented to ensure the industry is still thriving in 5-10 years time.

AD: Most wagering operators' business models are different, which should lead to heightened competition. I know we've already touched on it, but how has the landscape changed for your business in particular?

TM: The landscape for our business has undergone a radical transformation, necessitating a complete overhaul of our business model. Consequently, we've experienced a 70% reduction in turnover over the past two years.

By doing this, unfortunately it means less returns to the industry, reduced tax for the government, an inferior product for punters, and an elevated margin for TopSport – which had to be executed in order to survive.

Implementing these changes serves as a stark demonstration of the challenges we face, underscoring the urgent need for long-term reforms to ensure the industry's sustainability moving forward.

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AD: So an environment has been created that's forcing businesses to downsize and even turn away customers – where in the world do you see that?

TM: Seems crazy.

AD: Following on from that, if I asked you to pull out your crystal ball, what do you envisage things looking like in say 10 years' time?

TM: We have a lot of very sharp operators on all sides of the industry, whether that be WSP's, administrators or punters, and I am sure there will be some tweaks over the next 10 years to ensure the sustainability of an industry which has survived in Australian for centuries.

I see a little bit of the test cricket scenario here, where fans were concerned over the longevity of that form of the game – but ultimately if the curator prepares a pitch that favours both batsmen and bowlers, the fans get a great spectacle and it is still the premier form of the game – we just need to make sure the pitch is prepared in such a way which allows something for all participants, and we will see growth again.

We don't need to reinvent the wheel, but make minor, well thought out, tweaks, and the industry will get through this challenge like it has on many previous occasions.

That being said I certainly see a lot less operators in the market, how many will be determined by what changes are implemented.

AD: Changing tack, is the punter getting a fair crack at it at present?

TM: Yes and no. In some senses and on face value, punters have it better than in any previous period with the increased competition and the introduction of MBL's on the majority of racing codes.

However, in order to account for the escalating taxes, and the enforcement of betting all customers to the MBL – we have seen market percentages increase across the board, products removed/reduced and some operators not complying with the regulations in the spirit they were intended.

This means that marginal, winning punters are having their margins squeezed and their turnover reduced which has forced a number of larger players out of the game.

Recreational, high margin punters are losing their ‘bank' for the weekend quicker which means they do not engage with the product and enjoy the product as they have previously.

But probably the most concerning are customers who lose at ‘just' 3-5%, who should be ideal customers for the industry, as they are betting sustainably and within their means but are being turned away, or significantly restricted, as their business does not generate enough revenue to cover the taxes levied on their business.

AD: Over-regulation has been a real buzzword lately, are you concerned customers are being suffocated into non-existence with all these compliance measures?

TM: There have been some significant positive strides in this space to really assist with Responsible Gambling – which I am sure all operators would agree is necessary for the long-term viability of the industry.

However there seems to be an ever increasing, over complication of a number of items, which does suffocate and impact customers who are betting within their means and may not want to provide sensitive records to online operators.

Additionally, it is exceedingly difficult for the small to mid-tier operators to have sufficient resources to complete with the bigger operators in this regard which can cause flow on effects.

AD: So back to the taxes, a lot of the noise from the wagering providers is that the model is shortsighted, focusing on now, not later. How so?

TM: Agree with this. By the same token, we completely understand the pressures racing bodies are facing, and the level of funding required by the industry – It's clear that alternative revenue streams beyond taxing operators need exploration.

Unfortunately, a lot of prizemoney increases were made on the basis of increasing turnover numbers which probably were never sustainable, and some changes need to be made to adjust to the new norm, to ensure that we have a thriving industry in 10 years' time, as opposed to a race to the bottom of constant prizemoney increases in a short-term bid to outdo other states.

AD: Deep down, do you think that the powers that be are aware of the potential headwinds the industry faces on the horizon?

TM: I certainly think a number of PRA's are acutely aware – and we have had a number of incredibly positive discussions in recent times, where there has been some positive back and forth.

While we recognise the pressures that PRAs are under and are committed to contributing to the industry, it's crucial to strike a balance. Simply hoping for a miraculous increase in turnover to sustain industry funding is not a viable strategy. It's essential for all stakeholders to acknowledge the realities of the situation and work collaboratively to find sustainable solutions.

AD: There has been talk that one jurisdiction is looking to engage with government in a bid to return Point of Consumption levels to a more manageable level. That must be encouraging?

TM: Very encouraging. I have a lot of confidence in a number of the individuals at a number of the PRA's. I also have an understanding that they want what is best for the industry as well and are starting to understand that punters are price sensitive to a degree, whether that be consciously or subliminally, and hopefully that equates to some positive changes in this regard.

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AD: A concern in the marketplace is that the way the system is currently set up it will ultimately squeeze out the little guy, therefore reducing competition. In a world where on-course activity continues to diminish, that cannot be good for racing?

TM: Again, I would suggest this is a yes and no answer and varies depending on your definition of the ‘little guy'. I think while thresholds are in play, smaller genuine operators who are shifting their operations online have the ability to succeed in the current landscape if they wish to remain small and offer a service to their existing clientele.

However, the way the marketplace is set up gives absolutely no incentive for these smaller operators to grow in an effort to expand their brand reach to one day potentially elevate their turnover to a middle tier operator.

The barriers for entry to scale are exceedingly difficult, and the difference in fees and taxation when an operator crosses the threshold is extreme and the smaller operators haven't got the scale to flatten the margins as required to succeed when playing in the same ballpark as the top tier operators.

This setup incentivises operators to aim for staying under the threshold rather than seeking opportunities for growth, which ultimately harms both PRAs and customers.

In my opinion a very simple solution for both Racefields, and POCT could be implemented where the fees are remodelled to be akin to the largest taxation system in the country, income tax, where 4 or 5 tiered thresholds are introduced, which would provide an incentive for WSP's to grow, as they would not immediately be hit with the same rates as the top tier operators.

It would be an incentive for all levels of operators to grow which would undoubtedly have many flow on positive effects for the marketplace, such as increased competition, and customers receiving a better product.

Without a sizeable change like the above, I fear that middle tier operators are going to struggle over the next 2-3 years, which will lead to consolidation, and ultimately see only a handful of big operators in the industry.

AD: There was a story doing the rounds a few weeks ago about a chap that lost $86,000 in a month – a figure more than manageable. But such was the volume of turnover on that loss, the wagering operator ultimately shelled out more on taxes. That seems staggering?

TM: We have countless scenarios like the above. Unfortunately, some of the hybrid models on racing mean you pay on margin when a customer bets on certain states, and then turnover on another state – which means that on occasions we are actually hoping to lose on certain races at the back end of a Saturday in the hope customers reinvest on other products which are taxed at a more reasonable rate.

In our business enforced turnover reduction, we have had to remove products, and drop limits on customers who have lost six figure amounts to us over the last couple of years, because despite the fact they have lost significantly to us, as a business it would be better for us not to have them as a customer due to the outgoings. This situation may seem counterintuitive, but it reflects the challenging realities we face in managing our operations.

Can you imagine having to have a discussion with a customer who is in this boat, and tell them we would prefer you do business elsewhere despite them thinking in their eyes they are ‘VIPs' – this means they either shift their business to another licensed operator, or what has to be the big concern, leave the industry due to being disenchanted with the conversation, or worse still, go to an unlicensed operator which has enormous flow on effects to the detriment of the industry and governments.

The constant ‘kick-out' dividend of the STAB dividends in recent times show that the Citibet operation is currently thriving offshore. It raises the question of how much of this turnover could be retained in Australia, benefiting the industry and the broader economy.

AD: Lastly, garnering let us call it ‘understanding' when you're a bookmaker is no easy task. But it is not so much about the bookmaker, is it?

TM: No one wants to hear a bookmaker whinge; in fact, many take great pleasure in recounting stories over when they ‘got' the bookie. Some of my favourite stories are betting ring tales over a large plunge which came off, and the punter got the spoils. It is a part of Australian folklore.

So we are never going to get the message across by bringing out the violin, but I think it is getting the message through to the man on the street, that every time a tax increase gets passed, any punter, from a casual bettor to the seasoned pro, will feel the impact of these tax hikes.

 

 

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Adam Dobbin