Is sportsbook margin on a downward trend?

The UK sportsbook sector has been engaged in a price war for the past couple of years and we’re beginning to see some casualties. Ladbrokes and William Hill both reported falling margin in their most recent results, although it was the case of the former that gives a better picture of the sector.

William Hill posted a fairly healthy looking 8.6% sportsbook gross win margin for the third quarter, blaming some weaker horse racing results and a tough comparative against the 2014 World Cup for a 0.8% drop. The fall was the same size at Ladbrokes which saw margin fall from 7.6% to 6.8% with similar reasoning given.

Ladbrokes said margins were within its target range, and are certainly not wildly out of line with long-term averages in the sector, but its case is intriguing considering its move towards a more “recreational” audience. The firm has hiked up its marketing spend to 30% of net revenue and has launched a number of promotional offers for both new and existing customers.

“Margins are a bit softer than our plan, largely due to racing results in September. But let’s also be frank; we are investing some margin in the value offer because the customer demands value, especially when you’re trying to win them back,” Ladbrokes CEO Jim Mullen said. The firm reported in-play margin was unchanged but pre-match gross win margin was 1.5 percentage points lower at 11.1%.

A Downward Trend?

Ladbrokes’ margin was still relatively healthy in historic terms despite some aggressive pricing and some pretty dreadful horseracing results. Nonetheless Mullen faced a barrage of questions related to margins from analysts and it was a similar picture at Hills despite 2015 the firm delivering its second highest Q3 margin in the past five years.

A clearly exasperated James Henderson pointed to general consistent trends in overrounds, percentages of winning favourites and in-play margins over the past few years. And the feeling is rumours of margins heading on an inexorable downward trend are being overstated at the current time.

Henderson and Mullen both noted horseracing results were the worst they have been for the past three years, but margins were saved by strong football margins in the period. The intentional shift towards higher margin products such as accumulator bets has skewed this slightly and does add an element of volatility to the overall margin.

This volatility has not gone unnoticed by the analysts, and in an increasingly closely-watched sector where quarter on quarter growth is not just expected but demanded this can be problematic. The only predictable thing about sports betting margin is its unpredictability and a product that can swing between 7% and 10% with normal results distribution can make investors nervous.

Long Term Impact

But is there any truth in the downward pressure on margin? From looking at recent results there does appear to be some weight to the argument. Paddy Power has also reported margins below its historic trend in recent years with 7.2% in H1 2015 compared to 9.7% in 2013 and 8.4% in 2012.

A recent research note form Barclays drew attention to the move towards in-play with this now forming the majority of revenues at most major operators. A traditionally lower margin product, at around 5% typically, this presents even more pressure on the margin trend in the future. Although Henderson was quick to dismiss this as a concern.

“Pre-match wagering growth was very slightly stronger in Q3 than H1, and that’s arguably with more pressure on non-core markets. We’re not seeing a marked decline in run-rate in pre-match wagering in the UK,” Henderson said.

We may even see a slight upward trend in margin for in-play as this becomes a more recreational mobile-driven product. Operators were initially reporting higher margins through mobile and any increase in incremental in-play betting is likely to be due to increased mobile usage so it wouldn’t be an unexpected for margin to improve slightly.

The Big Winners

Another knock-on effect of the descent into discount pricing is the need for far tighter account management, particularly around horseracing. There is a rising discontent from some segments of the horseracing industry at winning or shrewd punters being restricted heavily at the major operators.

While this is mostly anecdotal evidence and is hotly disputed by the egaming industry there is little doubt it needs to be careful to remain the right side of regulatory perception here. And we’ve already seen Coral offer to guarantee large bets in its retail outlets in an effort to counter the growing negative press.

What does appear clear is for all but the largest operators, winning market share will come at the expense of margin. Free bets and promotions are still the main tools for winning and retaining customers and we’ve seen this impact Ladbrokes over the past 12 months and Coral in the 12 months prior.

That operators are beginning to relieve pressure on pricing and promotions as a marketing tool speaks to a sector that is still heavily commoditised in product, despite a greater focus on differentiating through in-house technology.

Because if the sector continues to become more aggressive on margin we may enter into a price war where everybody loses.