How the white paper miscalculated the impact of affordability checks on racing
We examine the government's estimate of the financial cost of affordability checks to British racing
This is the final part in our Affordability Files series. Part one, about the claim just three per cent of accounts would be subject to checks, can be found here. Part two looked at the government's promise that affordability checks would be 'completely frictionless'.
Ever since the gambling review white paper was published in April, the message to British racing from the government has been consistent and – at least superficially – reassuring.
Stuart Andrew, the minister with responsibility for sport and gambling, wrote in the Racing Post in June: "I said back in April the white paper’s impact on the sport would be minimal. I stand by this."
In the white paper, the Department for Culture, Media and Sport (DCMS) estimated the impact for the first year of the new regime of affordability checks on British racing's finances at a range between £8.4 million and £14.9m. Not inconsiderable sums, but not enough to cause those working in racing sleepless nights either.
However, racing's leaders and analysts have consistently expressed significant concerns about how DCMS calculated the expected reduction in income to racing, with BHA chief executive Julie Harrington stating after the publication of the white paper that the government had been told "in no uncertain terms" that the impact of the checks on racing was an underestimate.
The accuracy of the impact assessment depends on the reliability of the forecast that just three per cent of accounts will be affected by enhanced affordability checks and that almost all of those checks will be 'frictionless', contentious claims that were scrutinised in the first two parts of the Affordability Files series.
Even without those doubts, however, the DCMS calculations defy logic when it comes to the impact on the most important of the sport's betting revenue sources, media rights payments.
Additionally, experts have told the Racing Post they believe the impact on the levy has also been significantly understated, as it fails to account for the importance to racing of a relatively small cohort of high-staking punters.
The DCMS's impact assessment was made up of three elements: a £5m to £8m reduction in the levy, a £3m to £6m reduction in media rights and a £0.4m to £0.9m reduction in sponsorship.
This is despite the white paper itself stating that the levy makes up six per cent of British racing's overall revenues, while media rights payments provide a further 11 per cent (investment from owners, at 40 per cent, was the largest revenue source).
According to the white paper, the levy is therefore hit harder than media rights despite the latter being almost twice as important to British racing's finances.
The white paper admits an assumption that "there may be an impact on racing's income from gambling sponsorship and media rights, as operators' income is reduced".
However, it adds: "Nothing in the review affects the ability of operators to sponsor racing and the incentive to promote and differentiate their products will remain. Streaming of live horse races is a key product for betting shops and online operators, and will remain so."
The Racing Post has asked the DCMS how the figures for media rights and sponsorship were calculated – but was only told that the white paper assessment was that they would not fall at the same proportional rate as the levy.
Media rights deals between bookmakers and the two racecourse-owned media rights companies, Racecourse Media Group and The Racing Partnership, are now largely based on turnover rather than per stream, but that appears not to have been taken into account by the DCMS.
Anything that will directly reduce turnover, such as affordability checks, will therefore hit media rights income, an issue that is already adversely affecting racing because of the checks operators put in place in advance of the white paper.
Paul Leyland, co-founder of strategic advisory business Regulus Partners, says: "One problem with the white paper taking so long is that so many things have changed since the analysis was started – especially changes in media rights, which have done most to temporarily ameliorate the impact of higher inflation on racing's cost base.
"Betting operators are now paying more than twice as much in media rights as they are in levy and media rights revenue streams are now mostly volume-related on overall turnover rather than fixed per digital stream or per betting shop. Consequently, the impact of any loss of staking and/or revenue on media rights caused by affordability interventions will be more than twice as much as the levy impact even before the largely fixed costs of filming, production and distribution are factored in.
"So if we accept that DCMS's more reliable assumptions on levy impact are correct, then the overall impact has to be significantly understated – with the real impact figure based on DCMS's same underlying assumptions coming out at more like £20 million."
Since the white paper's publication, it would appear that the DCMS has also arrived at the realisation that it needs to have another look at its figures.
The department is using its estimate for the financial repercussions for British horseracing as part of its work on the review of the levy system announced along with the white paper in April, "to ensure an appropriate level of funding for the sector".
A DCMS spokesperson tells the Racing Post: "The impact of the white paper on the horseracing industry will be minimal, and we are reviewing the contribution the horserace betting levy is making to the industry.
"As part of this levy review, we are working on revised estimates to assess the most up-to-date financial impact on the horseracing industry."
How the DCMS came to its conclusions about the impact of the white paper is clearer when it comes to the levy.
The government, applying modelling assumptions to data from the Patterns of Play report carried out by researchers from the National Centre for Social Research and Professor David Forrest and Professor Ian McHale of the University of Liverpool, calculated that the overall impact of its financial checks on the entire online gambling industry would be a six to 11 per cent reduction in gross gambling yield (GGY), the amount of money retained by operators after winnings have been paid out.
It has then applied that six to 11 per cent reduction to online horserace betting GGY, using a Gambling Commission figure of £768.5m in 2021-22 as its basis – to come up with a £5m to £8m reduction in the levy, which is based on a percentage of gross profits or GGY.
Crucially, the white paper assumes an equal GGY reduction across all online betting and gaming products from the financial risk checks.
However, the data from Patterns of Play showed racing's online betting customer base had marked differences to other sectors – something that will leave the sport far more vulnerable to the impact of the checks.
In terms of demographics, the data showed that horseracing betting was much more popular with older bettors than the young.
Nearly one-third of horseracing GGY came from those aged 55 or more, in other words those more likely to be betting using savings or assets rather than a salary and who are, judged by the checks already put in place by operators, a likely target for more intrusive checks.
The data also showed that spending on horserace betting was extremely concentrated relative to other gambling activities.
In terms of volume, the top one per cent of horseracing bettors provided 59 per cent of total stakes and 52 per cent of GGY, while 76 per cent of revenue came from just five per cent of bettors, a small group on which to depend for so much of online racing GGY and one which will be heavily impacted by affordability checks.
David Zeffman, head of gambling and sport at law firm CMS, says it is unlikely that the assumptions in the white paper have taken this into account.
He says: "It follows from Professor Forrest's analysis that racing is likely to have a disproportionate number of bettors who will be subject to the enhanced financial risk check and that, were a significant proportion of these bettors to either have their accounts closed, cease betting or go to unlicensed bookmakers, it would have a serious adverse impact on racing's finances."
Zeffman adds: "I think this is likely to have a higher impact on racing because racing has a higher proportion of higher-staking punters than other gambling activities and I doubt whether this has been taken into account in their assumptions."
As William Woodhams, chief executive of bookmaker Fitzdares, stated earlier in this series, the relatively small percentage of punters who fund the vast majority of racing will be the ones most seriously affected by affordability checks.
He adds: "It's also worth remembering that we contribute two per cent of stakes in data rights. Even without levy, that represents £10 to racing for every £500 bet that is won or lost – and we have hundreds of those every day. If those bets die, then the funding dies."
It is highly likely that the DCMS's estimate of a £14.9m impact on British racing's finances in the first year of a new regime of affordability checks hugely underplays the actual cost. The crucial impact assessment relies on a dubious three per cent estimate for the proportion of bettors impacted by affordability checks and on 'frictionless' checks proving a reality, not a fantasy.
It is based on calculations that misunderstand how media rights operate, and thus dramatically underestimates the damage caused to that key revenue stream. And it applies a flat industry-wide calculation for a decline in gambling profits, despite it being well established that racing has a relatively small pool of big-spending customers who will be disproportionately impacted by affordability checks.
What, then, is a more realistic figure for the financial impact of the checks on British racing? We can say with a high degree of certainty that the impact on media rights payments will be far greater than estimated, which alone would take the financial hit from £14.9m to approaching £30m. Other elements are harder to account for, but some who have analysed the proposals fear a more accurate bill would be more than three times the original estimate.
Ultimately, though, the scale of the damage caused to British racing by affordability checks will be determined by whether the Gambling Commission and government heed the concerns of bettors and warnings from racing.
To complete the Gambling Commission's consultation on affordability checks, visit racingpost.com/consultation and follow the instructions.
The Racing Post also wants to hear from you: What has been your experience of affordability checks since the white paper was published at the end of April, and what do you think of the government's proposals? Have affordability checks affected your betting behaviour?
It's a chance for your voice to be heard. Email the Racing Post at editor@racingpost.com with the subject 'Affordability checks' to share your experiences, your thoughts about the government's proposals, and your contact details.
The Affordability Files:
Part two: 'The elephant in the room' - are frictionless affordability checks a flight of fantasy?
Sign up to receive On The Nose, our essential daily newsletter, from the Racing Post. Your unmissable morning feed, direct to your email inbox every morning.
Copy