Impact of financial turmoil on gambling

I've had plenty of time for reading recently and, as I always do, I have been nosing around some company reports. Ladbrokes, IG Index and William Hill have all reported good results recently and this seems to bode well for the wider gambling community. IG Index, the spread betting company continues to impress. They are growing much faster than Betfair.

While revenues seems to be holding up quite well, on two of those three there are shadows over the results. Both Ladbrokes and Will Hill have a fairly large debt burden and this will need to be re-financed. As you have seen in the news, banks are not that keen on lending and that could cause big problems for heavy borrowers. As you would have seen from previous posts, Betfair don't exactly have a problem with debt. But they do have another problem which will shape their business this year.

The Bank of England recently lowered interest rates again to just 1.50%. As, effectively, a net lender to society this is not great news for me, but at least I am in a good position compared to most. I owe this thanks to the wise words of Warren Buffett in 2003 who predicted exactly the turmoil we have seen. The problem that Betfair has lies in one aspect of Betfair's business model. One that is directly related to interest rates.

If you look at their reports and accounts in the last five years, interest received on cash in hand has totalled a eye watering £26m. In 2007 & 2008 interest received accounted for 25% of profit before tax for Betfair.

(1) Client withdrawals will no doubt have drastically depleted client funds on deposit at Betfair. This was no doubt exacerbated by the financial crisis last year and also by the fact that client deposits in gambling markets are not regulated in the same fashion as in financial markets. This probably sped up the withdrawal of cash.

(2) Betfair will earn less interest due to these lower client funds. Betfair's bottom line has obviously benefited quite a lot in the past from all this interest received. Now that interest rates are so low, the yield is going to be tiny. Betfair will have to plug the gap somehow, either by cutting costs or increasing charges.

Based on prior experiences, I think I can guess how they will plug the gap. What ever happens it looks like Betfair definitely have a business issue to solve.