A cup of coffee priced at $10 might seem excessive, yet if you’re the sole café in the area, you possess significant pricing power, especially when customers have a fondness for coffee. This scenario mirrors the reality of monopolies in regulated wagering markets, where firms enjoy extensive advantages through exclusive products, strong brand recognition, and solid relationships with both the government and the industry. However, this lack of competition can lead to less than optimal outcomes for consumers.
Take the Hong Kong Jockey Club (HKJC), for instance. Since its establishment in 1884, the HKJC has built a legacy anchored in horse racing, with its first races taking place at Happy Valley. The club is also noted for its charitable contributions, which are integral to its identity and economic role in Hong Kong.
Regulatory changes in 1959, specifically the Betting Duty Ordinance, broadened the HKJC’s operations to include off-course betting. Notable financial obligations include a 50% duty on football gross margins and up to 75% on racing. In the fiscal year 2022-23, the HKJC contributed $4.6 billion to the community, including $3.7 billion in taxes and contributions to the Lotteries Fund, alongside $0.9 billion in charitable donations.
At Waterhouse VC, the focus lies on B2B suppliers that deliver crucial or innovative services to wagering operators. Almost every wagering operator seeks services like odds pricing, trading, risk management, player account management for KYC and AML compliance, as well as customer engagement and marketing services.
Monopolies in this sector benefit significantly from technological advances and keep a close watch on product trends, integrating innovative B2B solutions. For example, Voxbet, one of Waterhouse VC’s portfolio companies, has partnered with PMU for seven years. If monopolies can maintain a modern technology infrastructure and develop a diverse product range, they could enhance their technological capabilities and customer experience, allowing them to expand their well-known brands into more competitive regulated markets.
This geographical expansion could also lead to increased tax contributions and further charitable initiatives in their home countries. By utilizing their domestic expertise and product offerings, monopolies could mirror the global strategy of Flutter, which expanded from its UK base through Paddy Power to Australia with Sportsbet, the US with FanDuel, and globally with local entities like Sisal and MaxBet.
Flutter has successfully established market-leading global wagering businesses by capitalizing on product development, customer insights, and data analytics, creating a “flywheel” effect from their operational efficiencies.
However, the HKJC has raised alarms regarding the movement of wagering volumes toward unregulated operators. After its annual general meeting on September 5, the club reported, “In the digital age, the club faces significant competition from illegal bookmakers who pay no tax, and from overseas sports betting bookmakers who operate under very low tax regimes.” They estimated illegal and overseas betting operators are generating over HK$15 billion in profits annually from Hong Kong customers.
The HKJC cautioned that any increases in betting duty rates could lead to a significant reduction in income and impaired competitiveness in pricing. This, in turn, would hamper their ability to invest in future growth.
Tax revenue losses from unregulated wagering markets are evident in various regions. In the U.S., unregulated operators attract an estimated $510.9 billion in bets annually, translating to a $44.2 billion loss in gaming revenue for the regulated sector, along with a $13.3 billion tax revenue shortfall for state governments according to the American Gaming Association in 2022.
Relying simply on monopoly status isn't a sustainable strategy in the face of unregulated wagering, which challenges monopolies to innovate and offer appealing products. The pressure from unregulated operators compels regulated monopolies to deliver competitive experiences to retain customers.
In regions where some wagering products are prohibited—such as igaming and non-football sports in Hong Kong or igaming and in-play betting in Australia—offering a monopoly license that fills these product gaps could greatly alleviate revenue losses to unregulated operators, while simultaneously enhancing tax revenue and charitable contributions. Moreover, it provides a layer of consumer protection that unregulated markets often lack.
Without a comprehensive product offering—including pre-match sports, in-play sports, racing, igaming, lottery, and bingo—domestic monopolies risk losing customers to unregulated operators and missing the opportunity to maximize their potential on both domestic and international scales.
