Offshore Sportsbook Face Crises

“Greed is good. Greed works,” insisted Micheal Douglas in the film Wall Street.

It doesn’t work if you’re a sports bettor, enticed by overly generous signup incentives to open an account with a book that runs itself into the ground by giving away the store in an attempt to attract customers.

Offshore sportsbetting has morphed from a small niche market into a mainstream business, currently estimated to be in excess of $4 billion annually. But despite impressive growth over the last ten years, it has experienced a few hiccups along the way and is currently going through a difficult period.

The emergence of betting over the Internet as an alternative to toll-free telephones accelerated the industry’s growth, and its problems. Fierce competition among bookmakers has created a players’ market. While many bettors are delighted with the leverage they have, there is a downside, which is frequently overlooked.

That downside is the vice cited in the opening paragraph: greed. The trend in which players succumb to offers too rich for a sportsbook’s bottom line has resulted in escalating signup incentives that are simply bad business, and which contribute to weaker, poorly managed books sinking out of sight, leaving in their wake outraged, stiffed bettors.

Irresponsible incentives are being offered by some books in order to attract new business. Here is just a sample of what is available: bonuses from a responsible ten percent to forty percent and higher; reduced vigorish or juice-free wagering at special times; a free sports pager; cash rebates on losses; reload bonuses; referral bonuses; special payoffs for teasers and parlays; free funds transfer; free contests; autographed footballs—the list goes on and on.

Whether they like it or not, the sportsbooks have created an environment in which bettors are encouraged to look for as much “free” money as the gaming companies can come up with. This new business strategy has been tried before in other industries, often with disastrous results. When the savings and loan industry suffered huge losses stemming from the inability to pay high interest rates used to lure customers, it had the FDIC as an insurer for many of the failed companies. Offshore books have no such safety net. Even shops that are solid veterans of the business have to bend somewhat and make offers that they know are not prudent.

You can’t blame the players for looking to get as good a deal as possible. But savvy bettors know not to gravitate toward offers that are obviously too good to be true. The proliferation of offshore books worldwide—over 600 and climbing—coupled with resistance from a large segment of bettors who are not betting offshore, means growth rates for some shops are stagnating. Essentially, the books are poaching customers from each other by making offers that ignore the economics of operating efficiently.

Why are so many bettors continuing to do business with local bookmakers, and eschewing offshore? Despite all the advertising dollars that have been thrown at every conceivable media venue, there are still lots of bettors who are unfamiliar with the concept, or haven’t bought into it. These players are happy with their local stores, or they have concerns about the safety of their money with offshore books.

We think the answer for offshore books is simply to take a look at the larger picture and act accordingly. There must be a different focus to efforts aimed at attracting the holdouts. We are referring to implementing an institutional ad via a campaign like the “Got Milk?” effort by the dairy industry to increase milk consumption. To quantify the startup and operational costs facing offshore sportsbooks, we spoke with William Caesar, general manager of Antigua-based Carib Sports, which has been a profitable entity since 1993. He provided an insider’s perspective.

Let’s start by looking at startup expenses the average offshore book must deal with. For argument’s sake, we’ll assume the book has a deep marketing budget and is shooting for 2,000 players. That is ambitious but attainable, advises Caesar, adding, “In order to achieve that goal, you are going to have to spend $600,000. The average cost to get players through advertising is $300 per customer. Years ago, that figure was $150 or lower, depending on your marketing ability.”

“Average deposit for players is $250, so with 2,000 customers averaging $250 per deposit, you are home free if you can get them to deposit twenty times. But the average customer makes only 10 deposits. However, for argument’s sake, let’s say you get $10 million in deposits that first year. And let’s say of the money deposited we win forty percent. That’s a reliable ballpark figure for most well-managed books.

So, with $10 million in deposits, you will win about $4 million. Out of that come your expenses. Whatever is left over is your profit.”“We accounted for advertising costs, but clearing $10 million through credit cards will cost you $500,000. Staffing up with clerks will run an additional $500,000 to $600,000 annually. Today, you need not only telephone clerks, but an online capability as well. So add about $1.3 million for computers, software, licensing and other Internet expenses. Then factor in skilled technicians that must be on hand; rent; telecommunications; just basic stuff; and the cost is about $1.7 million.”

The offshore veteran noted that the expenses he quoted actually add up to a deficit. “So to be profitable, you must increase hold, reduce expenses, or do a little of both. Books that insist on getting customers with excessive bonuses stand a good chance of becoming road kill,” he asserted.

Caesar summed up by stressing, “Those players who chase bonuses are not going to get paid a lot of the time. When the books finally realize they have no chance of staying in business as a profitable company, they just grab whatever deposit money is still left and they’re gone. The responsibility for avoiding all this is on the player. Those who chase the biggest signup incentives are at a much greater risk to get burned!”