Racing gambles on its future

Will online betting and interactive TV boost the industry's soaring profits or prove its downfall? Abigail Townsend examines the odds

Gambling used to be a simple affair. The punter went to a bookmaker, picked a horse, placed a bet and hoped. Sometimes you lost, sometimes you won, and by and large, that was that.

Gambling used to be a simple affair. The punter went to a bookmaker, picked a horse, placed a bet and hoped. Sometimes you lost, sometimes you won, and by and large, that was that.

But in recent years, the emergence of sophisticated technologies has brought about a transformation of the industry. Bookmakers can now be accessed online, via interactive services on television, or even bypassed altogether by means of internet betting exchanges. These advances have affected the whole industry, from traditional retail bookies to racecourse operators such as Arena Leisure, which announces its interim results this week.

Last year, through its membership of a consortium called attheraces, Arena moved from simply putting on the fixtures to broadcasting them. With its partners it paid £307m to secure the rights to screen races from all but 10 of the UK's racecourses. As managing director Ian Penrose says: "Horseracing is enjoying the biggest surge in popularity ever seen. More people are going, more people are watching and so, equally, there is more betting on horseracing than ever before."

Some players are already reaping the rewards. One is Ladbrokes, the UK's biggest betting chain and part of the Hilton Group. Its online offering got off the ground two years ago and is already in the black; interim operating profits at the e-gaming division have risen 22 per cent to £6.2m. That in itself is a small proportion of the £101.8m reported by the entire betting division, but as Hilton said at the time: "Ladbrokes is continuing to build on its investment in technology as a catalyst for growth."

Of course, as always in gambling, nothing is guaranteed. Hilton concedes that while demand for online gaming remains strong, its sports side has suffered from too many favourites romping home and no World Cup football - responsible for a surge in profits last year.

Dominic Harrison, Ladbrokes' commercial director, explains why the internet and gambling remain a perfect match: "There's an immediacy about the internet ... Its real time nature matches the real-time nature of betting."

However, one of the biggest growth areas on the web is actually something of a thorn in the side of big bookmakers such as Ladbrokes. Online betting exchanges allow punters to bet on prices they set themselves. There are currently around 20, with Betfair and Betdaq two of the biggest. The idea of doing away with the middle man and allowing punters to match each other's prices may be simple, but the betting exchanges are locked in a battle that is anything but with their bigger and more powerful rivals. The cause of the conflict comes down to something as old as betting - tax.

While the exchanges pay the same taxes all bookmakers have to pay, the punters do not. That allows for higher winnings and, say the bookmakers, is eroding their own margins as they try to compete. All parties are lobbying the Government hard, with the bookies trying to persuade the Chancellor to tackle the issue in November's pre-Budget report.

Gordon Brown could well go some way to settling that row, one way or another, later this year. What is not so easily fixed, however, is the issue of interactive gambling, hailed as one of the industry's biggest breakthroughs of recent years. This optimism was personified by the attheraces consortium, which includes BSkyB and Channel 4 as well as Arena. The idea was to launch a service allowing punters to gamble from the comfort of their own front rooms via their TVs.

Yet the concept has been beset by problems. Its launch was delayed because of technical difficulties, and the OFT then censured the 49 racecourses for collectively selling the rights to their fixtures. Both sides are still in talks and a resolution is expected later this year. The OFT could take the view that the racecourses acted as a cartel and demand that the rights be renegotiated.

But the main problem facing atthe-races is simply that there has been a slower-than-expected take-up of the service, something Arena is likely to show this week. Analysts are expecting a jump in operating profits to around £3.1m, but losses at attheraces are unlikely to show much improvement, coming in at around £5.5m and dragging down Arena's otherwise strong performance.

However, Arena remains committed to attheraces. Certainly, the potential rewards are there for the taking: the accountants KPMG estimate the interactive gambling and betting market will be worth around £2.8bn a year by 2006. Earlier this month BSkyB's Sky Bet was shown to have generated revenues of £117m, more than half of all BSkyB's interactive revenues for the last 12 months. The only concern is that the costs involved in persuading gamblers to adopt a radically different way of betting could end up turning the whole experiment into an also-ran.