Q & A: Ross Ivers, Paddy Power

With Ireland set to reduce its betting tax next year from 5 percent to 2 percent, the country's most prominent bookmaker, Paddy Power, is gearing up for a new era of tax-free betting. The company responded to last week's news by announcing that it will begin subsidizing the betting tax for all of its punters on May 1 when the new rate comes into effect. It will be the first time a major land-based bookmaker offers visitors to its betting shops the same tax break that's offered to its Internet and telephone customers.

Ross Ivers, finance group director with Paddy Power, told IGN that the move was more about trying to win over more customers outside of Ireland than it was to compete with business on Paddy Power's Internet site, or the sites of other bookmakers. Ivers also reviewed the events leading to the tax reduction and explained how the Irish government was forced to reduce the tax to stay competitive with the United Kingdom.

IGN: The reduction of the betting tax has been in the works for a long time. How did all of this come about?

Ross Ivers: Betting in Ireland is subject to a 5 percent government duty. That is on any bet placed in Ireland; it doesn't matter if it is placed on a sporting event or on racing. This is not a tote system or a pari-mutuel system like what you would have in the States.

The Irish government released its budget last week and they reduced the betting tax from 5 percent to 2 percent. This followed a move in the U.K. budget to reduce their tax to a 15 percent gross margin tax, as of Oct. 6.

The 2 percent tax that we'll have in Ireland is equal to about a 15 percent gross margin tax. It comes out about the same because most betting shops are going to have a margin of 13 percent of their turnover.

We wanted to get equalized with the U.K. We are just getting there in a different manner.

Obviously if your margins are lower than 13 percent then paying a turnover tax is higher than paying a gross margin tax.

IGN: Paddy Power and other bookmakers in Ireland were actively campaigning to get the tax lowered after the announcement in England. Do you think those efforts played a key role in getting the tax down to 2 percent?

RI: There has been a campaign going on for a while to get the minister to put in the budget a reduction in the tax. The movement was trying to get the reduction down to 1 percent. That 1 percent would have been an increase for Internet-based businesses because their margin tends to be lower. That would have been equal to the 15 percent margin that is in effect in the U.K.

The minister, of course, came out with the 2 percent reduction, and following that announcement we were at first a bit disappointed that we didn't get the 1 percent we were looking for. But notwithstanding that we announced the following day that from the first of May next year, which is when the reduced rate kicks in, we will subsidize the betting duty on behalf of our customers. We will therefore be offering tax-free betting to the Irish-based shop punter.

IGN: So how does all of this effect your account wagering systems?

RI: It doesn't effect our telephone or Internet operations; they were already tax-free. They were tax-free because we had structured those operations offshore from Ireland.

We were therefore part of the U.K. tax regime and were paying that 15 percent of the gross turnover tax, but the bettors themselves weren't being assessed a tax.

IGN: Your brand strength, which was built primarily through your land-based betting shops, gives you a luxury other Internet operators don't have. Did that help in making the decision to subsidize the tax?

RI: We are the leading brand in Ireland. We have 90 percent brand recognition in Ireland, and that is a pretty phenomenal statistic considering that nine out of 10 people know who we are and a lot of those people don't even bet. When people who don't even bet know who you are you know you have a good institutional-level brand recognition.

Obviously, in terms of the Internet space, we are able to build off that existing physical-world brand into the domestic Internet market which then gives us a channel to move overseas, particularly into the U.K. market.

We are expanding through all of our channels in the U.K.; our telephone, Internet and shop channels are all expanding over there right now. So we have been able to build off of our brand recognition.

IGN: Is the company confident that the business it generates by subsidizing the tax will pay for the cost of paying the tax itself?

RI: If you are subsidizing a tax and you are talking about a business that is depending on growth rates between a 7 to 13 percent growth margin, that is your betting win margin.

For betting over here in Ireland, if you are counting 2 percent, that is a big chunk compared to 7 or 13 percent. We are obviously hopeful that this move will pay for itself. We suspect that we will get sufficient turnover increase to compensate for the cost of subsidization.

I think we will come out ahead of the game. With the increased turnover, and the lower margin, we will make more operating profit than we would have before subsidization.

IGN: Your turnover at your land-based shops continues to outpace that of the Internet site. Is there intention to aggressively increase turnover on the Internet to get more in line with what the shops are bringing in?

RI: Absolutely. We are very pleased with the development of the Internet. We have learned from our early mistakes and have tightened our margins up. Our margins are getting to where we want them and the number of customer registration and customer growth is moving to where we want to see them.

We are still optimistic that we will meet our plan, which is a profitable business by 2004. We are on target to break even by 2003 and start turning a profit in 2004. That has been our long-range plan and we aren't changing from it at this point in time.

IGN: Bookmakers all over the globe are looking at the 2002 World Cup as a key opportunity for the year. Is Paddy Power any different?

RI: Paddy Power is the official bookmaker to the Irish National Football team. The Football Association of Ireland named us their official bookmaker. We are also the official bookmaker to the Irish Rugby Football Union and several other institutions. So we are delighted to see Ireland qualify for the World Cup and are hoping that it will be good for business.

It will be interesting to see which channels get the most of the business because of the starting times of most of the matches. If matches are on at 4 a.m. people aren't going to walk down to their local betting shop to watch the match. It is more likely that we will see an increase through the phones and through the Internet, where people can access it whenever they want. We think the World Cup will have huge interest across the country and will be very good for business.

IGN: This seems like a perfect example of how the Internet can create revenue streams when your traditional business models aren't viable. Would you agree?

RI: When Ireland was in the European Championships people would visit the betting shops and they could see the event live there. That really isn't practical with a number of the matches in this environment, but the Internet is a great way of accessing our system.