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Waterhouse VC: Monopolies on regulated markets

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Tom Waterhouse, of Waterhouse VC’s latest column examines how gambling monopolies function in regulated markets.

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Monopolies are common in the regulated betting markets. These monopolies have many advantages, including exclusive products and brands that are widely recognized. They also have a good relationship with government officials and industry professionals. Due to the lack of product variety and competition, this can lead to suboptimal results for consumers.

Below are some examples of monopolies.

Happy Valley

The HKJC was founded in 1884 and has a long history of horse racing. Happy Valley was the site of the club’s first races. Club members actively support charitable causes. This is a mark of the club’s identity in Hong Kong.

The Betting Duty Ordinance, promulgated in 1959, expanded the scope of the HKJC to include off-course wagering.

The HKJC is subject to a duty of 50% on the gross margin it earns from its football activities, and a duty up to 75% on racetracks. The HKJC returned US$4.6bn in the fiscal year 2022-23 to the local community. The HKJC donated US$4.6bn to the community in fiscal year 2022-23. This included US$3.7bn to the government as duty, profit tax, and Lotteries Fund payments, plus US$0.9bn to charitable organizations.

Monopolies, B2B transactions and B2Bs

Waterhouse VC focuses on suppliers who provide a crucial or innovative service for wagering operators. Nearly all wagering operators require odds pricing, risk management and trading, player account management services (including KYC/AML), marketing and customer engagement.

Monopolies, like other operators, benefit from the technological advances in their industry. They closely monitor trends and integrate with B2B innovative products. B2B companies have a great opportunity to work with monopolies. Voxbet, one of our companies in the portfolio, has been working with PMU for over seven years.

It is possible that monopolies could expand beyond their home jurisdiction and operate in more competitive and regulated markets if they maintain an up-to-date technology stack, develop full products, and provide a great customer experience.

The geographical expansion will also enable them to boost their charitable contributions in their own country and their tax payments.

Monopolies could emulate Flutter’s strategy by applying their experience and product offerings to new markets. Flutter began its journey in the UK with Paddy Power, before moving to Australia and the US via FanDuel and then globally through local heroes such as Sisal or MaxBet.

By leveraging their expertise in data analytics, product development and customer insight, the company has built a global betting business that is market leader. The company has effectively benefited from operational leverage leading to the “flywheel effect”.

Flutter’s flywheel. Source: Flutter Entertainment Plc

Unregulated operators bleeding out

The HKJC highlighted on 5 September after its annual general assembly the leakage occurring due to the shift in wagering volume towards unregulated operators.

It said that “In this digital age, there is a significant amount of competition for the club from both illegal sports bookmakers and bookmakers from other countries who have very low taxes.” Illegal betting companies and foreign bookmakers are earning more than HK$15bn a month from Hong Kong clients.

If betting duty rates increased, the club’s income would decrease significantly and it would become less competitive in price. The club will be prevented from investing in its future.

In all regulated betting markets, there is a leakage of tax revenue. Unregulated operators in the US are estimated to attract US$510.9bn of bets from Americans each year. The regulated betting sector loses US$44.2bn annually in gaming revenues. State governments also suffer a US$13.3bn loss in tax revenue.

Filling product gaps to increase monopolies

Monopolies should not rely on their position as monopolists, especially in light of the increasing accessibility and availability of unregulated betting. Monopolies will be forced to compete in unregulated betting, and must provide a good customer experience and attractive products. In order to maintain and attract their customers, regulated monopolies must innovate constantly as they are under constant pressure from unregulated operators.

Introduce monopoly licenses to cover product gaps in markets that have certain wagering products banned, such as in Hong Kong for igaming or sports other than football. In Australia it could be igaming with in-play betting. It would protect the bettors, as markets that are not regulated generally offer lower consumer protection.

Unregulated operators will take advantage of the fact that a monopoly provider is not able to offer a wide range wagering options within its domestic jurisdiction, including racing, pre-match and in-play sport, bingo, igaming and lottery.

This scenario shows that monopolies do not maximise their domestic potential, let alone international.

Waterhouse VC is a great resource for wholesale investors who are interested in the latest news about gaming and wagering industry trends. You can follow our updates via Twitter @waterhousevc or on WaterhouseVC.com.

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