What odds on online gambling surviving?

Cantillon: Smaller players in online betting field scramble to attract customers

Watch any British commercial TV channel after the watershed these days and you will there is an inordinate number of ads for betting businesses and, more specifically, for online betting businesses.

Many of them are the smaller players in the field. They are desperately fighting to increase their market share ahead of the UK’s introduction of an online betting tax in 12 months. As the costs of operating their websites remain the same, irrespective of customer numbers, the logical response is to recruit as many clients as possible as quickly as possible.

So they have considerably ramped up their marketing spend. Paddy Power chief executive Patrick Kennedy this week said that the bottom 10 per cent of the market is responsible for one third of what is spent on media ads. The net effect is driving up the cost of customer acquisition across the industry as a whole.

Many of them are focused on bingo or casino games, which means that they are all selling the same thing. Blackjack pays 6/4 no matter where you play it; increasing those odds simply wipes out any profit.

These operators will simply disappear in the wave of consolidation that is likely to follow the introduction of the tax.

However, others offer sports betting which broadens their appeal and their scope for incentivising customers. Paddy Power noticed a tightening of margins in football betting this autumn, indicating that competitors were offering more generous odds than usual. It responded in kind and its executives noted yesterday that margins had improved again.

While the competition intensified over the last 12 months, Power “maintained its discipline” and kept its marketing spend to its regular limit of about 20 per cent of net revenues. In the first six months of the year, it increased its number of active UK- based online customers by 15 per cent to 920,000, indicating that sticking to this policy would still pay dividends.

Paddy Power and established rivals such as William Hill, Ladbrokes and Boyles, are well equipped to deal with increased competition. It is the smaller players who are rolling the dice, as some of them will lose out. The established bookies will win in the end, the question is how long will it take to reach that end?