An economic analysis of the funding of horseracing A REPORT PREPARED FOR THE DEPARTMENT FOR CULTURE, MEDIA AND SPORT June 2016 © Frontier Economics Ltd, London. June 2016 | Frontier Economics i An economic analysis of the funding of horseracing Executive Summary 7 1 Introduction 15 1.1 The scope of our work.............................................................. 15 1.2 Our approach ........................................................................... 15 1.3 The Horseracing Betting Levy .................................................. 16 1.4 Industry structure and recent trends ........................................ 17 2 Costs and income associated with horseracing 23 2.1 Estimate of racecourse costs ................................................... 23 2.2 Estimate of racecourse income ................................................ 25 2.3 Funding flows into the horseracing sector ................................ 27 2.4 Cost and income variation across course type ......................... 39 3 A framework for considering the common interest between horseracing and betting 42 3.1 The French levy ....................................................................... 42 3.2 An economic framework for common interest .......................... 47 4 Common interest cost estimates 49 4.1 Framing the common interest from a practical perspective ...... 49 4.2 Scenario analysis of common interest costs ............................ 57 4.3 Summary of estimates ............................................................. 69 5 Future trends in horseracing and betting 71 5.1 Demand side trends ................................................................. 71 5.2 Supply side trends ................................................................... 72 References 75 Annexe 1: Our approach 77 Annexe 2: International models for the funding of horseracing 80 Annexe 3: Recent trends in horseracing 85 Contents ii Frontier Economics | June 2016 Annexe 4: Methodology 88 Bookmaker survey .............................................................................. 88 Deriving the costs of ownership .......................................................... 92 Racecourse costs and revenues ........................................................ 93 Annexe 5: Course cost and revenue category breakdowns 101 Cost categories ................................................................................. 101 Revenue categories .......................................................................... 102 Annexe 6: The media sector 104 Annexe 7: The role of prize money for racehorse owners 107 Annexe 8: Defining competitive races 109 Annexe 9: Further cost and revenue tables 114 Contents June 2016 | Frontier Economics iii An economic analysis of the funding of horseracing Figure 1. Monetary flows from betting to racing, 2014 estimates ......... 9 Figure 2. Overview of key funding flows into and around British racing .................................................................................................... 18 Figure 3. Horserace betting turnover and GGY, terrestrial, 2008-09 to 2014-15 ....................................................................................... 21 Figure 4. Monetary flows from betting to racing ................................. 28 Figure 5. Key flows from owners into British racing, 2014 estimates . 34 Figure 6. Variation in costs of owning horses, by type, 2010 ............. 36 Figure 7. Real average sale price, Tattersalls and DBS, 2002 to 2014 (2014 prices) ............................................................................... 37 Figure 8. Monetary flows from other contributors to the racing industry, 2014 ............................................................................................ 38 Figure 9. Racecourse costs by fixture type ........................................ 40 Figure 10. Racecourse revenues by fixture type ................................ 40 Figure 11. Racecourse costs by course quality ................................. 41 Figure 12. Racecourse revenues by course quality ........................... 41 Figure 13. Average field sizes over time by horseracing type ............ 50 Figure 14. Number of horseraces over time and relevant legislative changes that may have influenced these trends ......................... 51 Figure 15. Horseracing prize money in Great Britain over time (£ million, nominal) .......................................................................... 52 Figure 16. Phases of analysis ............................................................ 77 Figure 17. Attendance at horseraces in Great Britain over time ........ 85 Figure 18. Average numbers of horses in training, 1992 to 2014 ...... 86 Figure 19. Trends in numbers of people with a horse in training, by type, 1992 to 2014 ....................................................................... 87 Figure 20. Data template for bookmakers .......................................... 88 Tables & Figures iv Frontier Economics | June 2016 Figure 21. RMG company structure ................................................. 105 Table 1. Summary of scenario estimates, net common interest costs, £ million, 2014 ................................................................................ 12 Table 2. GGY from British horseracing provided by operators, by year and type....................................................................................... 22 Table 3. Estimated costs of racecourses in Great Britain (£ million, nominal)....................................................................................... 24 Table 4. Estimated prize money flows in 2014 (£ million) .................. 24 Table 5. Estimated income of racecourses in Great Britain (£ million, nominal)....................................................................................... 26 Table 6. Estimated direct and indirect income received by racecourses from betting (£ million, nominal) .................................................. 29 Table 7. Media services income and payments in relation to British based betting consumers and British horseracing (£ million) ...... 31 Table 8. Estimated total owner contributions through running costs, 2012 to 2014 ............................................................................... 35 Table 9. Common interest costs identified in France and mapping to our analysis ................................................................................. 45 Table 10. Proportion of fixtures that courses ran on AWT, 2012 to 2014 .................................................................................................... 58 Table 11. Gross common interest costs: Scenario A (All-Weather Tracks) ........................................................................................ 59 Table 12. Relevant apportioned revenues, Scenario A ...................... 61 Table 13. Net common interest cost estimates, Scenario A ............... 61 Table 14. Net common interest cost estimates, Scenario A, net of apportioned media, sponsorship and advertising income estimates .................................................................................................... 62 Table 15. Gross common interest costs: Scenario B (competitive races) .......................................................................................... 65 Table 16. Relevant apportioned revenues, Scenario B ...................... 65 Table 17. Net common interest cost estimates, Scenario B ............... 66 Tables & Figures June 2016 | Frontier Economics v Table 18. Net common interest cost estimates, Scenario B, 20 fixtures per course p.a. ............................................................................ 68 Table 19. Net common interest cost estimates, Scenario B, 25 fixtures per course p.a. ............................................................................ 68 Table 20. Net common interest cost estimates, Scenario B, associated with handicap and pattern races with eight or more runners ....... 69 Table 21. Summary of scenario estimates, net common interest costs, £ million, 2014 ............................................................................. 70 Table 22. Stakeholders interviewed ................................................... 78 Table 23. Returns to racehorse owners by country and betting model (2008) .......................................................................................... 81 Table 24. Common interest costs identified in the French decision ... 82 Table 25. GGY from British horseracing provided by operators, by year and type....................................................................................... 89 Table 26. Estimated direct bookmaker costs related to British racing, by year and type .......................................................................... 91 Table 27. Calculations for jockey fee contributions ............................ 92 Table 28. Quantity and price assumptions for owner running cost categories .................................................................................... 93 Table 29. Estimated costs of racecourses in Great Britain (£ million, nominal), broken down by racecourse quality ............................. 97 Table 30. Estimated income of racecourses in Great Britain (£ million, nominal), broken down by racecourse quality ............................. 98 Table 31. Estimated costs of racecourses in Great Britain (£ million, nominal), broken down by fixture type ........................................