A press submission from the Kwa-Zulu Natal Bookmakers Society
1. A substantial dispute has arisen between the various bookmakers in the provinces of Kwa-Zulu Natal, Gauteng and Western Cape Province and a partnership known as Tellytrack in relation to the Tellytrack channel. That is a television channel which deals exclusively with horse racing and which has been broadcast by Multichoice under channel number 239.
2. The dispute arises out of a demand by Tellytrack for a very substantially increased fee from bookmakers to enable bookmakers to display the Tellytrack channel in their various betting premises known, colloquially, as “shops”.
3. Although there have been historical changes, for some time and at present the bookmakers in RSA have been and are organized into three separate bookmakers associations (“the Associations”) being
* The Kwa-Zulu Natal Bookmakers Society (“KZNBS”)
* The Gauteng Off Course Bookmakers Association (“GOBA”)
* The Western Cape Bookmakers Association (“WCBA”).
4. The Tellytrack channel in its varying forms has been broadcast in South Africa since 1992. Essentially Tellytrack took over the television broadcasting of horse racing from an organization known as IGN. What happened was that IGN went into liquidation and Phumelela Gaming & Leisure Limited (“Phumelela”) and the various Associations which represented the bookmakers in RSA reached an arrangement under which Phumelela in co-operation with Gold Circle (Pty) Ltd (“Gold Circle”) would procure the broadcasting of the Tellytrack channel and all of the bookmakers would subscribe for and pay for that channel.
5. The only two owners and operators of race courses in RSA, namely Phumelela and Gold Circle, formed a partnership for purposes of establishing and broadcasting the Tellytrack channel. The partnership itself is also called Tellytrack.
It is important to understand that horse racing and the race courses in RSA are controlled by those two entities. Gold Circle controls horse racing in KZN – it owns or leases and operates the only three race courses in KZN. Phumelela indirectly controls horse racing in the Western Cape Province through Kenilworth Racing (Pty) Ltd and it directly controls horse racing in every other province in RSA – in other words it directly or indirectly either owns or controls and operates all the other seven race courses in RSA.
6. Historically and factually the understanding of the bookmakers is that that arrangement was that Tellytrack would be operated on a break even basis to benefit the sport of horseracing and bookmakers would contribute their proportionate share to the costs of operating Tellytrack. This flows from various meetings held from time to time between the Associations and Phumelela and Tellytrack.
7. Initially Tellytrack was distributed through decoders supplied by Tellytrack itself.
In 2006 Tellytrack arranged for MultiChoice to broadcast the Tellytrack channel and, over a period of time, from that date, the various bookmakers, while paying Tellytrack a direct contribution towards the costs of the Tellytrack channel, also concluded arrangements with MultiChoice, for what is known as the Pubs and Clubs Package and purchased the relevant decoders and smart cards from MultiChoice to enable the Tellytrack channel to be received by and displayed at each for the bookmakers shops.
8. Notwithstanding the arrangements with MultiChoice the bookmakers continued to pay directly to Tellytrack a fee which they believed was to cover, on a break even basis, the costs of the Tellytrack channel. For those purposes each of the relevant Associations, in the case of Kwa-Zulu Natal, the Kwa-Zulu Natal Bookmakers Society (“KZNBS”) from time to time concluded agreements with the Tellytrack partnership in accordance with which the Associations paid an aggregate monthly sum to Tellytrack and in turn collected from its bookmaker members an amount to cover the payment made to Tellytrack.
9. The initial amount payable by each bookmaker to Tellytrack (via the relevant Association) for the Tellytrack channel was determined in accordance with discussions between Tellytrack and those Associations and was thereafter negotiated from time to time in the same way. Written agreements were concluded between Tellytrack and the Associations which generally ran for periods of five years. A fee based on costs to produce the channel would be settled by negotiation at the commencement of each agreement and then would escalate in an agreed manner until the end of the agreement whereupon a revised fee would again be negotiated between Tellytrack and the Associations. The underlying emphasis of all of those negotiations was that Tellytrack would be operated on a break even basis and that is how the fees payable by the bookmakers were to be determined.
10. In accordance with those principles, agreements were entered into between Tellytrack and each of the Associations. The last five year agreement expired in September 2013 and, at the date of expiry, the various bookmakers in KZN had been paying a monthly amount equal to R5 500 per bookmaking shop. Tellytrack are now demanding that each bookmaker must conclude a separate contract with Tellytrack which contract will provide for payment by each bookmaker in respect of each shop operated by the bookmaker of a fee equal to 3% of over the counter horse racing turnover in the relevant shop. This fee is a very substantial increase over the fee previously payable and is extortionistic in the extreme. While the ratio of the increase will vary from shop to shop the aggregate of that increase is approximately ten times (namely 1000%) over the fee previously payable.
11. Tellytrack argues that it is entitled to receive, from the bookmakers, a fee equal to 3% of turnover because this is the international rate charged between suppliers and receivers country to country of televised horse racing content. However Tellytrack ignores the fact that
* In the United Kingdom, the largest supplier to bookmakers of a similar horse racing channel does not charge its bookmaker customers 3% of turnover but charges them a flat fee per shop,
* The fact that the international rate payable from one supplier to another in cases where the same bodies frequently both supply and receive from one another does not constitute a market rate appropriate for the supply of such content to individual customers such as bookmakers or tote operators,
* An economically viable fee in RSA must have regard not only to what the supplier regards as being reasonable but also as to what is affordable by the relevant customers. In this case the bookmakers are the only true customers because, in so far as concerns all of the off course totes, those are either owned or controlled (or licenced in the case of the tote agents) by the respective partners in Tellytrack.
* The fact that they supply the RSA racing content to international betting shops on a fixed fee per shop as opposed to a turnover basis.
12. The impact of such an increase will in a large number of cases, cause the relevant operations to become unprofitable and those shops will go under.Even in the case where the size of the bookmaker will enable it to survive such an increase it has a very negative impact on the operations of the bookmaker including, in respect of bookmakers which have a number of shops, the necessity to close those shops which are unprofitable.
13. Tellytrack has taken steps to split the content of the Tellytrack channel into international racing and local racing. However Tellytrack is still demanding a fee equal to 3% of the relevant horse racing turnover in respect of each of those two channels, and the impact thereof remains the same.
14. That impact must be seen in the light of the following background and particularly the dominance of Phumelela both as a race course owner and operator and also as the major partner in the Tellytrack channel. The Tellytrack channel is, of course, a pure monopoly – there is no other similar and competitive offering in South Africa to which the bookmakers can turn for a horse racing channel. Until Gold Circle disposed of its Western Cape horse racing operations to Kenilworth Racing (Pty) Ltd (“Kenilworth Racing”) the only partners in the Tellytrack partnership were Phumelela and Gold Circle. When Gold Circle sold its Western Cape horse racing operations the Tellytrack partnership was, we understand, restructured so that the partners are currently Phumelela (63%), Kenilworth Racing (17%) and Gold Circle (20%). In as much as we believe that Phumelela indirectly controls Kenilworth Racing, Phumelela holds the major interest and is the dominant partner in the Tellytrack partnership.
15. Phumelela is, consequently, dominant in RSA as an owner and operator of race courses and dominant in the Tellytrack partnership. Additionally Phumelela owns the largest betting operation in RSA namely Betting World which has 53 betting shops in RSA.
16. Phumelela has pushed very hard to dominate the betting market, not only through its acquisition of Betting World but also through steps which it took to seek to prevent bookmakers from laying the open bet. Without going into too much historical detail Phumelela sued bookmakers in Gauteng to seek to prevent them from laying the open bet. The case itself, which was a test case, ultimately ended in the Constitutional Court which held that it was perfectly legal for bookmakers to lay the open bet. Phumelela has continued, in making representations to various gambling authorities, to seek to establish a legal monopoly over the open bet by the race course owners and operators namely Phumelela, Kenilworth Racing and Gold Circle.
17. In KZN the aggregate of the horse racing bets placed by punters is shared approximately equally between bookmakers (on the one hand) and the tote including the on course tote, the off course totes and the tote agents (on the other hand). By legislation, and in KZN, Gold Circle is the only entity which is entitled to operate any of the totes or to appoint any tote agents to do so. It consequently has a monopoly over those betting avenues. Kenilworth Racing and Phumelela enjoy the same monopolies in the Western Cape and the rest of South African respectively and, as indicated previously, we believe, as did the Competition Commission in its investigation into the Kenilworth Racing merger, that Phumelela controls Kenilworth Racing.
18. A tote bet is, from the point of view of the tote itself, absolutely risk free. The tote takes all the bets placed on a particular event, accumulates the bets into a gross pool and deducts what is referred to as a “take out” which by law can be as high as 25% of the amount wagered and pays out the balance to the winning punters.
– The tote consequently operates at a legally protected risk free monopoly gross profit which, based on the 2013 fiscal year published statistics, provided a gross gaming revenue return on turnover of 24%.
19. Bookmakers, on the other hand, make an undertaking to a punter to pay a predetermined amount to the winning punter. That is generally expressed as a function of the bet placed for example 10 to 1 (10/1). In this event, if the punter wins, the bookmaker pays to the punter the number wagered (in this case 1) plus the factor agreed (in this case 10) but is obliged, by the Gambling Board in KZN, to deduct 6% of the winning bet which is in turn paid to the Gambling Board. The Gambling Board pays 50% of the amount received over to the licenced tote operator, in the case of KZN, to Gold Circle. In other words of the 6% betting tax 3% of the winning bet is paid over to Gold Circle.
– Bookmakers, because they undertake in advance to pay out the agreed amount, are very much at risk. In other words being a bookmaker is not a risk free business. Furthermore, because they do not have the luxury of a predetermined take out and compete with one another for the punters custom, they work to a much lower profit margin one which is, averaged over a lengthy period, of the order of 11% (as reflected in the same 2013 fiscal year published statistics).
– Consequently, when compared with the tote, bookmakers run a business which results in a substantially higher return to punter than is the case in respect of the tote. The return to punter from a bookmaker is of the order of 89% and the return to punter from the tote is of the order of 75%. Furthermore bookmakers do this at risk and not all bookmakers survive.
20. The various off course totes and tote agents do not compete with one another on the price or return offered to their customers because that is determined by the very nature of pari-mutuel betting, after the event, and the deduction of the take out determined by the tote. The bookmakers on the other hand do compete with one another and with the off course totes and this competition is reflected in the lower rate of return earned by the bookmakers. Furthermore bookmakers can and do negotiate with customers the relevant price (effectively the odds offered) on a particular bet. True competition only manifests itself through the bookmakers. The totes and all of the off course tote operations operate under a legislated monopoly.
21. Phumelela and Tellytrack seek to justify the exhorbitant Tellytrack fee which is now demanded by them on the basis that bookmakers should (for reasons which are not altogether clear) be obliged to pay more to contribute to the sport of horse racing. This, however, ignores certain factors and provides a smoke screen for the very real competitive danger which flow from those proposals.
What is ignored is the fact that bookmakers are at risk when they run their businesses (as opposed to the risk free operation of a tote), that they offer a punter a better alternative than having to place a bet with a tote and that they can be and are flexible, when dealing with punters, in deciding on the odds offered on any particular bet.
22. The danger, to which reference is made, is the following.
For very many bookmakers an increase in the Tellytrack fee from the previous amount of approximately R5 500 per shop per month to a fee equal to 3% of over the counter horse racing turnover is too excessive to permit the bookmakers operation to survive. In other words the bookmaker is driven into a loss and will have to close. The only practical solution for bookmakers placed in that position is to try and find a purchaser of the relevant business. However, at the reduced level of profitability caused by the massive increase in the Tellytrack fee, the only real customers for the acquisition of the relevant insolvent shop will either be very large bookmakers such as Betting World or the tote operator itself (Phumelela or Kenilworth Racing or Gold Circle) because there is nothing which prevents a licenced tote operator from also conducting a bookmaking business (as evidenced for example by Phumelela’s ownership and control of Betting World).
This is equally true in relation to the larger bookmakers which may have a large number of shops and which may not be driven out of business but will likely also be forced to sell one or more of their existing shops.
23. There is little doubt that, in order for the bookmakers to compete with the off course totes and Phumelela’s wholly owned fixed odds operator Betting World, they need to be in a position to show the same horse racing content as that shown by the off course totes and Betting World. In the real world they just do not have the option of refusing to pay the requested fee and not taking the channel itself. In other words a refusal by bookmakers to take, or by Tellytrack to supply, the Tellytrack channel will have the same commercial impacts on the businesses of the bookmakers. Without the channel they will also be squeezed out of business.
24. The bookmakers consequently believe that the steps being taken by Phumelela, and which Phumelela argue are for the benefit of horse racing are, in fact, for the benefit of Phumelela in that it will, in so far as concerns the surviving bookmakers, very substantially increase the cash flow to Phumelela, and in so far as concerns the bookmakers which cannot survive offer Phumelela an opportunity to increase its dominance in the betting market by enabling it to either acquire and then operate the bookmaking businesses concerned or to acquire the relevant premises and to operate enlarged off course totes. The latter is obviously the case in relation to the whole of South Africa other than KZN (bearing in mind the fact that Phumelela controls Kenilworth Racing) and in so far as concerns KZN is equally for the benefit of Gold Circle.
25. There is a specific reason for the bookmakers concerns. As indicated above Betting World operates 53 shops in RSA. However Betting World “manages or unofficially owns” two shops in KZN, (the subject of which is under enquiry by the Provincial Gambling Board) and this is as a result of the fact that the provincial government and bookmaking licencing authority in KZN controls, in accordance with its own parameters, the grant to bookmaking licences. Thus neither Phumelela or Betting World have not been able to establish the same foot print in KZN as they have been able to establish in the rest of RSA. However, to the extent to which the increased Tellytrack fee has the effects referred to above this will open further opportunities for Phumelela and Betting World to acquire further bookmaker shops and to increase its dominance in the betting market.
26. Gold Circle’s agreement to sell its Western Cape horse racing operations to Kenilworth Racing constituted a merger which required investigation by the Competition Commission and the approval of the Competition Tribunal. The Competition Commission prohibited the merger. In its prohibition it made reference to documentation which relates to the very fears discussed above. The following are direct quotations from the Competition Commission’s prohibition of the merger in on 19 March 2012 under its Notice CC16.
“In particular, Phumelela can leverage its dominance from the horse racing administration market into the media rights market and thereafter the betting markets. There are several strategy documents alluding to Phumelela’s keen interest in single handedly controlling the entire horse racing industry in South Africa”, and “In various Betting World board minutes there are suggestions that Phumelela could use a media rights feed (Tellytrack) to squeeze rival bookmakers that offer the open bet”.
27. Although the Tribunal overruled the Competition Commission’s prohibition of the merger it did not, in its reasons, refute the statements which appeared in the Competition Commissions prohibition and which are quoted above.
28. The threat posed by the Tellytrack proposals has caused GOBA to institute action against the race course owners under the provincial legislation and tote licence applicable in Gauteng. That litigation is still ongoing.
29. MultiChoice has recently and publicly announced that it has terminated its broadcasting arrangements in respect of the Tellytrack channel. It is believed, although this is not affirmed by MultiChoice, that MultiChoice did not wish to be caught in the middle of a dispute between the race course owners/tote operators on the one hand and the bookmakers on the other hand. It is not known, at this point in time, what alternate arrangements are to be put in place by Tellytrack or indeed whether, if sense were to prevail, MultiChoice might be prepared to continue to broadcast the Tellytrack channel.
30. It is important to bear in mind at this juncture, that the racing industry is the only industry in this country that is directly funded by Government taxation. The 3% of government taxes amounted to R 82 million in the 2013 fiscal year. The racing operator continues to receive taxation subsidies generated on international racing events that they do not produce themselves but merely broadcast. In certain provinces they continue to receive taxation subsidies generated by bookmakers on sporting events like soccer, cricket and rugby.
31. The bookmakers accept that Tellytrack is entitled to a reasonable fee in respect of the channel. However they are firmly of the view that such a fee cannot be so onerous as to put them out of business or, even when they may be able to survive, severely curtail their income and accordingly their ability to offer reasonable services to their customers.
32. KZNBS has been forced to take legal advice in relation to the Tellytrack proposals, and has been advised that those proposals constitute practices prohibited by the Competition Act and that KZNBS should lodge a complaint with the Competition Commission.
33. KZNBS has also advised Tellytrack that it would be prepared to negotiate with Tellytrack in an endeavor to reach an accommodation and that it would be prepared to accept what it believed was an offer from Tellytrack to mediate but was advised by Tellytrack that Tellytrack would not mediate with KZNBS, nor seek to negotiate with KZNBS and would only do so with individual bookmakers. This clearly has unfortunate administrative and cost impacts on the bookmakers but some of them have already advised Tellytrack that they are prepared to mediate.
34. KZNBS is also in discussion with Gold Circle in an endeavor to find an accommodation appropriate for this province and the persons involved in horse racing in KZN. As a result of these discussions neither KZNBS nor any individual bookmaker which is a member of KZNBS has as yet taken any steps to lodge a complaint with the Competition Commission but Tellytrack is aware of the views of KZNBS and its members and that they are contemplating and may take that action.
35. The bookmakers would prefer to reach a reasonable accommodation with Gold Circle and Tellytrack rather than to be forced to take action under the Competition Act or on any other basis, and are hopeful that this may still occur.
The matter is ongoing
