The punter's pocket: Taking less is the only way to improve revenue

Cover image courtesy of The Image Is Everything

On Sunday, professional punter Kingsley Bartholomew warned that if the recreational punter continues to be driven away from racing, the sport can only suffer. With wagering still a major source of the industry’s current revenue, the way forward in this sphere is to make it more enticing to bet.

But the road to what that looks like isn’t straightforward.

Everyone’s take-out

The overriding problem that Bartholomew outlined is that rising taxes and other business pressures have led to rising marketplace percentages from bookmakers, which in turn leads to poorer results for the punter. The higher the market percentage for each race, the less each horse in the race will be paying. A bookmaker that used to operate with a market percentage of 105% now needs a greater number in order to cover costs and still turn a profit.

In Australia, point of consumption tax (POCT) is the first cost, which is paid when the bet is placed. On top of this, the bookmaker pays for access to race fields and the operational costs of running a business.

The POCT varies by state, climbing as high as 20% in Queensland while much of the rest of the country operates at 15%. All principal racing authorities receive a percentage of the revenue from this tax (the pass through rate) as one of their main income streams, which also varies state to state.

The steeper the tax, the higher a bookmaker’s margins must be to turn a profit, and thus the less is paid out to the punter with every bet. And when that scale starts to tip away from the punter, the punter is de-incentivised to wager - at which point the proceeds of that tax also start to reduce.

“A recreational punter will lose money, whatever he puts aside to bet on horses or other things,” said bookmaker Rob Waterhouse. “It's just a question of how quickly you take it from him. And I think it's a mistake to take it so quickly.

“When I was 14, I stayed with a friend of dad's in Las Vegas for two weeks, and he palmed me off to the manager of his biggest casino, who also owned himself a small casino downtown. He had a sign outside the small casino. ‘We return 97.5% to the player’.

I dug him in the ribs and said, ‘that’s a lot of rubbish, in Australia it’s 60% to the player.’ He said, ‘no, it’s right. If someone comes into our casino with $20 in their pocket, that’s ours. The question is, do you want them there for five minutes or four hours.”

Another bookmaker, speaking anonymously, pointed out that the recreational punter is not aware of the market percentage or the POCT, and isn’t factoring that into their calculations. All they see is a better price offered at a different location, and that is where they may place their bets instead.

“Punters run out of money very quickly if there's no value,” Waterhouse added. “You don't have to explain it to them. If they run out of money, they run out of money and they stop betting.”

The competition isn’t between racing bookmakers alone either.

“Racing used to have a monopoly, and they've abused their position,” Waterhouse said. “I can bet with a corporate on sports and you’re only paying 2 or 3%. In roulette, if you take out just over 1%, a person can turn over his money a hundred times before it’s lost. In racing, with a 16-18% takeout, it turns over six or so times before it's all lost.”

Ahead of the curve

Waterhouse highlighted that there is a way to model what the optimal tax rate would be.

“Professor Laffer, of the United States, changed the way people taxed things in the 70s, when he wrote the famous Laffer Curve,” he said. “And Adam Smith told the English government, in his book, The Wealth Of Nations, that if they reduced the tax that increased the revenue.”

The Laffer Curve, formulated by economist Arthur Laffer in 1974, is an economic theory that suggests there is an optimal tax rate that maximises government revenue without deterring productivity and economic growth. After the curve’s peak, profitability for the government begins to decline. It can, in theory, be applied to the wagering landscape.

There is some argument that the Laffer Curve is an over-simplification of the economic picture for wagering, that it can’t account for other economic factors like the cost of living’s effects on people’s betting habits. But it does present a starting point on how to address declines in turnover.

If you take out less at the point of consumption, the bookmaker requires a smaller market percentage for the same margin, and more is - theoretically - returned to the punter.

“In Hyderabad in the 1980s, they had a 20% tax on the tote,” said Waterhouse. “They reduced it to 10%, and the turnover trebled or quadrupled, and the revenues grew by 50%. So there is some evidence for it.”

If the punter is incentivised to continue placing bets because there is more value on offer, the revenue from the POCT increases regardless of the lower fee.

A tiered approach

An additional layer Bartholomew suggested would be to structure the tax in a tiered system that accounts for the variability in the size and scope of bookmaking businesses. Those offering a lower market percentage - and therefore, a better return for the punter - can access a lower tax rate than those looking for a bigger margin.

The idea is to create a more competitive market and drive turnover upwards by offering the punter better options to spend their money on.

“As a bookmaker on course, I've been on the rails in a very competitive market,” Waterhouse said. “And basically, I pay the same or similar taxes, to someone who bets on the grass, with people that have been having a great day out, but they have lots of percentages on their board. And I bet the same as people who bet with the corporates, who offer very poor odds.”

If Waterhouse could pay a lesser tax rate than corporate competitors, he could offer a better, more enticing product without compromising his own margins. The tax rate’s position on the theoretical Laffer Curve moves towards where revenue is optimised.

The needle moves back the other way, in favour of the customer, to the benefit of everyone in the system.

An industry divided

The roadblock, however, is who is needed to introduce these kinds of regulations. Without a united industry body lobbying on racing’s behalf for changes to regulations, there will still be variance over state lines.

There is one consensus, and that is that there is no consensus across the industry. While every organisation looks after their own pocket, they are reluctant to look further afield to what could help the industry as a whole. Without a unified front lobbying to make change, there is no chance of change being made.

“It's a hard problem,” Waterhouse said. “You can't find economic realists, either in racing or the government’s relationship to racing, because they shake their fingers and say this is a ‘sin area’ and we tax ‘sin areas’ very highly.”

While gambling remains a negative in the eyes of the government, improving the situation for bookmakers, and by extension punters, is not front of mind. The Albanese government has already announced that gambling advertising will begin to be limited during primetime television, as will sponsor logos on uniforms and in stadiums.

The current climate in the United Kingdom is a window into what could come to Australia in the not too distant future; deposit caps and financial assessments have already begun to be implemented, and the effect on wagering on racing is expected to further squeeze an industry already struggling against decline.

The aforementioned anonymous bookmaker pointed out that this doesn’t truly stop people betting, either. They just move it off shore or find other ways to play.

As he put it, “it feels as if racing has a lot of existing customers, but it is not exactly getting new ones in the door.”

The competition from sports betting, which offers better margins and faces less scrutiny of their social licences, and different, newer forms of gambling tug hard on the punter's pocket.

“They've made it very hard, unless you use a VPN, to bet on prediction markets from Australia, which have had a huge explosion in popularity, and it’s where they charge a 0% tax,” said Waterhouse. “It’s like free food and drink, any restaurant giving away food would have a huge queue outside it.”

While Hyderabad experienced its gambling heyday before the turn of the century, the picture is very different in the modern day. The introduction of a 28% GST on all bets placed has pushed much of the gambling off shore.

Those that remain betting on shore may not stop, but they may just reduce their stake and opt to pull out sooner. And with nobody united in promoting the interests of the punter, the industry might find itself having to do the same thing.