Tatts and Tabcorp: Worth a punt?

With the race that stops the nation now run and won, bookmakers and the lucky few punters who picked the winner are tallying their gains. Australia has long been a nation of gamblers, but are the big two worth a flutter?

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With the race that stops the nation now run and won, bookmakers and the lucky few punters who picked the winner are tallying their gains.

Australia has long been a nation of gamblers – it's often claimed (probably correctly) we'd happily bet on two flies crawling up a wall. It's perhaps no surprise then that we have our share of ASX listed gambling companies.

Reigning champs…
The granddaddy of gambling businesses in Australia surely must be Tatts Group (ASX: TTS). Long familiar to Victorians and Tasmanians, Tattersall's traces its history back to a lottery business started in the Apple Isle in the last decade of the 19th century. For many decades, Tatts was a privately held business, before listing on the ASX in 2005.

Only barely resembling the business of a couple of decades past, Tatts still controls Victorian lotteries but now has the licence to run lotteries in NSW and Queensland, poker machines in Victoria (until next year) and in 2006 merged with UNiTAB, which owned the Queensland, South Australian and Northern Territory TABs – itself a public company after the floating of what had previously been government-owned businesses in those states.

Competing with Tatts Group in the horse racing and sports wagering space is Tabcorp (ASX: TAH). Newly lightened after spinning off its casino businesses into newly listed Echo Entertainment Group (ASX: EGP), Tabcorp has retained its formerly government-owned TAB businesses in NSW and Victoria. It also runs Keno in licenced venues in NSW, Queensland and Victoria, the latter in a joint venture with Tatts.

…and heirs presumptive
The proliferation of gambling options available to Australians is the key challenge facing these two 'traditional' gambling businesses. Once upon a time – not too long ago – you had to trudge down to your local TAB or to a bookmaker on-course at a race meeting to place your bets, or to your local newsagent to buy a lottery ticket.

These days, there is no shortage of alternative options, including a plethora of online bookmakers and an increasing number of ways to gamble your hard-earned. Among the new brigade are now-UK-owned Centrebet, which led the charge in online bookmaking, and you don't have to go far – especially at Melbourne Cup time – to see ads for Tom Waterhouse, Betstar and many others. The arrival of Betfair in Australia means you don't even need a bookie – gamblers can take either side of any bet.

It seems whatever your interest – anything from horse racing to federal elections are fair game – you can find someone to take your money to speculate on the outcome. Many bookmakers are now even taking bets during matches, and you can bet on first try scorers, half-time margins and the result of the next game in a tennis match.

Gambling has become a commodity…
For the incumbents, the dual benefits of entrenched exclusivity and geographic monopolies have swiftly come to an end in fixed price wagering. In the days of one betting agency and one lotteries provider in each state, there was no (legal) competition. Governments, and later shareholders of the privatised TABs simply clipped the ticket on each bet. Innovation was limited, and profits were reasonably easy to come by.

Consumers now have many more places to spend their gambling dollars, and most products have swiftly become commoditised with the advent of broadly available online gambling. Gamblers can now pick and choose the best odds from among the plethora of bookmakers. More disconcertingly for the established players, the online providers are now offering to match or beat the best TAB price. The explosion in competition has also put pressure on the odds that are being offered – and that puts pressure on margins.

…and online may well win
If you're imagining a gambling version of the current challenge for 'bricks and mortar' retailers, you're exactly right. In fact, it's not too much of a stretch to imagine Tatts and Tabcorp at the pointiest end of that comparison – analogous to music retailers in the face of iTunes and Amazon.com.

The product in question – in this case a financial transaction – is a known item, is easily digitised, requires no inventory or shipping, and size and colour are irrelevant. It is as true for music as it is for gambling – and the incumbents are racing to shore up their existing business, while building competing online offerings to take advantage of the new technology.

Foolish take-away
While it's a truism that the house always wins, the internet has enabled many houses to be built on this particular street. Tatts Group and Tabcorp may well emerge victorious from this particular battle, but I'm not sure there's enough of a discount built into their share prices to reflect the current uncertainty.

For my money, the odds aren't sufficiently in our favour to make shares in this duo a bet worth making.

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Scott Phillips is The Motley Fool's feature columnist. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only. Authorised by Bruce Jackson.

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