FOBTs: where on Earth did they come from? And why?

FOBTs: where on Earth did they come from? And why?

  • Andrew Tottenham — Managing Director, Tottenham & Co
May 3, 2018 6:00 AM
  • Andrew Tottenham — Managing Director, Tottenham & Co

As most of you may know, the long-awaited decision on whether to cut the maximum bet on Fixed Odds Betting Terminals (FOBTs) has been pushed back again. Some of you, though, may well be asking: what, exactly, are these FOBTs, and why were they allowed in the first place?

Let me try to bring a little clarity to the matter. An FOBT is simply a gaming device with several different games on it, the most popular of which are variants of roulette. Currently, the maximum stake is £100, the maximum pay-out is £500, and a game (or spin) cannot be shorter than 20 seconds. Each retail betting outlet is allowed to operate four of the machines. The roulette game variants account for about 70 percent of gross gaming revenue from this type of machine; total GGR from the approximately 33,000 FOBTs installed in bookmakers’ retail outlets in the UK was approximately £1.8 billion in 2017.

So why do bookmakers have the privilege of operating these machines when other gambling establishments do not? That process was started quite a while ago, in the last decade of the last century. There were two changes then (one was law, the other innovation) that made FOBTs possible: first, a shift in tax structure that removed the tax burden from a gambler’s stake and levied it instead against gross gambling revenue. Clearly, if a bookmaker had to take a tax of 9% on every bet placed on a machine, that machine would not be very popular. The second change was the innovation that’s effectively upended the world in the years since: the ability to communicate securely via the internet. I’ll explain.

Licensed bookmakers have the legal right to offer bets on future events so long as they are not taking place in the bookmakers’ premises. William Hill plc started it all off by offering bets on a keno style game. They had pseudo random number generators (PRNGs) set up in an office somewhere in the UK. Every few minutes, the PRNG would spit out a four-digit number, which would be transmitted to and displayed in the betting shop. Customers would bet on what the next four-digit number was going to be and would win an amount depending how many of the numbers were correct. These were termed fixed-odds bets.

The bookmakers’ argument was that the PRNG generating a number was an event, albeit an electronic event, and it was located outside of the bookmakers’ premises and, thus, legal. Some bookmakers, wanting to ensure legality, went so far as to set up Sixties-style lava lamps (I’m old enough to remember them) with cameras trained on them. The lamps were located somewhere undefined – but away from the bookmakers’ premises – and, every so often, the camera would take a picture of the lamp. A computer would then pick four pixels from the picture of the lamp at random and assign each one a number between 0 and 9 depending on its colour. Four pixels, four numbers.

The Gaming Board, as it was then known, took a dim view of this. So did the National Lottery, which saw it as competition to their lottery monopoly. The Board eventually sued the bookies, claiming the product was illegal. The bookies stood their ground, and just before midnight the Gaming Board caved in and dropped their law suit. It seems fair to conclude that their counsel had advised them that the case was weak. Ultimately, in 2003 the Gaming Board and the bookmakers negotiated an agreement, or code of practice, covering the offering of this type of fixed odds product.

As is usual, once the legal framework was established, capital began, as it does, to flow toward this new opportunity. This, coupled with the ingenuity of entrepreneurs, meant there were suddenly a plethora of fixed odds games to choose from, including slot cabinets with roulette games on them. With that, the FOBT was born.

Roll forward to the 2005 Gambling Act, which gave the Government the opportunity to put legal restrictions on what had been, up until then, a voluntary agreement about the number of FOBTs and the stake and prize limits. Under the new Act, bookmakers were permitted to operate four FOBTs per venue; the revenue from these products is now about 36 percent of all UK bookmakers’ land-based revenues.

The problem with this, naturally, is that, when you restrict the number of machines per location but do not restrict the number of locations, it is inevitable that more locations will open if the machines prove popular and profitable. Which is exactly what happened.

As you are no doubt aware, much angst and hand-wringing in the media about the dangers of FOBTs, coupled with more than a few politicians jumping on the bandwagon and echoing those views, has forced the Government to act on the matter. To that end, the Gambling Commission recently held a long public consultation about what the maximum FOBT stake and prize should be, and concluded that the current £100 maximum should be reduced to £30. The media and politicians would have none of that, some going so far as to accuse the Gambling Commission of being in league with the bookies. The consensus among the media and the pols has called for a reduction of the max bet to £2 and not a penny more, this figure seemingly based on no evidence but the view that reducing the maximum stake would reduce the potential for harm. The Government has thus far postponed its decision, and various other maximum bets have been floated lately. I suspect these may have been leaked by the Government to see what the reaction might be. It has remained loud and vociferous against anything larger than £2. A decision will have to come soon. Whatever that result might be, some people are going to be very disappointed.