How Does the Regulatory Environment for Pool Betting Impact on the Financial Health of Horseracing Around the World?
Simon Bazalgette, the founding Chair of specialist management consultancy GVS EQ, and Martin Purbrick, a founding GVS EQ associate, take a canter around the world to see how betting regulation, and particularly pool betting, has a vital impact on the relative level of prize money, and therefore the financial health of the sport.
For the last century and beyond, Horseracing has had a symbiotic relationship with betting, and this remains the case in most countries – to a greater or lesser extent. As a result, the financial strength of each national horseracing industry depends on the way that betting is regulated and owned in that country. An understanding of a national regulatory structure for betting is vital for any understanding the wide variation of prize money in different countries.
Pool betting, also known as ‘Tote betting’ or ‘pari-mutuel betting’, has long been associated with horse racing. Tote betting was established in the 19th century and involves all the amounts bet combined in a pool, from which the operator takes a cut, then the odds are calculated based on the proportions wagered on each outcome. Totalisator odds are different to fixed odds in that they are not set until the race begins, no more bets are accepted and the total amount in the pool is finalised.
Tote operators were created to harness wagering to support the sustainability of racing, the welfare of horses, as well as employment for the large numbers of people involved in the sport around the world. Horse racing is a high cost and capital intensive sport to organise and operate, and requires considerable sustainable funding to survive.
In markets with strong totes such as Japan, Hong Kong and France, racing generally does relatively well. In countries where other forms of betting have been licensed, racing can still do well if there is a fair balance of funding provided back to the sport from all types of betting. Australia would be a good example of this. In the US the position is rapidly changing from a pure racing tote market with the introduction of sports betting.
In the UK, the introduction of off course fixed odds betting in the early 1960s, with a relatively loose link to horseracing, has meant that British horseracing has lost pace with its fellow racing jurisdictions around the world when it comes to prize money and investment in the sport from the betting industry.
In South Africa and Australia there remains a mixed economy of fixed odds and pool betting. Australian racing has strong statutory support to ensure a meaningful percentage of betting revenues goes to horseracing ensures that prize money levels remain internationally competitive.
For many years there has been a steady but less than speedy process of the official totes connecting with each other to combine pools on racing – commonly known as commingling. There are several reasons for the slow progress, primarily the different bet types and conditions attached to similar bet types, but also the commingling technology (ITSP) which has been in place for more than 20 years but is still embedded in many heritage platforms. The most important development in commingling has been the World Pool, which is hosted by the Hong Kong Jockey Club.
In addition to the main national or state totes, there are a number of private pool operators who offer access to the pools particularly for large international players who offer significant liquidity to the market.
Some countries, particularly the Gulf States, do not have licensed betting of any sort, and the sport relies mainly on the financial support of the state, the royal families and rich owners.
To a large degree, the level of funding available for horseracing is dependent on the level of support that national or state regulations provide, particularly with regard to funding from betting, and therefore any attempt to assume that success in one country can be used as a template for another should be treated with great caution.
Let’s take a high level look at what this means for the major racing jurisdictions.
France
The French pool betting market is around €9 billion annually, the profits from which are reinvested back into the sport. It is notable for its wide retail distribution through the vast network of over 20,000 tabacs (tobacco and convenience stores) in the country.
Pool betting in France is primarily controlled and run by the PMU despite attempts to open up the market over the last decade or so. The PMU returns all its benefits to the 66 French horse racing companies organising gallop and trotting races (France Galop and Le Trot), sustaining more than 60,000 direct and indirect jobs throughout France.
In 2023, the PMU paid a total contribution of 835 million euros to France Galop and Le Trot. This financial contribution supported the operation of 233 racetracks and 26,000 horses in training.
Other types of betting operator have been licensed in France since 2010 but they remain heavily restricted and take only a very small share of the French horserace betting market.
Japan
The Japan Racing Association (JRA) is the custodian of horse racing and also tote betting at the national level. Pool betting on racing in Japan generated a betting turnover of over 2.5 trillion Yen (Euro 15 billion). The JRA is required to provide 10% of its gross betting turnover to the national treasury, as well as 50% of any surplus profits remaining at the end of the fiscal year. Three-quarters of the contribution must be used for improvement of livestock breeding and the JRA also contributes additional funds to horse breeding as well as the promotion of equestrian culture.
It is no coincidence that Japanese racing offers the largest pool of prize money in the world, given the JRA’s control of horserace betting in Japan under its vertically integrated sole licensed operator. Betting on other sports is also limited to only a small number of local sports such as bicycle, boat and motor racing.
The Japanese pool is restricted from commingling with other international pool operators, with only limited pilot trials having taken place to date. Typically this is driven by the presence of Japanese runners in overseas races, to allow Japanese punters to bet on these horses. When this does take place, it generally has a major impact because the level of Japanese betting will be significantly larger than the home pool.
Hong Kong
Hong Kong has vertically integrated racing and pool betting, operated by the Hong Kong Jockey Club (HKJC). It generates around HK$130 billion (€15 billion) in annual betting turnover, with the HKJC being the largest corporate taxpayer in Hong Kong, and operating one of the world’s largest and most active charitable trusts. All surplus funds after operating expenses are either reinvested in racing or passed to the HKJC Charities Trust.
Most recently, the HKJC has become the host of the most successful international pool betting initiative, the World Pool and involves a collaboration of over 25 racing jurisdictions allowing customers to bet into a single pool involving enormous liquidity. This enlarged liquidity ensures that there are less odds (price) variations in smaller betting markets and better value for all betting customers. In the 2023/24 racing season, there are 45 World Pool fixtures at racecourses around the world, and the number is likely to continue to grow.
By allowing international horseracing fans the ability to bet into one pool on the major group races around the world, it has created a significant additional betting revenue stream in other territories whereby, for example, racedays such as the Epsom Derby, Caulfield Cup and the Dubai World Cup benefit from the significant level of betting that can be generated.
United States
In the US, betting is regulated at the state level and historically was limited to pari mutuel betting on horseracing.
Alongside this there were some examples of licensed casinos or slots which would usually be allowed only on racecourses or designated casino sites. Where a racecourse had such additional betting, it would significantly increase the level of prize money that racecourse could offer compared to other US racecourses.
The first Off Track Betting (OTB) service for horseracing was licensed in New York State in the 1970s, and rolled out in a number of states thereafter. These have been superseded by account deposit wagering services (ADWs). Horseracing remained the prime beneficiary of the OTBs and ADWs until in 2018 a Supreme Court ruling opened up the potential for states to licence fixed odds sports betting and almost 40 states have now done so to some extent.
US horserace pool betting is dominated by the two major racetrack groups - Churchill Downs (through its Twin Spires service) and the Stronach group (through their 1/ST and Xpressbet services). The two groups also own two of the major tote tech companies, United Tote (CD) and Amtote (1/ST). Churchill recently announced that NYRA (the racing operator in NY State) had completed its purchase of a 49% stake in United Tote.
Licensed betting on horseracing remains around $10 billion pa but betting on other sports has grown to over $90 billion pa.
United Kingdom
The UK has arguably the most competitive licensing environment for betting in the world. The UK Tote was created by Winston Churchill (a Jockey Club member) in 1926 as an independent body run for the good of racing; but unlike other countries, its betting monopoly was ended in the early 1960s with the creation of licensed fixed odds betting shops. Also unlike elsewhere, British horseracing was given no control over the off-course market, but instead a statutory levy was created to ensure that a small proportion of the profits from betting on horseracing was passed through to contribute to the financing of the sport.
Since that time, pool betting has had a declining share of the betting market and currently represents around 10%. The UK is dominated by fixed odds operators, and while British punters have the widest choice of competitive bets in the world, they also benefit from the highest return on bets in the world. This means that pool betting, with its higher take-out rates, struggles to match the pricing for fixed odds for simple bets, but is more competitive in so-called exotic bets, particularly the Place Pot.
The Levy is currently set at 10% of gross margin on betting on domestic horseracing, which, due to the highly competitive market and the low margins, is the equivalent of around 0.7% of betting turnover, amongst the lowest return from betting to horseracing in the world.
There have been various attempts to bring the Tote closer to racing, either through transferring its ownership to the sport, or through a preferential sale to racing, but these attempts have all failed. In 2011, the Tote was nationalised and then sold to the bookmaker group, Betfred, who sold it on to its current owners (which includes several large owners and breeders) in 2018. The UK Tote has had a commercial arrangement with the British racecourses (via their shared on-course betting company, Britbet) which is due for renewal in 2025.
Horserace betting remains at a significant level in the UK, c£5bn pa, second in Europe to France, but due to the difference to the regulatory structures, the amount transferred to the sport is significantly lower than in France.
Australia
Australia is arguably the best example of a mixed economy of pool and fixed odds betting, all of which provides significant funding back into horseracing.
Each state and territory has its own regulatory authority for betting and racing. Betting is owned and run separately from the sport, and generates around €15 billion pa, which is pretty evenly split between pool betting and fixed odds.
Tabcorp Holdings, a public company, is the largest operator of pari-mutuel betting, running TAB-branded services across multiple states, and each state tends to have its own pool operator as well.
As in the UK betting operators are required to pay a proportion of their revenues to the sport, under what is known as Racing Fields regulations. The level required in Australia is significantly higher than the UK levy – typically between 1.5% and 3% of betting turnover - and allows Australian racing to offer prize money at the top end of international levels.
Ireland
The betting market in Ireland has many similarities to the UK. Betting on horseracing is around €1.1bn to €1.3bn each year, with Tote Ireland representing a small proportion (6%-7%). Betting operators pay a government levy which is paid over to the horseracing industry via Horse Racing Ireland (HRI), usually between €80m - €100m pa. This funding supports the development and promotion of the industry, racecourse maintenance and annual prize money of around €65m pa.
South Africa
South Africa is a market with a mixed economy between the original pool operator (the SA Tote, owned by Phumelela, the largest racecourse group) and fixed odds operators. Phumelela has arrangements in place with the National Horseracing Authority of South Africa to support prize money and the promotion of SA racing in the country.
Pool betting on horseracing is around €400m pa and represents around two thirds of the market, with fixed odds operators growing fast.
Conclusion
The financial contributions to racing from totes are a critical part of the sustainability of racing, supporting a huge number of jobs in the sport. However, the regulatory and tax structure for pool betting varies considerably around the world.
Most countries will have started from a similar position of the tote being the only form of licensed betting as explained by Sir Winston Churchill: “I have always believed that it was a good thing for the State to organise the totalisator and take control of this form of betting in order to eliminate illegal practices and to ensure that a proper proportion of the proceeds went to public purposes.”
The position in each country has diverged significantly over the last 100 years, and this means the impact on the funding for the sport is very different in each country. While there are areas of similarity, building greater collaboration between tote operators is a long road but one that can only benefit racing in the long term.
The growing influence of South Africa in the world Pari-mutuel industry
Trivia fiends interested in international horseracing and betting will have a field day with the combined question: Which country operates the world’s most extensive pari-mutuel system, and which company is the operator? It might not be who you would expect...
Howard Wright (European Trainer - issue 18 - Summer 2007)
Trivia fiends interested in international horseracing and betting will have a field day with the combined question: Which country operates the world’s most extensive pari-mutuel system, and which company is the operator?
Many would probably go straight for Hong Kong and the local Jockey Club as the joint answer, given that Far Eastern punters are deservedly renowned for their fanatical pursuit of riches through horseracing and more recently football betting, and that Hong Kong has the best-known, most successful legalised system. They would be wrong.
A sizeable proportion of those who dismiss Hong Kong as being too obvious for a trivia question might plump for the United States, based on its size and well documented propensity for gambling. They would be wrong. A few might look to Europe, and suggest either the French PMU or Britain’s Tote as their solution. They too would be wrong. The answer is South Africa, and Phumelela Gold Enterprises. Surprised? I’m not surprised that you’re surprised, especially since Phumelela did not exist until April 1999, when a new dispensation was negotiated between the country’s horsemen and the South African government, which included the “corporatisation” of the several individual race clubs and totalisators, and a reduction in betting taxes.
The development led to the consolidation of South Africa’s racing and tote betting industries into two operators – Phumelela Gaming and Leisure, which immediately listed on the Johannesburg Stock Exchange and became responsible for operating in seven of the country’s provinces, and Gold Circle, which takes in the remaining two provinces. As Brian Mehl, a well respected businessman who became Phumelela’s first chief executive and remains deputy chairman, explains, the new dawn was born out of sheer necessity.
Without it, racing and betting in South Africa would almost certainly have sunk into third-world status, drowned by the tide of new forms of legalised gaming, such as metropolitan casinos, bingo halls and the national lottery. He adds: “The situation was further exacerbated by South Africa’s re-entry to the international community, with renewed access to international sporting events, all of which resulted in industry decline and the chalking up of significant losses. The future was very bleak indeed.” Today, Mehl enthuses that both Phumelela, which also operates football and sports spread betting, and Gold Circle are viable and operating profitably; the South African breeding industry is producing record levels of sales, “and the future looks very promising.”
To get to this point in such a short time, though, has involved a deal of pain. Costs have been cut back ruthlessly, hundreds of jobs have been lost, racecourses have been closed - and are still closing - and the financial model has been changed. Mehl explains: “The turnaround can be attributed to the restructuring of the South African racing and betting industry into commercially orientated, professionally managed and focussed businesses, with successes - and failures - being enjoyed by all participants.” The two companies operate under different philosophies. Phumelela sets aside 30% of its income for race stakes, but has shareholders - the Racing Association (35%) and Black Empowerment Groups (27.5%) being the biggest - who can expect to earn dividends of around half of any profits after the payment of expenses for running racing on five courses and a major training centre – including the provision of transport from stable to racecourse at no cost to owners - staging events and operating the tote. Its 2005-6 operating profit, following a loss the previous year, was R9.7 million (£680,000).
Gold Circle essentially runs a non-profit making business, ploughing back income for the benefit of its racing constituents. Despite the differences, the two companies have worked closely together to achieve efficiencies, economies and scale. Mehl explains: “Wherever it makes good commercial sense, we have either combined our operations - for example in TV broadcasting, racing services and publishing - or we co-operate fully to try to achieve an optimal result, on race programming and fixtures for instance.”
The earliest most obvious example of co-operation was the co-mingling of tote pools, which came about in April 2002, when single national pools were created under the banner of Saftote. Growth in tote betting turnover was achieved for the first time in several years. More significantly, though, came the establishment of a joint venture company, Phumelela Gold Enterprises (PGE), which controls all media and information rights emanating from the two entities, owns and controls the industry’s broadcasting and publishing interests, as well as totalisator co-mingling activities and internet sites, and is responsible for developing the jointly-owned international business. This is the foundation on which South Africa’s worldwide reputation as a pari-mutuel facilitator has been built.
The first indication that the old colonial country at the tip of the African continent had a technological capacity that very few could rival came in October 2002, when Saftote betting pools on the Breeders’ Cup meeting at Arlington Park were co-mingled with those of the host tote operator. “That enabled South African punters to bet into the huge US pools, and demonstrated Phumelela’s ability to participate on the global horseracing and betting stage,” says Mehl, with justifiable pride.
However, the traffic is not all one way, and four and a half years on, this year’s Dubai World Cup experience demonstrated how far, and how fast, Phumelela has come in advancing its capabilities as a host for co-mingling bets. Over R36.7m (£2.57m) was bet in global tote pools handled by Phumelela, of which R32m (£2.24m) arrived via 56 individual tote sources in the US and Canada, compared with R17.43 (£1.22) on the same day the previous year. Other betting centres connected to the service in Johannesburg were in Holland, Austria, Germany, the Isle of Man (where Phumelela has a secondary hub), Spain, Russia, the West Indies and Tasmania. More than 400 outlets in South Africa also bet on the meeting through Saftote.
Remarkably, at least to those who can only look in from the outside, the UK Tote system does not penetrate the same internet language as Phumelela’s can. The UK Tote operated its own pool on the Dubai World Cup, which throws up a further irony, since many of Phumelela’s customers that day also co-mingled bets on the Kempton meeting that was going on almost simultaneously. Phumelela redirected win, place and exacta bets on Kempton to the UK Tote, but due to various limitations hosted trifecta and quartet bets itself, declaring its own dividends. John Stuart, Phumelela’s director of international operations, reflects: “Hosting the global tote pools on behalf of the Dubai Racing Club is a substantial undertaking, but it’s a responsibility that we’re immensely proud of.” Live pictures go with co-mingling like bread and cheese, and Kempton’s appearance on the same programme as Dubai came down a path trodden originally by Stuart’s energetic predecessor, the late Derrick Wiid, who was largely responsible for forging the link with Attheraces in 2003 that first brought UK racing into South Africa.
The following year, after the UK’s daily satellite racing coverage had fallen apart, Racing UK was born, with 30 tracks in the fold, and Phumelela joined as its international partner. Phumelela also retained rights to other UK meetings for showing, and, more importantly, betting on in the local market of 400 shops, three call centres, the internet and mobile phones, and race tracks. UK racing is the mainstay of South Africa’s imported product, but events also come in from Australia, Singapore, Hong Kong, France and the US, as well as more local fare from Mauritius, Kenya and Zimbabwe. “Our growth strategy depended on international racing,” Stuart explains. “South African racing alone was boring for punters, with a race every 30 minutes. Now we have an event every ten minutes, and the aim is to provide a round-the-clock service. Our betting shops are open from 10am to 10pm, but the internet has no boundaries, and we recently had our first race, from Hong Kong, at 6.30am. “Simulcasting was our only option, and that feeds into everyone down the line. Our prize-money increases are earned from simulcasting, and that means the whole industry benefits, from local horsemen to jockeys and stable staff.”
The UK also presented South Africa with its first opportunity to export its racing pictures, when in the mid-1990s bookmakers realised they needed something to keep mid-morning punters in their shops on Saturdays, before the afternoon programme began. South Africa provided the answer, and proved the saviour when a foot and mouth epidemic closed much of UK racing for a period in 2001.
The Racing UK link prompted Phumelela to create Racing International, a pictures and data television product that now covers four-fifths of the world, by Stuart’s estimation, and is seen in 30-plus countries, fostered most recently by the introduction of a 48-hour declaration system in the UK. However, co-mingling is the key, and Phumelela works on the back of a tote system bought off the shelf from leading US supplier Amtote. It has net pool pricing capabilities, dealing with any major currency through exchange-rate software, and supports scan-type bets such as the Pick6 and Superfecta, while each country pays its own local tax rate, to avoid double counting.
Stuart says: “Our vision is to have the global switch, to provide connectivity to any legal betting operator anywhere in the world, with royalties being paid to the host track.” The development of a race every ten minutes on Racing International has produced a 50 per cent increase in turnover over the last five years to R4.8 billion (£336m) in 2005-6. Stuart explains: “There are two parts to our business. Exporting pictures abroad gives us the opportunity to earn a royalty from betting, traditionally a margin of 3-4%. At the same time, bringing bets into our own pools means we pay the royalty but earn the full margin from the tote, which on average in South Africa is 24%.”
Looking ahead, Stuart is working to make Racing International a 24/7 horseracing channel, with prime content supported by a global tote system. He reasons: “Without betting, there’s nothing, and we have to create the premiership of horseracing and tote betting to take on competition from legal and illegal bookmakers, the sports betting market, casinos and websites. “If we reach the ideal, racing will get its fair share out of the market, and a tote system delivers the money to ensure that racing is the survivor in the long term.”