Affected market: Off-course licensed bookmakers
The OFT’s decision on reference under section 22(1) given on 16 April 2008. Full text of decision published 24 April 2008.
Please note that square brackets indicate figures or text which have been deleted or replaced at the request of the parties for reasons of commercial confidentiality.
Ladbrokes plc (Ladbrokes) operates 2,114 licensed betting offices (LBOs) in the UK, Channel Islands, Ireland and Belgium offering a selection of betting services for sporting and non-sporting related activities. Ladbrokes also offers remote betting services through its telephone and internet services.
Eastwood Bookmakers (Eastwood) owned and operated 54 LBOs in Northern Ireland, offering a selection of betting services, and a telephone betting service. Based on gross win [Note 1], Eastwood's UK turnover was [….] for the year ended 31 December 2006.
Ladbrokes acquired the whole of Eastwood and all relevant assets on 6 February 2008. The statutory deadline is therefore 6 June 2008. Ladbrokes notified the OFT on 22 February 2008 in response to an enquiry letter sent on 8 February 2008. The administrative deadline is 22 April 2008.
As a result of this transaction Ladbrokes and Eastwood have ceased to be distinct. The share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met. The parties overlap in the supply of off-course betting in the UK with an estimated share of supply, based on gross win, of 25-30 per cent with an increment of less than 1 per cent. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.
FRAME OF REFERENCE
The parties overlap in the supply of off-course betting services through LBOs and telephone betting. The Eastwood telephone betting service is relatively small, with an annual turnover of [….] compared to [….] for Ladbroke’s telephone service in the period January to June 2007. Given that telephone betting is a national market and that there are other large competitors with a national presence, the increment in Ladbrokes’ share of supply in this segment is so small that the OFT does not believe that this transaction will result in a substantial lessening of competition in telephone betting, and so this segment will not be considered further.
In previous decisions relating to mergers in the LBO market [Note 2], the OFT has followed the conclusions of the Monopolies and Mergers Commission (MMC) in its report on the Ladbrokes/Coral merger [Note 3]. Ladbrokes submitted that the definition of the market should be consistent with this previous approach.
The MMC concluded that betting is a separate market from other forms of gambling and leisure activities, as the terms on which betting is undertaken are not closely constrained by other forms of gambling or leisure activities [Note 4]. Further, on- and off-course betting were each separate markets as they were carried out at geographically separate locations and constituted different activities (e.g. on-course betting is part of attending a race with its associated extra costs) [Note 5].
Third parties in this case agreed with the MMC approach. One noted that there are few gambling alternatives in Northern Ireland to visiting an LBO and the prevalence of horse racing and football as the dominant betting products means that LBOs have a significant position with respect to gambling activities. Another third party agreed that on-course and off-course betting were distinct offerings (while noting that LBOs rely on the on-course bookmakers to provide the starting price), while a further third party considered that on-course betting might only be interchangeable with off-course betting in racecourse towns (on race meeting days).
The MMC also found that off-course betting through an LBO is not in the same market as telephone betting. Telephone betting was found to attract a different type of consumer accustomed to betting much higher stakes, often with a credit facility. Telephone betting services can also remain open twenty four hours a day, seven days a week, unlike LBOs. In the William Hill/Stanley decision, the OFT found no evidence to suggest that customers switched from LBO to telephone betting. Third parties generally agreed with this view. While one third party believed that recent growth in telephone betting had limited increases in LBO turnover, another considered that a large proportion of customers rely solely on LBOs.
The OFT considers that the investigation in this case and responses by third parties do not provide any reason to depart from the approach to the product market taken in previous cases and so for the purposes of this assessment the relevant product market is the supply of off-course betting services through LBOs.
The MMC considered that there were both national and local elements of competition with regards to the activities of LBOs. For the purposes of assessing competition at the local level, the MMC stated that a 400 metre radius was a reasonable distance within which to consider competition, supplemented by a finding that competition concerns would arise if a transaction removed all competition within a radius of 800 meters. Further to this, the OFT also considered regional elements in the Ladbrokes/Jack Brown decision. Ladbrokes submitted that there were local and national elements to competition between LBOs but that there was no regional element, as prices were not set regionally and LBOs were not chosen by consumers on a regional basis.
Overall, the OFT considers that its investigation and third party responses in this case have not provided any reason to change its previous approach to the geographical market. Competition on price takes place at a national level as LBO’s tend to offer odds on a national basis. Further, with regards to horse and greyhound racing almost all the bets taken by LBOs are laid either at board or starting prices. The former are set by bookmakers operating at the relevant race courses, while the latter are based on odds derived from the on-course bookmakers when the race starts by an independent body, the Starting Price Regulatory Commission. These are used by all LBOs and are therefore the same nationally.
Third parties in general agreed with the MMC view with regards to the use of a 400 metre radius to assess local competition. One third party considered that customers would travel much further than 400 metres, but did not provide any evidence to support this claim. One third party responded that LBOs competed on their accessibility to consumers. Another third party considered that it did not compete with LBOs outside of its immediate area of operation, and noted that Ladbrokes put in place specific promotions in LBOs in those localities where they were in competition with each other.
The OFT considers that it does not need to conclude on the relevant geographical market on the basis that competition concerns do not arise in this case on any level. For the purposes of this assessment however, the OFT has considered the competitive effect in line with previous decisions, taking into account national, regional and local markets, the latter based on a 400 metre radius around each LBO with an 800 metre radius used as a sensitivity check.
The evidence before the OFT indicates that competition between LBOs can be split into price and non-price competition. As noted above, prices in LBOs are set on a national basis, and there is limited competition with regards to horse and greyhound racing, where most of the prices used by LBOs are derived from on-course bookmakers.
Non-price competition thus forms the basis of the majority of competition between LBOs and this appears to take place on a local level. Third parties generally agreed that promotions are the key form of this competition, such as enhanced odds, payout bonuses, double results [Note 6], enhanced lottery odds and betting without a favourite. Customer service and staff attitude, facilities (such as gaming machines) and location were also considered important ways that LBOs competed with each other, with location particularly significant due to the importance of accessibility for consumers.
At a national level, Ladbrokes and Eastwood combined have a market share of 20-25 per cent, an increment of less than 1 per cent. The merged entity faces competition from several other national LBOs, including one with a higher market share, William Hill. Given the small increment and the competition provided by other national LBOs, the OFT considers that there will not be a significant lessening of competition at the national level.
Ladbrokes will be the largest LBO operator in Northern Ireland, with a market share of 20-25 per cent, an increment of 15-20 per cent from their pre-merger market share of below 5 per cent. Ladbrokes will continue to face competition from a number of operators around Northern Ireland, two of which (William Hill and McLean) have market shares above 10 per cent. In addition, over 40 per cent of the market is accounted for by small chains and individual LBOs. Given the small base from which Ladbrokes started and the continuing competition it will face from existing competitors across Northern Ireland, the OFT does not believe that the merger will result in a substantial lessening of competition at a regional level.
Information provided by Ladbrokes on the location of LBOs indicated no instances where LBOs owned by either Ladbrokes or Eastwood overlapped within a 400 metre or 800 metre radius. The OFT did not receive any evidence to suggest that individual Ladbrokes and Eastwood LBOs outside these radii competed with each other. As such, there are no instances where competition is reduced on a local level and therefore no likelihood of a significant lessening of competition.
Barriers to entry and expansion
LBOs in Northern Ireland are still subject to the demand test laid out in the Betting, Gaming, Lotteries and Amusements (Northern Ireland) Order 1985 under which licences for new LBOs are only granted if the applicant can prove unmet demand in the area in which they wish to enter. Third parties agreed that this is the main barrier to entry, with one noting that the existence of the demand test restricts the number of LBOs and another noting that it adds to the costs involved in setting up a new LBO as applications are likely to be contested in the County and High Courts.
As the OFT does not believe that there is a likelihood of a substantial lessening of competition, it does not need to conclude on barriers to entry. Nonetheless, the OFT does, however, consider that the demand test is a significant barrier to new entry at a local level. The main entry/expansion in the past five years has been through acquisition (William Hill and Ladbrokes), with the prices for acquisition being high due to the lack of new licences available. However, acquisitions will not increase the number of LBOs or add capacity.
THIRD PARTY VIEWS
In addition to the comments noted above, two third parties raised some concerns regarding the merger. However, these concerns related to the size of Ladbrokes and its ability to offer more attractive terms to consumers and were not merger specific. The remaining third parties had no concerns regarding the merger.
Ladbrokes and Eastwood overlap in the supply of off-course betting services through LBOs. Price competition mainly takes place at a national level, while at a local level non-price competition is more important, most notably promotions and location. For completeness, the OFT has assessed the merger on a national, regional and local basis.
At a national level, Ladbrokes will have a post-merger share of 20-25 per cent, an increment of less than 1 per cent. At a regional level in Northern Ireland, Ladbrokes will have a post-merger share of 20-25 percent, an increment of 15-20 per cent from a pre-merger share of less than 5 per cent. Ladbrokes will continue to face competition from a number of competitors, including strong regional and national players. On a local basis, there were no instances where LBOs owned by either overlapped within a 400 metre or 800 metre radius, meaning that there are no instances where competition is reduced on a local level.
Consequently, the OFT does not believe that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
- Gross win is the money that is kept after the winning bets are paid.
- See in particular Completed acquisition by William Hill plc of the licensed betting office business of Stanley plc, 1 August 2005, and Completed acquisition by Hilton Group plc (through Ladbroke Racing (Reading) Ltd of Jack Brown (Bookmaker) Limited, 27 September 2005
- Ladbrokes Group plc and the Coral Betting Business: A report on the merger situation, CM4030, 24 September 1998
- Ibid., Para 2.63
- Ibid., Para 2.64
- In the event of a stewards enquiry and the disqualification of the winning horse, LBOs will pay out on both that horse and the official winner.