Fine balancing act: The rise of low-margin operators

The hunt for recreational punters is well and truly on. New products such as Edit My Acca, Request a Bet, Each Way Edge, Spin & Bet and Lengthen the Odds are all designed to get price-agnostic punters playing at healthy margins. At the same time, traders and risk management teams are scouring through account databases to scrub any potential profit-drainers from the books.

After its takeover of bwin, GVC executives were said to be stunned at just how many sharp punters bwin was accommodating. Or as GVC CEO Kenny Alexander put it: “Bwin had some customers who were beating us and long term we could not beat them. We closed accounts or limited how much they could bet.”

Sports margin promptly climbed 1pp to 8.1% in H1 16 versus H1 15. That climbed even higher to 10.5% in Q3, as more restrictions were implemented. On annual sports wagers of close to £4bn, that kind of margin improvement is worth £44m alone. And those kind of benefits have sparked changes across the industry. Earlier this year Ladbrokes scrapped its high roller programme to focus on recreational punters, bringing it in line with stablemate Coral, which made the decision to scrap its own high roller business back in 2015 after it lost £9.3m in Q3 2015.

Both these companies are of course public, and it’s well known that as more bookmakers become publicly traded corporations, the pressure to deliver steady, consistent profits grows, with major shareholders not necessarily wanting to hear they’ve lost millions of pounds because one sharp customer went on a hot streak.

“The big boys are essentially marketing companies now,” says Craig Nicholson, co-founder of online bookie Black Type. “They’re not bookmakers anymore. You look across price comparison sites and many of the firms are the same price.”

Land of opportunity
But that shift towards homogenised bookmaking has created a whole new category of punter – those who are finding their ability to get a bet on disappearing rapidly. And with social media, and the backing of groups like Justice for Punters, this demographic is making its presence known like never before.

“Had 28 accounts closed or heavily restricted. Thousands like me. Game dying,” tweeted one well-known racing punter. But is it? Because several operators appear to recognise that this growing host of disillusioned punters represents an opportunity.

One of the newest firms that set out to fill this gap in the market is Black Type, an online bookie that celebrates its one-year anniversary in August. The firm is the brainchild of Mylo Sangster and Nicholson – who can reasonably claim to have built the racing product at 888 – and the firm’s core message is simple: ‘No hype, just great odds’.

In practice that means “old fashioned bookmaking” as Nicholson puts it, with market-leading margins and guaranteed stakes for customers. With around 11 months of operation under its belt, Nicholson says the concept has been received “extremely well” by punters.

The firm has its underlying sportsbook provided by FSB, but takes control of certain events, to trim margins and price its own opinions into markets. The initial focus, as the Black Type moniker suggests, was horseracing – a low hanging fruit, as Nicholson puts it – but the firm plans to bring the same pricing strategy to football in time for the new season.

Back to basics
So how can Black Type do what very few others are willing to do and take on their shrewd customers? It starts of course with the trading function. “We’re based on – I don’t want to say old school talent – but perhaps attracting people that don’t get jobs elsewhere in the industry now,” Nicholson says.

“Building that talent is a black book exercise – people who were in the industry 10 years ago. You need to know the best traders don’t necessarily come with a university degree. They’ve got to be streetwise and understand the sport, but that doesn’t tick the boxes of lots of corporate companies. With respect to suppliers now, you could ring them up and ask for a price and if they didn’t have a computer they couldn’t do it.”

Employing these types of traders also requires something of a leap of faith, because taking standout positions at low margins will inevitably result in taking some lumps.

“Small companies have gone up against giants and have disrupted them successfully using technology” – Mark Brosnan, Matchbook

“Anyone who thinks you can win every month is wrong,” says Nicholson. “There’s always the chance of horrendous results on football or at Cheltenham, as we’ve seen. You’ve got to be prepared to look to the bigger picture and if you log onto your sportsbook report at 2pm, you’ve got to know it could be drastically different at 5pm and that’s out of your control.”

The other key to the Black Type operation is its minuscule operating cost base, which stems from having a very small core team, very low technology costs and most importantly, a tiny marketing budget.

“We let our pricing and Oddschecker do the talking for us,” says Nicholson. “The key is we’re not starting £20m behind on marketing costs like Sun Bets is. Our aim was to come to market as cheap as possible.”

Of course, even Nicholson admits, Black Type was lucky with the timing of its launch, coming as it did, not long after the godfather of the low-margin model, Pinnacle, was forced to withdraw from the UK market. Even though Pinnacle is planning to return and is currently in the process of getting its ducks in a row for a UK licence application, Nicholson says he doesn’t see it as a threat.

“I think we’ve very much got first mover advantage,” he says. “Lots of firms have talked about filling that space but we are the one that has actually done it. Pinnacle obviously has that global scale so they can take far bigger volumes than us, but we’re looking to get new licences and expand globally as well, so we expect to improve there.”

Wising up
Pinnacle for its part isn’t concerned about some competition because it sees a growing demand for its low-margin model in the UK and around the world, as punters in general become ever more sophisticated.

“There are gradual changes in the way some sports fans consume content that reflects a growing statistical sophistication and a demand for meaningful data,” says Mirio Mella, head of customer engagement at Pinnacle.

“This is in part fuelled by DFS and can be seen in the emergence of the sports analytics community. This kind of transition is creating a much larger potential audience for analytical betting, which is in turn aligned with the low-margin model.”

Indeed there seems to be a growing consensus that the industry’s push for recreational punters isn’t necessarily what modern punters, and millennials in particular, are looking for.

“People are a lot more price sensitive and they will shop around,” Nicholson says. “If you put your consumer hat on, companies like Lidl and Aldi have made inroads into the bigger supermarkets by offering better prices. Even the most recreational punter is aware of Oddschecker and if you’re best price on there it’s great advertising.”

Customer is king
A similar belief in the power of the consumer is the driving force behind the strategy at betting exchange Matchbook, which aims to offer punters low margins via its peer-to-peer exchange.

Matchbook says the shift towards more sophisticated customers is only increasing

“I’m a firm believer that customers are sophisticated and will become increasingly more so,” says Matchbook CEO Mark Brosnan.“If you look outside the gambling industry into other major entertainment industries, small companies have gone up against established giants and have disrupted them very successfully by using technology to deliver high value content. Netflix, Spotify, Uber and Amazon have all done this.

“And in gambling that means letting customers bet the size they want, free from limitations and delivering the best possible price point to give punters that sense of value. We see that when we deliver that user experience, we are getting a lot of traction.”

Brosnan argues that the shift towards more sophisticated customers is only increasing, with millennials in particular accustomed to dealing with web and mobile products that give them exactly what they want.

“No-one is necessarily fulfilling that level of customer service in the gambling sector just yet, but that’s our aim,” he adds. “And when someone properly delivers that low margin product with a smooth, customised UX, customers will vote with their feet and that will become the new benchmark in the industry”.

Polarisation
While Brosnan believes that all customers will soon be demanding this kind of improved experience, it is clear that the majority of the market doesn’t necessarily agree. There are plenty of punters who want a little interest in a Saturday slate of Premier League games, and the ability to edit an acca in-running is an engaging tool rather than a bad value bet.

That’s at least the view at Paddy Power Betfair, where the group’s sportsbook strategy is to target both ends of the market with their two distinct brands. Between April and June the Betfair Sportsbook offered the lowest overrounds on average on England’s top four football leagues, as well as being best-priced most often on rugby union, per Oddschecker.

“The Betfair brand is primarily focused on customers whose motivations to bet are value-related, and accordingly its marketing communications have a key emphasis on highlighting its strong value proposition,” the firm explained in its annual report.

A Betfair spokesperson declined to comment on the success of this strategy, but it’s understood the Betfair sportsbook delivered a bigger contribution than Paddy Power to the group’s 21% sportsbook growth in Q1 2017.

While PPB has not gone ‘full Pinnacle’ and started offering minimum bet guarantees to sharp punters, it is perhaps the clearest sign that the corporate bookmakers are recognising there is money to be made in courting shrewder customers.

William Hill too, has dipped its toe in this pool, with the (very quiet) relaunch of its Centrebet brand in Australia last December. Hills said the brand would have the highest available limits on Australian metropolitan horseracing and major sporting events, and would be “the only place that professionals could get a big bet on,” adding it would be targeting punters who had previously had their accounts restricted or closed by Tabcorp, Ubet and other corporate bookmakers.

Hills declined to comment on the success of the relaunch and whether it would be expanded to other countries, but with Australia representing one of the most sophisticated and competitive gambling markets in the world, it could be seen as a facsimile of the UK, and a good test of whether the Centrebet concept would work there. Indeed Hills could feasibly mimic PPB’s dual brand approach in the UK, with William Hill at the recreational end and Centrebet appealing to sharper customers in Australia.

The growth of firms such as Black Type in the UK suggest there may well be profit to be made in courting the punters being discarded by other firms, and of course that pool will only continue to grow. Black Type doesn’t make its figures public, but has major investments and product upgrades planned over the next year, suggesting its upward trajectory is not a flash in the pan. And with Pinnacle eyeing a return to the UK and publicly listed firms dipping their toes into the low-margin pool, those unwanted customers might suddenly find themselves in demand.