On Feb. 28, Taiwan Sport Lottery Corp., a subsidiary of Taipei Fubon Commercial Bank Co. Ltd., sent a letter to the SAC claiming it lost over NT$500 million (US$15.71 million) in 2009 and needed to halve the amount of revenue it forwards to the council under the terms of their agreement.
TSLC, which is authorized to run the lottery from 2008 to 2013, must give the government NT$20.83 billion over six years, or an average of NT$3.47 billion a year. The company had anticipated sales of NT$33.65 billion from 2008 to 2009, but only reached NT$19.1 billion—56.8 percent below forecasts.
Attributing low sales to a delay in launching the lottery, changes to regulations governing issuance, and the global financial crisis, TSLC said these factors had driven up operating costs, forcing it to save money by offering less-attractive odds. The company believes that the business is now irretrievably damaged, with many punters pursuing “underground” alternatives.
Admitting that it was caught off guard by TSLC’s admission, the council said it would seek legal advice and request an independent audit of the company’s books and operating procedures before settling on a response. However, the SAC assured consumers that even if the company cannot be persuaded to honor its contractual obligations, the sports lottery would remain in operation until an alternative tender is located. In addition, TSLC will forfeit its deposit of NT$650 million if the contract is terminated.
So, what went wrong for the sports lottery? It seems like only yesterday that TSLC officials were celebrating the venture’s launch with rosy predictions of healthy bottom lines and ambitious expansion plans that capitalized on the local passion for pro sports.
As with many he-said, she-said wars of words, it is difficult to pinpoint the exact reason for the operation’s difficulties, but TSLC must shoulder most of the blame for submitting over-optimistic earnings forecasts. The Ministry of Finance, which oversaw the tendering process on behalf of the SAC, is also at fault as it asked bidders to submit revenue forecasts based on a fixed-rate portion of expected sales rather than actual sales.
On the surface, the MOF requirement makes perfect sense, but only in a business with large amounts of local data that can be used for financial modeling and planning. As legalized sports betting is new to Taiwan, analysts did not have much to go on and may well have fallen prey to Taiwan’s corporate organizational culture that has zero tolerance for those who go against the grain.
The best way forward for TSLC and the council is to hammer out a more open-ended deal that maximizes the lottery’s revenue generation potential. This is important because the lives of Taiwan’s handicapped and the development of sport on the island depend on revenues from this government-licensed business. According to the Regulations Governing the Issuance of Sports Lottery, 10 percent of net earnings from the business is allocated for social welfare programs, with the rest being placed in designated funds to promote sports activities.
The first step in this process is to recognize that under the current regulations, the lottery will always be nonprofitable for operators. As legalized sports betting has only been in operation for three years, it is difficult to ascertain exact revenue levels for the business. By employing a quarterly review mechanism over the first two years of the contract, both parties would gain significantly from any adjustments that needed to be made to their forecasts.
Another issue that must be addressed is the lottery’s low sales, which raises the question of whether there is a market for sports betting in Taiwan. For those in the know, this is a no-brainer. There has been a huge underground gambling market on the island for years, with hundreds of thousands of locals wagering on baseball, basketball, football and hockey fixtures. With the right business model, there is no reason why TSLC cannot win a lucrative slice of this action.
Such a model, however, would have to push game-fixing fears to one side and permit bettors to wager on single games. For example, TSLC puts local Chinese Professional Baseball League games and U.S. Major League Baseball games on the same slip, meaning that one needs more than the luck of the Irish to correctly predict winning outcomes and receive a payout.
Although the financially hurting TSLC has not yet cried “no mas” and turned away from Taiwan’s punters, this could be a possibility unless the SAC agrees to cut a new deal. The sports lottery involves the livelihoods of many people, including those employed at more than 1,000 betting outlets and affiliated enterprises. It is an odds-on wager that the business will not be allowed to fail.
—Alex Yermoloff is a free-lance writer based in the Isle of Dogs, U.K. These views are the author’s and not necessarily those of “Taiwan Today.” Copyright © 2010 by Alex Yermoloff
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