The sharks are circling as rising taxes bite the bookies

Online bookmaker TopSport once aimed to be at the top of the Australian wagering food chain until increased taxation forced it to make a strategic business decision.

*TopSport’s Tristan Merlehan (right) with Lachlan Murray. Merlehan has adapted his business to changing times. (Photo: Backing the Punt Conference)*

When Lloyd Merlehan started to transition his bookmaking business and its clients to an online platform, the fundamentals were as simplistic as they were innovative for the era.

One of Australia’s highest-profile on-course bookmakers at the time, Merlehan seized on the opportunity to expand his reach via the internet.

Merlehan was by no means an Australian pioneer in the field but he was the first to gain NSW Gaming and Racing Authority approval to bet on racing and sports.

And so was the beginning of TopSport, established on the old-school bookmaking values Merlehan had become famous for in many headline-grabbing stoushes with Australia’s biggest gamblers but with an eye on a new generation.

“I believe the future of racing is on the internet and that sports betting is surpassing racing with regards to betting,” Merlehan said during a 2006 interview after opening TopSport with his son Tristan.

“The young generation is all tuned into the internet. From a bookmaker’s point of view there are very little overheads in a business like that.”

Fast-forward almost two decades and the bets that Merlehan Sr often accommodated, such as letting John Singleton often back one of his horses to win $1 million, are more likely to be found in some web-based archive instead of at the forefront of a modern-day wagering landscape.

Merlehan Sr got it right about the internet. It has changed the way we bet.

Ask his son about overheads and taxation nowadays, and the narrative will undoubtedly be much bleaker.

While the initial expenses of starting up and maintaining an online wagering firm remain manageable, Tristan says current operating costs are putting pressure on mid-tier bookmakers such as TopSport.

Taxation increases are taking their toll. Some of the smaller online operators have been forced to close, and others, such as BlueBet and betr, have decided to merge, saying it is the best way to give them a chance to compete against the multinationals that dominate the Australian wagering scene.

For TopSport, the impact of Point of Consumption Taxes has affected the way the Merlehans do business.

From a peak of a $1.2 billion annual turnover, TopSport now sits at around $350 million in a deliberate strategy to stay in the game.

“We got the point where we were growing rapidly but we’ve been forced to scale back due to the constant increase in taxes,” he told The Straight

“And that’s not what we want to do. We spent a lot of money on resources to grow the brand and to get ourselves into a position where we were.

“We still have that ambition to get into that top tier of operators but in the current ecosystem unless you can really push past that figure we were running at you are much better off to be back where we are now.

He said focusing on margin and retaining a core group of customers is a key plank, without trying to “get into the war that some of the others are in when they have a lot more ammunition than we do”.

“So, for us, we’re not looking to fish in a massive pond at the moment; we’re looking at trying to make sure the little pond we’re fishing in has a nice shark net around it,” he said,

In essence, the art of on-course bookmaking from which the Merlehans forged a reputation has no place in an online space because it simply isn’t worth the effort to become a high-turnover business.

“We were trying to grow by being a point of difference by being old-school bookmakers,” Tristan said.

“That was something we really prided ourselves on. We were betting everyone to certain limits, we were betting aggressive pricing, we would take an opinion and without doubt – and I don’t think anyone would argue – that we were the fairest operator in the marketplace at our height.

“Unfortunately, now with the way the taxation model is set up, old-school bookmaking is impossible in our middle tier which is very sad.

“We love nothing more than challenging ourselves against the best punters out there but unfortunately now you need every customer losing at 7 per cent.”

“We’re looking at trying to make sure the little pond we’re fishing in has a nice shark net around it.” – Tristan Merlehan

Many wagering industry figures believe this situation will become even more challenging if state governments continue to revise POCT rates.

There is mounting speculation that NSW will increase its POCT to 20 per cent, and if that happens, many smaller operators are certain to go the wayside.

Include the likelihood of severe advertising restrictions under reforms outlined in the recommendations in the federal government’s online gambling review, and it all points to a storm brewing for most of Australia’s wagering operators.

“It’s going to be very difficult for operations that don’t have a sizeable database to do that (combat advertising restrictions),” Tristan says.

“And then obviously you get the natural attrition of your customers as well at times.

“It is going to be a challenge, particularly against the operators that do have sizeable databases, to be able to keep up with them and to be able to offer your customers something that keeps them on your platform.

“That’s the area we are focusing on and trying to make sure that any customer that has been loyal to us over a period of time that we give them the best service and they haven’t got a reason to go elsewhere.

“Fortunately we’ve got a sizeable group of customers where we can do that but there may be others that may not be in that same boat which makes it a lot more difficult.”

Amid a decline in wagering revenue since the sugar-hit that the COVID-19 pandemic provided racing and bookmakers, industry experts say hiking gambling tax rates is counterproductive to long-term benefits for the sake of short-term gains.

There is a view that there will be a breaking point and the next five to 10 years will be critical to achieving a taxation model that allows bookmakers such as TopSport to survive.

“It’s a case now where turnover isn’t the most important metric out there which is sad to see,” Tristan says.

“It seems like there’s constant talk about margin and these sorts of things, which, in my view, isn’t the healthiest discussion in the industry.

“I think at some point we will realise as an industry that we do need to look at ways of stimulating turnover again without constantly ratcheting up the tax rates

“I think that once we get to that realisation that if POCT keeps increasing it will cause turnover to decrease and then the pie will continue to get smaller.

“Turnover isn’t the most important metric out there which is sad to see” – Tristan Merlehan.

He expects there will be a point where there will be a realisation that ongoing increases in taxation is not sustainable.

“Turnover breeds turnover and liquidity breeds liquidity and once it shifts the other it will move pretty quickly but we need to get ourselves into a position where the models are correct,” he said.

“When that happens, I don’t know. But I feel it has to at some point.

“It’s also a case of waiting to see how many people are around when that occurs. You don’t want the horse to have bolted by the time these changes occur.”

Nor, for that matter, the wagering industry’s sharks to breach that netting that is keeping operators such as TopSport safe for the moment.