Paddy Power is an Irish bookmaker which was founded in 1988 through the merging of 3 existing Irish bookmakers. It is a publicly owned company with its headquarters in Ireland and it is listed on both the Irish and London Stock Exchanges with a share price of €60.07 on 08 December (Yahoo Finance, 2012). It currently operates 319 retail outlets, with 212 in Ireland and 107 in Great Britain (Paddy Power, 2012).
Paddy Power offers their customers the opportunity to bet on sports events, Presidential elections and even the extinction of animals. The company also operates its own website, where in addition to the above mentioned betting services, it also offers customers online poker, online casino and spread betting.
This analysis was written in 2013.
Paddy Power lays out its mission & values clearly as it has ‘adopted a commitment to offer greater value and fairness to customers who had for too long suffered from the whims and self-interest of a staid oligopoly’ (Paddy Power 2012). Paddy Power PLC has a hierarchical organizational structure which is laid out in the company’s annual report (Paddy Power PLC, 2012). The Board of Directors comprises 8 non-executive directors who formulate the strategy of the organization. The CEO is responsible for the implementation of these strategies which he communicates to the middle management of the company. Since the early 2000s, Paddy Power has enjoyed continual revenue and profit growth, despite the economic downturn (Paddy Power PLC, 2012). There was a 17% increase in revenue between 2010 and 2011, with a turnover of €4.6bn and an operating profit of €120m (Paddy Power PLC, 2012). Please see appendix for breakdown of Paddy Power financial information for past 5 years.
In our report, we will analyse Paddy Power as a company using strategic analysis tools such as a SWOT analysis and Porter’s value chain which should highlight the competitive advantages of the company. We will also analyse the external elements affecting Paddy Power by completing an analysis of the bookmaker industry using Porter’s five forces model and a PESTEL analysis. Once this has been completed we will be in a position to identify the key strategic challenges facing Paddy Power and what strategic options senior management can pursue to overcome these challenges. We will finish the report by issuing our recommendations for Paddy Power with regard to the future direction of the business.
Paddy Power has many strengths throughout its core business which help to differentiate it from the myriad of competitors in the industry and together they contribute to the firm’s strong market performance (Finfacts Ireland, 2008). One of their key differentiating factors are the creative marketing campaigns that they develop, such as messages in the sky at the Ryder Cup (Harrison, 2012) and giving Nicklas Bendtner sponsored underwear at Euro 2012 (Independent.ie, 2012). Paddy Power has integrated online and mobile betting into its operations and the huge success of these platforms has had a major effect on their bottom line, with net revenues up 74% between 2009 & 2011 (Paddy Power PLC, 2012). The Paddy Power brand ranked 4th out of all gambling brands in research conducted by Apiafi Associates (PRNewswire, 2010).
Paddy Power does experience some difficulties however. Customers have reported problems with their I.T systems at different stages, some of which have caused the website and mobile application to crash and the company have been forced to apologise on several occasions (Paddy Power Blog, 2012). While the company offers a wide range of products, some of their offerings are standardised and not able to compete with the bigger players. An example of this is the poker software as CEO Patrick Kennedy conceded that competitors “have the technology platforms to provide online poker operations that Paddy Power doesn’t possess” (Mulligan, 2012). Another weakness is the controversy that Paddy Power has courted due to their risky marketing campaigns. This was seen when the company took bets on which marine life would be first to die out as a result of the BP oil spill (Fottrell, 2010).
Paddy Power has expanded into a number of new international markets in recent years (iGamingBusiness, 2012) and the opportunity for continued expansion exists as the profits continue to grow. Online gambling is due to become legal in many of the U.S. states (Mulligan, 2012) and this would provide the company with a great opportunity to establish a presence in that market. Concentrating more resources on mobile betting could be a good strategy for the future with further growth expected in this area (PR Newswire, 2012).
The economic slowdown has also affected Paddy Power’s revenue (Mulligan, 2012) and if the decline continues it could be bad news for the company. If the Irish government contemplated increasing regulations in the industry, this could curtail some of Paddy Power’s commercial activities. Government taxation policy also represents a threat to the company which we will look at in further detail in our PESTEL analysis.
Paddy Power’s strengths far outweigh its weaknesses as we have shown above. Extra focus should be put on eliminating these weaknesses and turning them into strengths – e.g. an unstable website can become a consistently reliable form of betting for customers. In a similar way, the opportunities facing Paddy Power are far greater than the threats they face. The economic slowdown has impacted all of the companies in this sector, but Paddy Power is in a unique position to successfully expand into new markets due to their differentiated brand.
Value Chain Analysis
Using Porter’s value chain model, we will now look at the value adding activities of Paddy Power.
The inbound logistics of Paddy Power refers to the data/information required to produce odds for different events. It is essential that the data is correct and reliable and therefore the sources of the data must be trustworthy, such as Opta Sports.
Operations: teams of quantitative & risk analysts set the odds on 12,000 to 15,000 events a week (Dillow, 2011). They calculate these odds by interpreting the information received through inbound logistics. E.g. the analysts may use a horse’s weight, form, etc. to predict the likelihood of that that horse winning a particular race.
The outbound logistics of Paddy Power will be the final odds produced for each event. These will be made available to customers through its 319 retail outlets (Paddy Power, 2012), via its website and through the Paddy Power Smartphone app.
Paddy Power’s marketing & sales department and creative marketing campaigns have been described in the SWOT analysis. Recently the company has begun engaging its customers through social networking, with the company having an active presence on Facebook & Twitter.
Paddy Power’s after sales service is one of their main competitive advantages. If customers wish to contact the company with any issues the response time is very fast, with average response time to phone calls of 8 seconds & e-mails 1.5 hours (Paddy Power Support, 2012).
Infrastructure: the organizational structure of Paddy Power was explained in the introduction to this report.
Human Resource Management: Paddy Power employs approximately 3,000 people and insists that talented employees are given a chance to develop their potential. Salaries offered are competitive and there are a wide range of extra benefits to reward & motivate employees such as bonuses, pension, health insurance, etc. (Paddy Power, 2012).
Unlike other companies, technology acts as a support activity for all the primary activities in Paddy Power’s value chain, beginning with gathering the statistical data, right through to after sales service. We will discuss the company’s successful use of technology in greater detail later in the report.
The procurement function in Paddy Power is responsible for ensuring that all systems used are up to date and acquiring any new systems required.
Thompson, Strickland & Gamble (2012) argue that a company achieves a competitive advantage when an attractive number of customers prefer its products or service over the offerings of competitors. Paddy Power’s main source of competitive advantage is its relationship with its customers.
One of the core elements of Paddy Power’s brand is that the company aims to be seen as the ‘Punter’s Pal’ (Davy Stockbrokers, 2005). There are a number of techniques Paddy Power uses to maintain its strong relationship with customers. Paddy Power offer a ‘Money Back Special’ on many of its bets, where they give customers their money back if a pre-specified outcome materialises. This has been a very successful strategy for the company, which Paddy Power’s CEO Patrick Kennedy believes ‘has been borrowed and poorly replicated by many of our competitors’ (Paddy Power, 2012). This initiative has proven to be very popular with customers and has encouraged customer loyalty along with further enhancing the company’s reputation as one of the most customer friendly companies in the industry.
In conjunction with the money back special, Paddy Power is also known for its ‘justice payouts’ which occur when the company refunds bets because the bet was deemed to be unfair by Paddy Power. For example in May 2012, Paddy Power refunded any bets placed on the horse “Flag Officer” in a race in York because the horse pulled up just 100 yards into the race. Paddy Power said its customers “didn’t get a run for their money and they’d feel a little dirty keeping hold of it” (Paddy Power Betting Blog, 2012). This type of payout has helped to create a great relationship between the customers and the brand, which have lead to Paddy Power being perceived as the most customer-friendly bookmaker.
Completing a PESTEL analysis for Paddy Power will help highlight any opportunities that could potentially lead to another source of competitive advantage, as well as any further external factors the company must be aware of.
Technological and Social
With the creation of the internet and more recently the invention of the Smartphone, technological developments in recent years have had a major impact on the betting industry. Paddy Power has been an industry leader in adapting to this ever changing technological environment. As mentioned in our SWOT analysis, Paddy Power has been very successful with the development of its website and in particular its Smartphone app. In 2011, the fast growing online sector of Paddy Power’s business accounted for 79% of the company’s operating profit, while turnover from its Smartphone operations had increased by a staggering 255% since 2010 (Paddy Power PLC, 2012). Many of the factors associated with the increased use of technology have a close correlation with new social trends. Consumer’s time is more precious now more than ever before, with many of the “new” generation of users struggling to find time to spend travelling to traditional bricks and mortar betting shops. The advancement of Paddy Power’s website and more importantly its mobile betting facilities has allowed the company to meet its customers’ needs.
The recent worldwide economic downturn has had an impact on all firms in the bookmaker industry, and Paddy Power is not an exception to this. In a circular issued to shareholders (Paddy Power PLC, 2011), the company stated that the company is dependent on its customers having sufficient disposable income to spend on sports betting and gaming, and that during the recent economic crisis it has experienced a lower average stake per bet. However as mentioned above, Paddy Power’s financial results have been excellent over this period, showing that its technological innovation has helped to shield it from the economic downturn.
Political, Environmental and Legal
Despite the rapid recent growth of online betting, governments are only attempting to introduce new legislation to replace the current, outdated laws that deal with this issue. Legislative changes in this area are expected soon in Ireland (Department of Justice, 2006) and it is important that Paddy Power is aware of these changes and puts sufficient measures in place to manage this new legislation. The UK legislation is much more up to date and so long as the company hold all the relevant licences and permits and keeps up to date with any legislative changes, it should face no issues here. In the company’s annual report, Paddy Power’s Chairman highlights the risk the company faces in relation to increased betting tax, (Northridge, 2012).
Porter’s 5 Forces Model
Analysing the bookmaker and online gaming industry using Porter’s 5 forces model will give us an overview of the competitive pressures facing Paddy Power and the effect these might have on the future strategic decisions of the company.
Threat of new competition
The major barrier to entry to the bookmaker industry is the strict regulation which exists in the industry. A licence must be granted by the state for a company to be allowed to register as a bookmaker (Department of Justice, 2006). To be granted such a licence a firm must pass a background check on the security measures that are to be implemented and also on the prospective company’s key employees.
Threat of substitute products or services
The National Lottery acts as a substitute to the offerings of firms in the industry, as they can be easily purchased online or in newsagents at the customers’ convenience. However Paddy Power now offers customers the opportunity to bet on the Lottery so this is less of a threat than was previously the case.
Bargaining power of customers
The bargaining power of customers is very high in this industry as there are a large number of bookmakers offering odds which are the exact same or very similar. This power has increased further with the development of internet gambling, where the potential customer can now access dozens of different online gaming websites and choose whichever company the offers the best odds (888, bet365, etc).
Bargaining power of suppliers
In the case of the retail side of the business, the bargaining power of suppliers can be high. For example, Paddy Power has entered into leasing agreements to rent premises for 10-25 years in some cases. To try to combat this long term lock in period, Paddy Power has inserted clauses into the newer lease agreements that will allow them a review of rates every five years, as well as concentrating more resources on the online & mobile parts of the business.
Intensity of competitive rivalry
The bookmaker industry is a highly competitively competitive market. Competition comes from both the online gambling websites and the other retail outlets that are established around the country. Paddy Power must be able to compete with companies who devote all their attention to online gambling such as 888.com and Full-Tilt-Poker.
We will now look at the key strategic challenges & issues facing Paddy Power and discuss some of the actions the company’s senior management could take to overcome these issues. We will then issue our recommendation of the strategy that we believe the company should follow to ensure the ongoing success and profitability of Paddy Power.
Legislation exists in countries around the world which makes sports betting and online gambling illegal, preventing companies such as Paddy Power from expanding its operations as much as it would like. This legislation currently represents a barrier to entry into the U.S. but not to countries in Europe as the E.U. has forced European nations such as Germany, Italy & France to legalise online gambling (European Commission, 2012). One possible course of action Paddy Power could take is a far reaching marketing campaign to portray gambling in a more attractive light and see it as a form of entertainment, rather than an addiction where people can lose large amounts of money. This campaign could be supported by all the companies in the industry, with the aim of convincing governments in countries such as the U.S. to follow the lead of the E.U. and legalise online gambling.
In our PESTEL analysis we discussed how Paddy Power were worried about the increase in the betting tax in Ireland & the U.K. which at the moment is just 1% in Ireland and non-existent in the U.K. (the tax is on the company’s profits instead). If these tax increases are introduced Paddy Power will be faced with the decision of whether the company or their customers will be the incidence of this tax. i.e. where will the tax burden fall on. Presently the 1% Irish betting tax is paid by Paddy Power (RTE News, 2007), however until the late 2000s the 9% U.K betting tax was passed on to customers. We recommend Paddy Power absorb the tax themselves as much as possible because unless every other bookmaker passed the tax on to customers, they would almost definitely lose business.
We have discussed the growing importance of the online and mobile areas of Paddy Power’s business and yet, as mentioned earlier, they have had many problems with their IT systems failing. In a circular sent to shareholders (Paddy Power PLC, 2011) the company itself emphasises the importance of responding quickly and adequately to changes in technology. We recommend the installation of early warning systems which will warn technicians that problems may be on the horizon. These systems must be installed in the very near future while Paddy Power still has an advantage over its competitors in this part of its business. Significant resources may need to be invested to ensure Paddy Power maintains this competitive advantage.
According to the above mentioned circular issued to shareholders (Paddy Power PLC, 2011), the company needs to maintain, develop & enhance its brand to prevent its financial performance from being adversely affected. Damaging coverage of its activities (e.g. the BP oil spill example) may require greater expenditure and management time invested into maintaining customer loyalty to the brand. We recommend that the senior management of the company has a meeting with the marketing department to establish a line which the company does not feel should be crossed in its marketing campaigns. Of course the company does not want to impose overly tight restrictions on a department which has been very successful in the past, but it is important that marketing campaigns strengthen rather than damage the Paddy Power brand.
The strategy we believe Paddy Power should follow to achieve most success would be to concentrate on the online and mobile betting sectors of the business, whilst paying less attention to the retail sector and closing down its telephone betting service. Paddy Power should look to the software behind the online & mobile aspects of its business as a possible core competence, rather than its current policy of outsourcing this part of the business. This could be done by acquiring a relatively small software company which require heavy spending in R&D and we have shown Paddy Power has the funds available to do this. If the company does not feel an acquisition is the best option for them, some kind of merger or partnership with software providers is essential to ensure the company maintains its competitive advantage in online & mobile gambling.
Following this strategy would mean a reduction in the number of the bookmaker’s retail stores, with the less profitable and loss making shops the first to go. Although this will result in the loss of some customers, the higher overhead costs associated with these stores make it the correct decision. These resources would be put to better use in the online & mobile side of the business which is where the future of Paddy Power lies. The marketing department could roll out a marketing campaign to convert many of its retail customers to transfer their betting activity online. The telephone betting service provided by Paddy Power (dial-a-bet) should be completely closed down. Its operating profits in 2011 were just €1.1m (Paddy Power PLC, 2012) and the resources used to operate this service could be put to much more profitable use if employed in the online & betting areas of the business. Since the introduction of mobile betting, the profits from dial-a-bet have fallen continually from year to year.
As has been clear from our analysis of both Paddy Power and the bookmaker industry, the company is in a very strong position financially and it can expect plenty of opportunities in the coming years to ensure its ongoing success. There will also be a number of challenges which the company must overcome and we believe the company will be best prepared to deal with these challenges by concentrating more on the online & mobile areas of the business. By changing its current policy of outsourcing software development, Paddy Power can build on its current advantage in online & mobile gambling and perhaps create a sustainable competitive advantage in this area.
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