Summary
Ladbrokes' trading statement today really blames recent profit falls on "bad luck". We, the punters, are meant to reel off the hard luck stories when we lose to them. However, bookies also can get hit in a pretty uncontrollable way when hot favourites deliver, as they did in this year's Cheltenham Festival. The real question, though, is whether The Great Recession will see more, or less, money staked generally. Is betting seen as a luxury to be curtailed as disposable income comes under pressure, or a potential source of additional income?
Analysis
I should start by admitting that betting is something of a sideline business for me. I am a very keen follower of football (soccer) across the whole of Europe. Betting on it is an additional source of income. My betting activities do produce positive returns. I treat it more as a (derivatives) investment strategy rather than pure gambling, and Ladbrokes is one of the bookmaking firms I use to run my strategies. However, I have no investments in any bookmaking firms. My observations on Ladbrokes' results and future prospects are essentially derived from a punter's perspective, and from there we can deduce the possible impact on Ladbrokes and others.
From a personal perspective, current economic conditions are encouraging me to divert additional funds to betting. Why? Primarily to try and compensate for recent income tax rises. Betting profits are free of all taxes to punters (assuming offshore internet betting sites can be used legally, as is possible in my own case). This provides attractive compensation at a time when income tax rates and tax free allowances against income are both being attacked by governments desperate for revenue as lower profits/employment hit tax revenues, and higher unemployment add to expenditure.
Is my approach that of the "typical" punter? Whether the logic is the same, I do not know, but economic downturns are frequently good for bookmakers and similar organisations. For instance, sales of lottery tickets frequently rise at a time of economic hardship. What are the dynamics supporting (or not) current levels of betting?
Until recently, a decline in attendances at major sporting events would have had a proportional effect on stake monies received by bookmakers. There was a clear and almost universal link between interest in sporting events, attendance, and betting. Not any more, however. Online betting has severed the link between attendance and tax-free gambling. Attendances at the Cheltenham Festival were well down this year (it is dominated by Irish racegoers who are now a lot poorer because of Ireland's economic problems). However, I do not think monies staked on Cheltenham fell. Indeed, lower attendances might actually be helping to protect bookmakers' earnings. People save money (ie the luxury element of their disposable expenditure) by not attending, and divert/maintain elements such as their satellite/cable TV subscriptions and betting expenditure.
I think Ladbrokes and others are far more at risk of business loss if people are forced to cut their TV subscriptions, and I suspect this is low risk. Sports channel subscriptions are, after all, only about GBP200/year. They are hugely important to the betting industry, however. For instance, the level of monies staked on a live televised football match is about 10x that for a similar level of game that is not televised.
Online gambling is also hugely important to bookmakers. They were the first "old" economy companies to make big gains from the internet. While other industries saw the rapid emergence of new players online (think Amazon.com in retail and low-cost airlines in the US and Europe), existing bookmakers soon went online as a way of offering better returns through avoiding betting taxes for their customers via offshore jurisdictions (eg Gibraltar). The ease of online gambling clearly helps the bookmakers. However, it provides challenges as well. Betting exchanges, where punters can effectively "short" the market ("lay" as well as "back" results), can only exist online. Betting exchanges can offer much better odds (at least one claims to offer 20% better odds on a routine basis). These provide new competition to traditional bookmakers. Online sites have also allowed bookmakers to launch a vast number of new products along the lines of casino games, poker, bingo etc all of which, until recently, have required the physical presence of punters. Where the "to go or not to go" decision is required, punters may well choose to save money and stay home. With the online version, betting online can easily be justified as a low-cost form of entertainment and seen as actually saving money versus a night out.
So, overall, I think bookmakers' turnover will remain resilient in the face of a severe, prolonged downturn. I suspect betting will be one of the last expense elements to be cut significantly by many regular punters. As such, therefore, bookmakers' may well be good defensive stocks during the current recessionary phase.
