Globalization and the French Horse Racing Industry

On a serene Tuesday evening, as the sun begins to set and the clouds reflect an ethereal glow from city lights, crowds congregate at the Vincennes racetrack just outside Paris. Proud horse owners, the bourgeoisie families gather on the indoor balconies of the hippodrome for dinner as they follow the races with binoculars. Parisian locals, mostly aging lower-to-middle-income laborers and salary men, congregate on the outdoor stands and pore over the plethora of statistics available for each race. They ardently debate each horse’s genealogical lineage, the performance of the jockeys, the quality of the trainers, the condition of the turf, and whether horseshoes should be worn on the front hoofs, the hind hoofs or not at all. No detail is too trivial to be factored into a bettor’s secret recipe for selecting the winning horse.

A scene much like this took place in exactly the same location in the nineteenth century, a testament to the fact that horse racing today is one of the least modernized and most perennially popular sports in France and around the world. The Tour de France takes place once a year and the World Cup is played once every four years, but each year more than 10,000 horse races are followed closely by 6.5 million bettors, wagering more than €9.5 billion (US$12.7 billion). At the heart of French horse racing is Pari Mutuel Urbain (PMU), the state-supervised horse racing authority, the second largest betting organization worldwide and the single largest supporter of the French equine industry. PMU acquired its name after revolutionizing horse-race betting 80 years ago by bringing pari-mutuel betting from racetracks to urban centers, thus popularizing the sport in villages, towns and cities all over France with a network of more than 11,000 points-of-sale.

The rituals and traditions of French horse racing have endured, but today the industry faces very modern threats: an aging bettor profile, a growing contingent of potentially untapped online gamers and gamblers, and competition from new horse race betting operators who contest PMU’s support from the French government. These challenges, hastened along by the loss of monopoly status for online betting in France in 2010, became a catalyst for PMU to modernize its commercial approach strategically and promote the globalization of the French horse-racing industry. As the largest pari-mutual betting operator in Europe and the second largest in the world, PMU responded proactively and turned these challenges into opportunities to become better prepared for the globalized economy.

Curtailed from Expanding Abroad and Restrained at Home

With the development of European Union free trade agreements, PMU saw its monopoly status to operate horse-race betting become a barrier to both international expansion and competitiveness at home. In 1989, PMU’s attempt to expand by offering French racing content exclusively through a Belgian partner competed directly against U.K. gaming company Ladbroke’s Belgian subsidiary. Ladbroke lodged a complaint with the Court of the European Communities, which levied a fine against PMU for receiving French government support. In 1997, Ladbroke filed a second complaint when the French government reduced the state betting levy by approximately 1.1% to help develop PMU’s social scheme, implement a computerized betting system and restructure PMU’s majority shareholders. Ladbroke and PMU finally settled the issue in 2001, when it was decided that PMU’s expansion into horse-race betting in Belgium would be limited to a standard business-to-business exportation model.

At home, PMU’s future competitiveness was potentially at risk when, in 2007, the French Supreme Court reversed a 2005 court decision blocking Maltese ZETurf.com from accepting bets from French bettors online, declaring it a violation of Article 49 of the founding treaty of the European Economic Community. ZETurf.com took advantage of differing tax structures within the EU countries and paid only 0.5% tax to the Maltese government, allowing the company to retain 4.5% in profits while still distributing 95% of bets back to players. In comparison, PMU paid 12% in French taxes and 8% to the French equine industry. After deducting operating costs, it could redistribute only 74% of bets back to players. Due to its monopoly status at home, PMU could not protect the French horse-racing industry from an offshore competitor that offered a 28.4% greater average return to its players.

The online French horse-race betting industry was finally opened with the passing of the Law of May 12, 2010 which, among other measures, created the French Regulating Authority of Online Gaming (ARJEL). The mission of this independent administrative authority is to protect the consumer, recognize approved gaming operators, fight fraud and money-laundering, and control tax revenue on stakes from the three approved sectors of online gaming: horse racing, sports betting and poker. PMU lost its rights to a French monopoly for online betting but maintained exclusive rights to non-Internet betting through its physical network of betting terminals.

PMU has not only survived the loss of its online gaming monopoly, but also has thrived by leveraging its core competencies to modernize itself for the online market and globalize French horse-race betting operations. In the words of PMU CEO Philippe Germond, “the loss of monopoly status presents a company with the ideal opportunity to reinvent itself.”

First, ARJEL’s impartial regulation of online gambling leveled the playing field for all betting operators and eliminated the advantages of operators located in tax havens, such as ZEturf.com in Malta. Foreign gaming websites were free to request a license to operate in France, but were required to pay the same taxes and contribute the same percentage of their stakes toward supporting the French equine industry as PMU had always done. Higher taxes eroded profit margins and reduced the competitiveness of foreign operators who did not benefit from PMU’s long history, brand recognition or economy of scale.

Second, rather than choosing to simply defend its position in horse-race betting, PMU moved into the previously unexplored markets of online sports betting and poker to become a one-stop-shop for French gamers. This key strategic decision was designed not only to cater to the rapidly increasing popularity of sports betting and poker in France, but was also an attempt to rejuvenate an aging consumer base by attracting a new generation of younger players. A redesigned PMU.fr website that offered sports betting and poker alongside traditional horse-race betting coincided with the launch of a radical marketing campaign that was far from PMU’s traditional image. Humorous television advertisements featuring star jockeys in fish-out-of-water sports situations (for example, performing the All Blacks Haka dance before a rugby match or sitting on each other’s shoulders to compete against a basketball team) were voted France’s second-favorite advertising campaign in 2010.

Third, the ability to offer a large betting pool is a critical point of competitiveness in pari-mutual betting. According to Gilles Bourron, PMU’s head of treasury and insurance, “one of PMU’s core strengths has always been our large player community. In pari-mutuel betting, where the amount of the winning pay-out is a percentage of the total amount wagered, PMU benefits from having a large number of bettors and a large total wagered amount, which allows us to offer more exotic and profitable betting products.” In 2010, 6.5 million players made five billion bets, and PMU is still the only betting operator that can offer eight ways to bet on each race with a daily €1 million (US$1.34 million) “Tirelire” (jackpot).

The Globalization of French Horse-race Betting

The successful navigation of international and online regulations has not only allowed PMU to enter the sports-betting and poker markets, but has also potentially put PMU on pace to saturate the horse-race-betting market in France. After more than a century of perfecting the pari-mutuel betting business model at home, PMU and horse-racing associations have leveraged their core competencies to aggressively globalize a traditionally local product by exporting French races and importing foreign races for French bettors.

PMU’s enormous common betting pool and the array of simple and exotic betting products make partnerships with PMU particularly attractive to foreign horse-race-betting operators looking to offer more profitable betting products to their betting community on PMU’s IT platform. This platform is a result of significant PMU investment in order to keep up with the volume of betting, allowing bettors to place bets almost up to the start time of a race and distributing winnings merely five minutes after the official results are announced.

With France as the home to the most active horse racing industry in Europe, PMU developed a business-to-business media and information network and created a dedicated television channel, Equidia, devoted to high quality live coverage of races. Bourron explains the critical relationship between information and propensity for betting: “It is well known that real-time race images significantly increase the volume of bets placed. Equidia has won numerous awards for excellent coverage. With multiple cameras covering all areas of the hippodrome — race track and stable areas, Equidia‘s live commentary is engaging and provides complete information on races.” Images, videos and statistics are transmitted real time to bettors in France and abroad via television, Internet and physical betting terminal.

PMU has been licensing and exporting images of French races through these networks since 1987 and has been offering French bettors foreign races since 1997. According to Aymeric Verlet, PMU’s international development director, “international expansion is extremely important for the future on both fronts: offering more foreign races for French bettors and offering more French races to bettors abroad. We are continuously looking to broaden our partnership base and deepen our relationship with these partners.” Starting with countries with the least amount of cultural and physical distance, such as those in Western Europe or Francophone Africa, PMU has moved further from its geographic comfort zone to partner with betting operators in countries like the U.S., Hong Kong and Argentina.

Local Malians, similar to their counterparts in many other francophone African countries, were already following French races and placing bets through local operators, so PMU was able to benefit from the vestiges of a colonial pastime to organize a previously unstructured market by offering an official agreement to provide French horse-race betting. South American and Asian races present an interesting alternative to French racing for European bettors due to time differences and opposing seasons. Argentinean races, for example, could be offered during the late evening and in the winter in France, when local races may not be available.

As a consequence of developing business-to-business partnerships for the last 10 years, as of June 2011, PMU was involved in 57 international partnerships, nine of which benefit from sharing PMU’s immense betting pool. These business-to-business partnerships represented €384 million (US$516.9 million) in 2010 revenues. To continue growing, might PMU now be free to consider more than just business-to-business partnerships through the acquisition of a foreign operator and provide direct business-to-consumer betting services? Before the aggravation of the European crisis, Odie, PMU’s Greek homologue and current partner, was a noteworthy candidate with which to examine a new business model of expanded control in a foreign market.

The broadcast in Athens of the October 14, 2010, Prix de l’Arc de Triomphe marked the debut of PMU’s partnership with Odie and was the first step in a chain of events that might ultimately result in PMU acquiring its first-ever international subsidiary. On December 2, 2010, George Kyriakos, special secretary of state-owned enterprises at the Greek Ministry of Finance, presented Odie as an example of one of numerous privatizations planned to raise a portion of the €54 billion (US$72.5 billion) required from Greece as part of the €118 billion (US$159 billion) bail-out orchestrated by the IMF. The partnership between Odie and PMU and French horse-racing associations could double revenues by increasing the number of races, introduce a 50/50 mix of Greek and French products, increase Odie’s physical network to 1,000 points-of-sale, and leverage PMU’s marketing expertise to broadcast races on a new, dedicated national television channel. Greece also planned changes to its Internet gaming laws in hopes of tapping into the estimated €4.3 billion (US$5.8 billion) Internet-gaming black market.

If it were to follow this strategy, PMU could drastically reverse the Greek racing industry’s downward momentum. Although Greece, like France, has a history of horse-race betting, the state of racing in Greece is in a downward spiral in which an insufficient number of races results in meager betting revenue, which further reduces the number of racing events. However, in order for PMU to export its proven business model of pari-mutuel betting, Odie would need to have full control and supervision of the races in Greece, as PMU and horse-racing associations do in France. Currently, that authority rests with the Jockey Club of Greece, which, unlike PMU and the French horse-racing associations, has no stake in Odie. A change so fundamental to the structure of the Greek horse-racing industry might take years of legal wrangling within parliament.

Although there is positive long-term potential for an acquisition in Greece, prospects are clouded by the short-term uncertainty in Greece’s and Odie’s finances, liberalization of Greek Internet gaming regulations and ODIE’s ability to obtain greater control over the horse-race organization from the Jockey Club of Greece.

New Demographics, New Games, New Markets

No matter how the Greek partnership evolves, however, the opening of the French online gaming market and PMU’s diversification into sports betting and poker present the company with several strategic opportunities and challenges.

One such opportunity is the potential for PMU’s rebranding to offer a younger demographic a unified betting platform that places sports betting and poker alongside PMU’s core horse-racing product. Sports gamers might also be drawn to a new PMU television channel that targets horse aficionados and racing fans rather than the gambling audience of Equidia.

A second opportunity is to grow a strong PMU presence in the online sports-betting and poker markets themselves. Between the opening of the online market in 2010 and August 2011, €12.4 billion (US$16.7 billion) of total online stakes were collected for the entire French market. After the tax payments and distribution of winnings, the net gambling product was €200 million (US$270 million). Of this amount, online sports and online horse-race betting accounted for 12% and 26%, respectively, and poker accounted for the remaining 53%. In terms of market share, PMU maintained 84% of the online market share for horse-race betting and gained 18% market share for online sports betting and 6% for poker: These advances placed PMU as the first global operator in the French online market.

However, the online market of horse-race betting, sports betting and poker combined represents only 10% of PMU’s stakes. The remaining 90% of stakes are collected from off-line horse-racing betting points-of-sale. Should PMU push into sports betting and poker to continue to expand its presence in the French online gaming market? And would such a move be in line with its priority of supporting the French equine industry?

Finally, a third opportunity is for PMU to realize its mission to improve the equine industry in France by actively boosting the global horse-racing market through direct foreign partnerships. Perhaps the success of a direct investment into a foreign network, such as Greece or another European country, would suggest the viability of similar business-to-consumer expansion into other horse-racing markets such as Asia, South America, Africa or beyond.

This article was written by Elsie Iwase, James Tanabe and Annie Wang, members of the Lauder Class of 2013.

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