The internet has revolutionised the nature of traditional betting markets. At the forefront of the revolution has been betting exchanges; trading systems that facilitate person to person betting, through allowing consumers to open back or lay positions in a wide variety of betting markets.
Throughout its short history, the betting exchange industry has been mired in controversy. The exchanges have come under heavy criticism from incumbent operators,sports body regulators and industry associations, and, at times, even their own customers. Ralph Topping of William Hill told an industry magazine in 2009 that Betfair was "a massive secret society where illegal gambling is taking place."
Betfair, the world's leading betting exchange has sought and failed to enter the US betting market with its betting exchange format. It has had its progress checked in Australia, and become bogged down in a regulatory quaqmire in Europe. The subject of a disastrous stockmarket flotation, Betfair once called for the death of traditional bookmakers, and yet in May 2012, introduced risk based fixed-odds betting on singles markets in certain of its sports markets.
The USP of betting exchanges?
The ability to back and lay, in conjunction with low transaction and information costs, conspires to attract a heavier concentration of better informed, more financially focused bettors into the betting exchange marketplace. These more informed bettors typically seek out opportunities to identify misperceptions of probability, so as to benefit by removing or mitigating it, their presence in the betting market thus contributing towards,for example, the erosion of the favourite-longshot bias. Moreover, the forced removal of the once dominant risk averse bookmakers from the betting market, or at least the erosion of their monopoly position, serves to contribute to the development of near perfect 100% books on almost every sporting event.
Transparent markets - Transparency equals fair betting markets, because it ensures that all players in the market are provided with the same market information. In its purest form, a betting exchange, which covers horse racing, presents a system, where all private information about a horses chance is incorporated in the price; in addition to information pertaining to Jockey; track, trip, form etc....Punters are able to learn of each others information by observing prices, and they are, for the first time, able to change their actions according to the prices that they see (they can play or lay, and bet in-running). There will be instances, for example, where the price of one horse drifts badly before the start of a race, whilst that of another contracts; punters may decide to lay the first horse, because they have concluded that the change of price of the second, contains important adverse information about the chances of the first. Transparency also facilitates arbitrage across the betting market, thus ensuring that different prices do not obtain on different markets. Late money on the betting exchanges is found to be the most accurate prediction of true outcome probabilities and the greater the late odds movement in an entrant, the higher its probability of winning. Betting exchanges, with their dynamic live markets, reveal this information to the betting public; whereas in the case of parimutuel/Tote operators, last-minute changes in odds are not signalled to outsiders.
Longshot Bias - Research into betting exchanges supports the notion that the longshot bias is positively related to the transaction costs faced by bettors in acquiring information concerning the true probabilities of runners in a horse race/sporting event. Markets that are characterised by lower transactions and information costs, have a tendency to be more informative, and punters trading those markets are provided with a more realistic assessment as to the chance of longshots. Accordingly, the favourite longshot bias is typically diminished, if not eroded - a situation that pertains in the horse racing betting markets available on Betfair.
Low cost structure - The low cost structure of the trading system, ensures that transaction costs for traders are kept to a minimum. This ensures that the prices available on the betting exchanges are significantly better value,and more informative, than those on offer from the traditional bookmakers. (often upto 20% more competitive).
Our analysis of outright betting on the 2006 World Cup revealed that Betfair's book on the top twelve teams in the betting market was betting to an over-round of 100.92 against an average over-round of 112 elsewhere.
Breadth of bets - Punters are able to undertake in a veritable melange of betting transactions; in simple terms they can play or lay, and bet in running on all events, however, the more sophisticated may hedge, arb; cut in running; etc....... much more appealing, when compared with the rigidity of the traditional fixed odds betting menu;
Perception - Punters do not traditionally like bookmakers and in the betting exchange they have been presented with a system that purports to be "betting without the bookies." Every time one of the Big Three UK bookmakers is seen to knock the betting exchanges punters are more likely to migrate towards the exchanges in defiance. In its early days Betfair's forum was particularly successful in breeding a spirit of loyalty amongst its exchange users.
Who are the betting exchanges?
Betfair is the dominant global betting exchange. In the financial ending April 2012,
the company had 852,000 active customers. It said that customer funds held off balance sheet in separate ring fenced accounts amounted to £288.3m, whilst it ended the period with a cash balance of £135.4m.
The bigger Betfair gets, the harder it is for its competitors to keep pace with it: the network effect. The Betfair exchange boasts a high degree of liquidity, across a wide range of sports betting markets, alongside a professional customer service operation and a fully integrated telephone and internet betting service. It would be difficult, if not impossible for any start up to be able to scale up to match the services that Betfair provides, without incurring significant costs.
The robustness of Betfair's business model is demonstrated by the fact that since its formation,
the company has continued to increase revenue growth month by month, despite facing fierce competition from other betting exchanges, many offering zero commission rates (Mansion betting exchange which opened in September 2004, offering zero commission, shut its doors in October 2007). Moreover, when Betfair introduced a premium charge on some of its super users In September 2008, the anticipated flight of liquidity to other exchanges simply did not materialise.
There is also the simple fact that a new trader is more likely to see his order matched on the Betfair exchange, than on any other betting exchange, because of the high number of users already trading on it. Accordingly, there is also an inducement for all traders to send their trades to the Betfair betting exchange at the same time, in the knowledge that they will all stand a better chance of having them matched.
Global Betting Exchange of Dublin, meanwhile, the Dublin based betting exchange company, funded by the Irish financier Dermot Desmond and the company behind the more well known Betdaq exchange, has to date, failed to challenge Betfair's dominant market position. Chatter persists of a strategic deal with Ladbrokes, and this is something that would certainly serve to threaten Betfair's domination.
A large number of other companies have sought to break into the betting exchange sector,but have been forced to exit with their tails between their legs.
In 2010 SpreadFair became one of the biggest casualties of the sector. Visitors to the company's website were met with the following message;
"Dear Cantor Spreadfair Customer. Cantor Index Limited has taken the decision to close Spreadfair, its online betting exchange, to focus on its financial spread betting and CFD business. Effective from 4 pm, 1st December 2008, Cantor Spreadfair will cease to accept new customers and will take no further opening wagers. Any funds that you have on deposit with us remain totally secure and any funds not required to support open bets will be refunded to you immediately. If you have any questions, please contact our customer services team on ..."
European Betting Exchange plc (Betbull)reported a net loss of 560,000 Euros for the first half of 2007, with net gaming revenue decreasing to 6.7 million from 7.0 million. For the first quarter ended March 31, 2007, the company reported a loss after tax of 94,924 Euros on net gaming revenue of 3.9m Euros compared with a loss after tax of 851,624 Euros on net gaming revenue of 3.3m Euros during the previous year.
In February 2009 Betbull announced that it had taken the decision to cease trading on it's exchange betting platforms www.betbull.com and www.betbull.de with effect from 28th February 2009. Commenting on the announcement, Simon Bold the director of Betbull Holding SE was quoted as saying;
"We no longer see exchange betting as part of our core business, we therefore prefer to focus our attention on the retail sector, where we are achieving sustained growth and healthy margins in Germany and
beginning to roll out units in Madrid under the winners licence awarded last September. We strongly believe
in the durability of the retail model and see great potential for growth in the European markets. Online
sportsbook will still be available to our retail clients via the existing Primebet website."
Casualties in the betting exchange sector to date have included; Abex88; Backandlay; Betbug; Betbull Exchange; Betx, matchedbets; iwageru; ggbet exchange; bluevex; ubetanything; spomaxx; swapbets; Betbutler; Betxc; Fairoptions; HubDub; Levelbet; Playp2p; mybetyourbet; bet-ex; bettingsociety, SpreadFair; SportingOptions; Betmart; Mansion betting exchange; Livebetting.Com, Tradesports and Parbet betting exchange.
Alternatives to Betfair currently include;
Betdaq, Matchbook, WBEX and Smarkets.
Betfair's initial competitive advantage centred upon the fact that it offered the punter value alongside a product architecture that was more easily accesible, more transparent and more versatile than anything that had gone before. That it was threatening the dominant market position of the Ladbrokes, William Hill's and Centrebet's of this world was clear clear. Sean Boyce of Ladbrokes was quoted as saying;
"We agree that betting at the current overrounds per runner is not sustainable either off-course or on-course, and we are concerned about the continuing downward trend of overrounds since the emergence of betting exchanges."
On January 29, 2003, David Harding, Hills' then CEO said;
"If you track the over-round per runner over the past twelve months, you can track it from the point where Betfair and Flutter merged (December 2001). Since then, there has been a steady decline in the theoretical overround per runner. ..........Some racecourse markets now return overrounds of only 1.2 to 1.3 per cent per runner. That is not sustainable. I cannot have a price mechanism for 50% of my business being desecrated."
On 12 February 2003, the CEO of Jupiters, one of Australia's largest gaming companies was quoted as saying; "European betting exchanges are taking some of our high value clients away . . . which is having a major impact on the business."
In a speech entitled 'The Impact of Betting Exchanges on Horseracing', Peter Savill claimed that the growth of betting exchanges had served to put the future of the entire horse racing industry in jeopardy. To hammer home his point, he noted that racing received £14 million from every one billion bet in betting shops, and seven million from every one billion bet on credit or through the internet, the sport received only one million from every one billion matched on the betting exchanges;
"their impact on racing's finances has been ignored by the Levy Board, and the charging mechanism by which revenues are raised by both the Levy Board and Government is fickle to say the least."
In evidence given to the Joint Committee on the Draft Gambling Bill, the BHB stated that their data licence to bookmakers was based on gross profits, because a stable relationship had always existed between turnover and gross margin, prior to the arrival of the betting exchanges. The betting exchanges, they argued, because they have directly led to a lowering of bookmakers gross margins, have upset the funding model;
"The gross profit model is unusual in charging for a product, the purpose of BHB's data licence. It is inappropriate where the relationship between turnover and gross margin dramatically alters, as is the case with a business which seeks to operate on low margins. It confers an unfair advantage on the low cost operator and creates an unwelcome market distortion. A supplier does not price his product lower simply because his customer is a low cost operator. In the case of low cost airlines, the example chosen by Mr Davies in his evidence, Ryanair does not get a pricing advantage on fuel over BA simply because it has adopted a low cost model."
As previously noted - the annual report of the Levy Board, the body that returns money to racing from off-course betting, was published in July 2004. It revealed that the Levy yield for 2003-04 had reached £100m for the first time. The figure represents a year-on-year increase of £25.5m, or 34%. This is the second year in which the Levy has been based on bookmakers' gross profits.
The 'Betting Exchange Task Force Report', made to the Australian Racing Ministers Conference in 2004, stated that "the two most significant issues associated with betting exchanges are the enhanced levels of risk (both real and perceived) to the integrity of the Australian racing product, and the likelihood of substantially diminished commercial returns to the racing industry and to State, Territory and Commonwealth governments."
Whilst the Joint Committee on the Draft Gambling Bill received evidence from the Asian Racing Federation, stating that "it is the view of our Executive Council that betting exchanges are incompatible with the best interests of racing and should be prohibited from operating on our sport."
In July 2004, the Australian Federal Government, as part of its review of the legislation dealing with interactive gambling services, the Interactive Gambling Act 2001, announced that it had decided against regulating betting exchanges in Australia; "The report found no compelling evidence to suggest that betting exchanges were likely to contribute to an increase in the level of problem gambling."
In August 2004 the South Australian Racing Minister Michael Wright, who was seeking to have betting exchanges outlawed, announced that the International Federation of Horse Racing Authorities Chairman Mr Louis Romanet had agreed to form a strategic alliance with him in pursuit of his campaign. Both parties agreed that betting exchanges, in that they allow punters to be on horses that lose, seriously undermine the integrity of horse racing. Mr Wright said;
"I am delighted to have the support of such a prestigious organisation supporting our push to have betting exchanges banned......The International Federation of Horse Racing Authorities shares my concerns about the very damaging effects this type of gambling could have on racing in Australia and overseas."
During the Annual General Meeting of the International Federation of Horseracing Authorities IFHA held in Paris on 4 October 2004, horse racing authorities of 50 countries agreed on the basic principles to be respected concerning the provision of cross-border betting services. These measures will form the cornerstone of an Action Plan to combat all types of unauthorised betting on horse races.
During the meeting, France-Galop's director-general Louis Romanet expressed his deep dislike of the betting exchange concept;
"Betting exchanges encourage the professional punter to cheat small punters, and they are a definite threat to integrity. We will do everything we can to stop them coming into France. We prefer to get nothing from them byway of payment to keep them out."
And, in its annual report for the financial year ending March 31 2004 the National Gambling Board (NGB) of South Africa warned against betting exchanges, which it said had "become a major threat to the stability of the industry, with more and more South African punters depositing money in the United Kingdom and betting via these exchanges".
On Thursday, 14 October 2004 the Australian Jockeys' Association issued a statement saying that they support of the Australian Racing Board's campaign to oppose betting exchanges from operating in Australia. AJA chairman Paul Innes said his National Executive unanimously supports the ARB's view that online betting exchanges threaten the integrity and commercial future of the Australian racing industry. He said that -
public confidence in horse racing had been built over many years and depended entirely on every horse racing on its merits. It was his contention, that betting exchanges, in that they threw open the opportunity to make a profit from a horse losing created the perfect recipe for malpractice, such as race fixing;
"Betting exchanges therefore have the potential to damage public confidence in racing, which is a great concern to the Jockeys' Association and the entire industry."
He went on to say that Members of the Jockeys' Association were opposed to betting exchanges as they basically threatened the sustainability of the entire horse racing industry, and that, accordingly, no operator in Australia should be issued with a licence to operate a betting exchange
"They piggyback on the efforts of the jockeys, trainers and owners who stage race meetings, but are not prepared to pay anything by way of fair remuneration. Betfair has a very strange idea of what is fair - their investors get rich on the back of our members being cheated of their wages."
Following the news in November 2005 that the Tasmanian government planned to introduce laws into its parliament to license Betfair, the Chairman of the Australian Racing Board, Andrew Ramsden was quoted as saying;
"For the Australian Racing Board this issue is squarely about the integrity of racing - our capacity to run the sport in a way that the public has confidence in its integrity. It is an unshakeable fact that the presence of betting exchanges undermines this. The easy facility to make money out of horses losing is an undeniable temptation to cheat."
The British Horseracing Board chairman, Mr Martin Broughton was also no fan of exchanges, which he has claimed do not pay their fair share to racing. Announcing a reduction in prize money of 13.4 per cent for 2007, he said;
"The real cause of lower margins is betting exchanges, and no progress has been made in seeking from them a fairer share for racing."
The Japanese Horse Racing Authorities also revealed themselves to be strongly anti-betting exchange;
"Our position on betting exchanges has been and remains, quite clear. We strongly believe that it destroys the integrity of our sports and will ruin thoroughbred racing. Japanese racing is televised in Australia from time to time but they are not intended to be used for the purpose of betting exchanges. Therefore, we respectfully request that Betfair Pty Ltd refrain from using our race events for betting exchanges. I trust you understand our position and I thank you for your cooperation."
A media release published by the New Zealand Thoroughbred Racing association headed "No to Betting Exchanges in New Zealand" stated that;
"I have seen the independent economic analysis on the implications of exchanges for racing and anyone who thinks that betting exchanges would be a good thing for the New Zealand industry should think again."
A media release dated 22 August 2006 from the chairman of the Australian Racing Board, Mr Andrew Ramsden stated;
"So far as betting exchanges are concerned I reiterate my total opposition to this destructive form of wagering. The integrity issue that is at stake here is clear - allowing unlicensed persons to lay horses is a guaranteed recipe for undermining public confidence in racing. Mere access to the so-called "audit trails" of betting exchanges is no compensation for this attack on racing's integrity, and anyone who believes otherwise is deluding themselves. I believe that the best policy response is the path the WA government is taking, which is to take decisive action and explicitly prohibit betting exchange wagering."
In October 2007 Betfair had its application to publish Western Australian race fields information rejected The decision, taken by Racing and Gaming Minister Ljiljanna Ravlich, was is in line with new legislation that prohibits the operation of betting exchanges in Western Australia, due to the threat they pose to the integrity of racing in the State;
"The State Government?s legislation is not specifically about Betfair, but about betting exchanges generally whereby punters can back a runner to lose," Ms Ravlich said; "The integrity of the racing industries has to be protected at all costs....After serious consideration of these matters, I am of the view that it is not in the public interest to approve the application by Betfair.?
Following the arrest of three jockeys and a trainer, as part of a police investigation into the corruption of horse racing in the UK the Association of British Bookmakers (ABB) issued the following statement;
"The ability of betting exchange customers to act as unlicensed bookmakers without revealing their identities to punters is the equivalent of the sport sitting on a smouldering powder keg. For the betting exchanges to say that cases of alleged corruption would not be identified but for the excellence of their audit trails is akin to a householder leaving his doors and windows wide open and then claiming credit for reporting a burglary."
In November 2007 Tabcorp chief executive Elmer Funke Kupper allegedly wrote to the NSW and Victorian premiers seeking a ban on betting exchanges. In a five-page letter to Victorian premier John Brumby he is said to have recommended that the state government "legislate a ban on betting exchanges". In the letter to Mr Brumby, Mr Funke-Kupper allegedly called on the premier to introduce basic reforms that "put competition over the internet and phone on a level playing field". He is said to have proposed the introduction of a fee of 1.5 per cent to 2 per cent of turnover on all corporate bookmakers and betting exchanges that publish Victorian race fields.
In what was one of the more bizarre outbursts against the betting exchanges, Ralph Topping of William Hill told an industry magazine in 2009;
"I call Betfair the choirboys of the betting industry...look at us we're so innocent...actually the exchanges are the biggest Masonic lodge there is. They're a massive secret society where illegal gambling is taking place."
In repsonse to the news of 21 Septmber 2010 that Betfair was to seek a listing on the London Stock Exchange, Paul Roy, Chairman of the British Horseracing Authority, said:
"There remain a number of fundamental questions around the business of exchange betting. We are confident that these will be resolved as part of the wider issue of the relationship between racing and betting. The new Government has signalled its policy commitment to ensuring a value transfer form betting to Racing as it sets policy to catch up with changes in technology and the way people bet.
We would entirely agree that Betfair has been disruptive and fundamentally changed the sports betting market. Whether intended or not, it has certainly disrupted British Racings finances, and has created severe consequences. It has indeed, for its customers, eliminated the need for a traditional bookmaker, and markets itself as cutting out the middle man. At the same time Betfair has argued it should be treated as a traditional bookmaker for the purposes of its contribution to our sport. Betfair cannot have it both ways.
Our response to the Levy Board consultation states that it seems certain that some customers of Betfair and other exchanges that carry on the business of receiving or negotiating bets, and that should therefore be paying Levy. This is entirely consistent with Betfair processing more transactions per day last year than all European stock exchanges combined, with some of their clients making many thousands of transactions and data requests on a daily basis.
Any international racing jurisdiction considering permitting Betfair to operate in their territory has to give very careful consideration to the impact on their sport, and learn from the British experience. In fact, we understand that they are offering far better terms to other Racing authorities, and we call on Betfair to now engage with us constructively and end the uncertainty."
On the question of allowing betting exchanges to operate in California, trainer John Sadler, representing California Thoroughbred Trainers, told Bloodhorse;
“We think this would be just terrible for us....A lot of people are going to be accused (of race fixing) even if they’re not guilty. We’re terrified of this. I spoke to trainer John Gosden, and he told me that it makes good people cheat and is the worst thing that ever happened to English racing. This is going to be the first time you can bet to lose, and we don’t think it’s a good idea.”
As recently as July 2012 the Cypriot Parliament introduced gaming legislation outlawing online casinos, online poker and betting echanges;"designed to facilitate the receipt or acceptance of bets between players".
Put simply, industry regulation achieves public interest objectives, that might not otherwise be achieved. In the case of betting exchanges, matters such as fairness, transparency, integrity, privacy and general market stability fall under the radar of the regulators.
A policy paper issued by the Department of Culture Media and Sport (DCMS) in April 2003, revealed, for the first time, that the UK Government was prepared to embrace the concept of betting exchanges.
The paper stated that betting exchanges would be bound by the general conditions of an ordinary betting licence, but, that they would also be subjected to specific duties:
A: They would not be able to initiate bets in any way on the exchange - in that they merely construct a controlled market; and are not a party to the bet.
B: They may not permit their customers to identify themselves to each other, either through personal contact or otherwise.
C:They must display and disseminate their betting rules.
D: They must consent to having their play and payment systems checked by someone authorised by the Gambling Commission.
E: They must at all time seperate money belonging to punters and their own operating resources.
F: On matters of public policy, the exchanges will be subjected to the same level of regulation as any other gambling product operating through the internet.
The paper also stated, that persuant to the steps which will be taken to achieve the Government's regulatory objectives, there will be no need for individual layers on the betting exchanges to be licensed;.
"the Government believes it quite unnecessary to license betting exchange customers. That would constitute superfluous over-regulation."
Two activities which directly threaten the integrity of any exchange based betting market, are insider trading (Jockeys, Stable Lads, Owners etc, laying their own horses) and price manipulation (giving a flase impression of market activity or price movement).
In October 2003 the government announced that the Gambling Commission would have the power to freeze bets on the betting exchanges that it believed to be unfair, and to void them if it transpired that they were. In February 2004, the DCMS extended the provision beyond bets that were not settled immediately.
The issue of taxing layers on the betting exchanges, raised its head in March 2004, when the Chancellor of the Exchequer Gordon Brown, as part of his budget speech referred to a review of "the tax treatment of betting exchanges and their clients."
The Joint Committee on the Draft Gambling Bill when making their deliberations in April 2004 stated;
"We believe that the best way of achieving a balance between these points is to ensure that those using the exchanges to lay bets professionally are identified, regulated, made subject to the appropriate levy arrangements, and have their status checked."
It was the Committe's contention that persons using the exchanges to lay professionally ("non-recreational users"), should be identified and dealt with appropriately;
non-recreational users should be identified through their betting patterns, with due regard given to the amount laid as well as the frequency of laying;
they should be registered with the Gambling Commission and any registered layer that is found cheating, or in breach of sporting codes, should have their registration cancelled and be prohibited from using a UK-based betting exchange for a set period of time;
certain employees should be ineligible to be registered, such as employees of betting exchanges etc;
betting exchange operators should be made responsible, as part of their license conditions for the operation of a system of registration of Non-Recreational Layers and the transmission of information to the Gambling Commission about such users.
non-recreational layers should be required to pay levies to particular sports over and above the commission they pay to the exchange.
On June 14, the UK Government made its response to the First Report of the Joint Committee on the Draft Gambling Bill; Session 2003-2004. On the subject of betting exchanges, they rejected the proposals put forward by the Joint Committee on the Draft Gambling Bill that layers on the betting exchanges should be required to register for integrity purposes, levy payments and, perhaps, additional taxation. However, the Government has said that those that use the exchanges to conduct betting operations in the course of business will require an operating licence;
We do not propose to adopt the Committee's proposal that non-recreational users of exchanges should be registered with the Gambling Commission. People who are betting in the course of a business require an operating licence from the Commission for their activities. As explained above, we do not believe there is then a further category of user who can be identified clearly who needs separate regulation.
The UK's Gambling Bill was printed on 18th October 2004; and contained no mention of the further regulation of individual clients of betting exchanges, or any attempt to tax non-recreational layers.
On the issue of licensing betting exchanges, sports minister Dick Caborn MP said in the Commons standing committee on the gambling bill (3 November 2004);
"Under the bill, there will be specific licensing for betting exchanges, with unique licence conditions.
It is our policy that those conditions should include mandatory registration of all customers,
information sharing agreements - the sporting regulator thinks that the question of integrity is at the
centre of things, as I think has been amply demonstrated this morning and ring-fencing of
customer accounts. Anyone laying a horse or a dog on a betting exchange in the course of business
will require a betting operation licence. That will ensure that people cannot use betting exchanges
for commercial purposes, as a back-door way of avoiding the need for a licence."
When appearing before the All Party Parliamentary Group Betting and Gaming in Decmeber 2004 Greg Nichols and Tristram Ricketts of the British Horse Racing Board were asked to comment on the Joint Scrutiny Committees recommendation that a distinction be made between recreational and non-recreational layers on betting exchanges. Ricketts responded;
I think we have gone beyond that now, to be honest. The BHB is about to engage in commercial discussions with the betting exchanges because we do not have any firm, long term commercial agreements in place with them yet. In the period since the Joint Scrutiny Committee reported, there has been a recognition that perhaps that was not the most practical way forward. We do not want at this stage to say what those discussions might contain but we are not looking at this stage to go down the recreational/non-recreational route.
Betfair's Annual Report for the year to April 30 2010, contained the following statement, which some took as ammounting to a veiled threat that should the regulatory environment turn nasty, the company would be prepared to up sticks and to move lock stock and two smoking barrels to Dublin;
"In July 2010, Betfair announced that it was to open an office in Dublin, including the opening of a new data centre and the relocation of the Betfair Group?s telephone betting and trading teams. This will provide strategic benefits for the Betfair Group by combining some existing technology and operational resources into a single location, which should deliver long-term improved performance and reduced costs. Betfairs Dublin base will provide the Betfair Group with additional flexibility as the regulatory
environment evolves, should the need arise."
On 08 March 2011 Betfair announced that it was to move its betting exchange offshore to Gibraltar. Regarding the move and the move of its data centre to Dublin Betfair said;
"The Company expects a positive EBITDA impact from the restructuring resulting from gross profits tax savings, partially offset by higher operational costs arising from running both new and existing data centres in parallel. These additional operational costs will reduce as our portfolio of data centres is consolidated during FY12."
Betfair said that it expected no material financial impact in the financial year of 2011 and a net EBITDA benefit of approximately £10m in FY12.
Taxation of betting exchanges
In May 2002 Betfair became the first betting exchange company to agree financial arrangements with both the British Horseracing Board, for a pre-race data licence, and the Horserace Betting Levy Board, over its contribution to British racing from betting activities taking place on it site.
On 1st November 2002, the 42nd Levy Agreement covering the year commencing 1st April 2003, was agreed between the Levy Board and the Bookmakers' Committee (the latter being a consultative body that is dominated by representatives of the "Big Three"). On the question of betting exchanges, it ruled that;
"(A) 10% levy will be payable by betting exchanges on the British horseracing gross profits achieved by individual successful layers, on an annual basis. There will be no aggregation between individual layers, and losses on backs cannot be offset. Layers' gross profits will be assessed before deduction of commission charges."
On February 5 2003 Sporting Options announced that they had applied for a judicial review of the 42nd Levy Scheme on the grounds that it is "wholly unfair and the process by which it was determined is totally unsatisfactory". In April 2003, Sporting Options was granted the right in the High Court to a judicial review of the 42nd Levy Scheme.
It was announced in in the 2003 Budget that the way in which betting exchanges were to be taxed was to be changed, so that operators would pay 15% gross profits tax on the basis of their commission.
In the week beginning March 03, 2003, the Department for Culture, Media and Sport (DCMS) circulated a letter asking for comments on a proposed reconstitution of the Bookmakers' Committee. One of the options put forward in the letter, was the proposed representation of betting exchanges on the committee.
Pursuant to the publication of this letter, Sporting Options, in August 2003, won a Judicial Review case, which had challenged the manner in which the 42nd Levy scheme had been cobbled together. The judge in the case concluded; "For all these reasons I conclude that the manner in which the Levy Board reached its decision on 31 October was manifestly unfair."
In july 2003, the Secretary of State, in exercise of the powers conferred upon her by section 26(1) of the Betting, Gaming and Lotteries Act 1963 , and after consultation with such bodies as appear to her to be representative of the interests of bookmakers generally, passed new Regulations (cited as the Horserace Betting Levy (Bookmakers' Committee) Regulations 2003 and coming into force on 28th July 2003), which gave the betting exchnages a representative on the Bookmakers Committee.
The Bookmakers' Committee now consists of thirteen members of whom; two shall be appointed by Coral Racing Ltd; two shall be appointed by Ladbroke Racing Ltd; two shall be appointed by William Hill Organisation Ltd; two shall be appointed by the National Association of Bookmakers Ltd from amongst persons nominated for the purpose by associations for the time being affiliated to the National Association of Bookmakers Ltd; four shall be appointed by the Association of British Bookmakers Ltd to represent the interests of the members of that body; and one shall be appointed by the Sporting Exchange Ltd.
The annual report of the Levy Board, the body that returns money to racing from off-course betting, was published in July 2004. It revealed that the Levy yield for 2003-04 had reached £100m for the first time. The figure represents a year-on-year increase of £25.5m, or 34%. This is the second year in which the Levy has been based on bookmakers' gross profits.
In a report published in January 2005 the National Audit Office said that Customs had underestimated (and failed to understand) the popularity of new forms of gambling, such as internet betting exchanges, adding that these new services posed "new risks to [tax] revenue". It was also said that; "The duty returns for betting exchanges do not include commission rates and therefore do not reflect the relationship between commission rate and turnover. Customs were in October 2004 working with the industry to devise an appropriate return."
In his Pre-Budget Report Speech to the House of Commons on 5 December 2005, the Chancellor Gordon Brown announced that current taxation regimes were working well and would stay in place. This represented a considerable victory for Betfair in its long fought battle against the "Big Three" bookmakers; William Hill, Coral and Ladbrokes.
5.111 - "The Government is committed to a modern and fair gambling tax system, consistent with wider tax principles and with supporting social and economic objectives."
Budget 2004 announced that the Government would review gambling taxation in light of the Gambling
Bill. This review has benefited from substantial input from stakeholders.
"The Government has considered taxation arrangements within the wider context of changes to regulation,
technology and gambling markets. It has concluded that the current taxation arrangements
for gambling are generally working well at present and that maintaining stability in the overall
structure of taxation is desirable in a period of transition. In these circumstances, the Government has therefore decided to maintain the current regimes which are working well for betting, betting exchanges, lottery and bingo, and to retain the system of amusement machine licence duty (AMLD), rather than move to a gross profits tax."
In November 2005 the Tasmanian government announced a deal to licence Betfair in the state. The deal will see Tasmania receive AU$5 million up front and is projected to pay Tasmania about $40 million per year.
Betfair, the world's leading betting exchange, also now operates in the Irish market. In August 2006 the company agreed to pay 10 per cent of its gross profit on Irish horseracing directly to Horse Racing Ireland (HRI); guaranteeing revenues to HRI in excess of ?1 million (£700,000) a year, for the first three years. The 10 per cent specifically relates to gross profit on all Irish racing trade, not just that from Irish residents.
In November 2007, the British Horseracing Authority put a case to the Department of Culture, Media and Sport for a greater contribution from the betting industry in the 47th levy. With horse racing seeking a levy of somwhere between £135million and £153million for 2008-09, the BHA's document calls for the government to settle the levy on the basis of 15% of gross win on British horseracing. It also calls for betting exchanges to contribute to the levy on a "new and equitable basis". This would involve the imposition of a 1.25% Levy on net profits of punters on betting exchanges, raising the possibility that Betfair, may be forced to increase its commission charges.
In response to the Levy Board July 2010 announcement of a consultation on betting exchange customers, Betfair's Legal Director, Martin Cruddace, said;
"We're very surprised by the Levy Board's announcement. This issue of whether betting exchange customers are acting as bookmakers has been the subject of debate since Betfair started. After a thorough, independent review of this very issue throughout 2004 and 2005, which took into account full representation from all stakeholders and other Government departments, the Treasury came to the conclusion that the treatment of betting exchanges and their customers was fair. Since then, there has not been one scrap of evidence produced by anyone to suggest the situation has changed.
We are extremely interested to see if the Levy Board is able to run a fair and impartial consultation process bearing in mind that several of their directors have publicly stated positions that would seem to prejudge any outcome. We are also surprised that any consultation that singles out the customers of one class of operator could be considered fair or lawful where no such distinction is made in any part of the relevant legislation.
Today.s announcement by the Levy Board, together with the statement from Nic Coward of the BHA, illustrates exactly why we have redirected our voluntary levy payment. We have not withdrawn this money from British Racing; we have withdrawn our donation to the Levy Board and BHA. We want to make sure that it is spent to deliver real benefits to the sport rather than being diluted by middlemen and the accompanying costs that cover their salaries, pensions contributions and the substantial legal bills incurred in a sustained and discriminatory attack on our business. We will be announcing some of the first investments we.re making shortly."
In its consultation paper published in July 2010 the Horse Racing Levy Board pinpointed the fultility of its own project, before it had even properly begun;
"First, there is a difficulty with a necessary premise: that there are customers of a betting exchange who are carrying on a business (section 27(2)(a)). That is ultimately a question of fact which would need to be demonstrated and in truth cannot be. Leaving aside that fatal initial objection, the following further points arise....
On 4 July 2012 Betfair announced that it had agreed a five-year, £40 million deal
with British Horse Racing, comprising the British Horseracing Authority (BHA), the Racecourse Association and the Horsemen’s Group. The agreement replaced Betfair’s current annual voluntary Horserace Betting Levy payments, and took effect from the 51st Levy Scheme covering 2012-13.
Under the terms of the deal, Betfair agreed to pay British Racing 10.75% of all revenues on the sport from its UK customers; with a guarantee of minimum payments. British Racing made commitments linked with these minimum payments to ensure a minimum number of fixtures per year. It was also said that Betfair’s betting data would be used to help construct a fixture list that would optimise British Racing’s "attractiveness as a betting product for punters, the racing industry and betting operators".
On 20 July 2012, a Judicial Review ruled in favour of Betfair, in the case of the William Hill Organization Limited versus The Horserace Betting Levy Board. The Court ruled for Betfair as supported by the Levy Board, and confirmed the outcome of the board's own extensive consultation, undertaken in 2010-2011, that had found that customers of betting exchanges were not liable to pay the Horserace betting Levy.
Martin Cruddace, Chief Legal and Regulatory Officer at Betfair at the time, said:
"We welcome the High Court ruling which has vindicated the position of Betfair. It is now neither sustainable nor rational to argue that Betfair customers should be liable to pay the Levy any more than should customers of any other betting operator. It is ironic that William Hill's online business pays not a penny in Levy itself, despite making tens of millions of pounds in profits annually from British Racing. Yet still, it chose to argue that an undefined class of exchange customers should be required to pay Levy. The savings made by William Hill through Levy avoidance may help fund poorly advised legal challenges such as this one, but I would suggest that their resources would be better spent working with British Racing to reach a commercial agreement in a similar vein to the one Betfair recently signed with the sport."
The question of integrity lies at the heart of much of the debate that taken place, since betting exchanges arrived on the scene.
In June 2003, Betfair and the now defunct Sporting Options signed a Memorandum of Understanding with the Jockey Club, alllowing it access to betting information on horse races which are "the subject of concern", including the personal details of those punters betting on such races.
When announcing the signing of the Memorandum, the Jockey Club, a private body that regulates horse racing, stated that it would only request such information whenever it had;
" reasonable grounds to suspect a breach of the Rules of Racing or a threat to the integrity of racing. Any request for information would be authorised by the Jockey Club''s Security and Investigations Committee, which includes independent representation and expertise in criminal law. Betting Exchanges will also be encouraged to draw to the Jockey Club's attention matters which give them cause for concern regarding the sport's integrity."
Users of both betting exchanges were asked to accept an agreement, which would see them surrender their legally enshrined right to privacy in the event of an investigation by the Jockey Club; which is, under law, a "private" body with no statutory mandate. Should they refuse to do so, they will not be allowed to trade on the respective exchanges.
Mark Davies, a spokesperson for Betfair, described the agreement as important initiative for his company and for the integrity of the sport of horse racing;
"This helps build a safer, fairer and more accessible betting market, and it gives the Jockey Club a tool in the fight against corruption that is unprecedented,..The exchange industry has taken a bigger step in rooting out corruption in sport in its first three years than the whole of the rest of the bookmaking industry has in its entire history."
Since the MOU was signed, there have been a number of high profile cases involving the identification of irregular betting patterns on the exchanges. In March 2004, Miles Rodgers, who ran the Platinum Racing club, was warned off for two years after investigations into his laying of two Platinum horses, Uhoomagoo and Million Percent. Darren Mercer, a leading owner faced the Jockey Club panel in May 2004 over bets laid on his horse Joss Naylor before it was scratched from the Welsh Grand National; whilst four individuals, including the trainer Alan Berry, were accused of running a horse they knew to be lame in order to make a profit on the betting exchanges.
On the 3rd July 2006 City of London Police announced that eleven people had been charged with offences relating to allegations of fixing the outcome of horse races between 1 Dec 2002 and 2 September 2004, and money laundering. The Police had spent more than two years probing over 80 horse races in the investigation named "Operation Crypton."
Miles Rodgers, aged 37, of Silkstone, South Yorks; Kieren Fallon, 41, from Eire, Darren Williams, 27, of Leyburn, North Yorks, Fergal Lynch, 28, of Boroughbridge, York, Philip Sherkle, 39, from Tamworth, Staffs, Alan Berry, 43, of Lancaster, Steven O'Sullivan, 35, of Preston, Lancs, and Shaun Lynch, 36, of Minskip, North Yorks, were all charged with Conspiracy to Defraud Betfair Customers.
Paul Scotney, Director of Security, at the Jockey Club left most observers in no doubt as to how beneficial the betting exchanges were to him;
"I use the information from the exchanges almost on a daily basis and the audit trail they provide us at the moment is excellent. It makes my job a
whole lot easier because of that. We do not have that situation with traditional bookmakers."
In 2007 Fallon and five other men including Fergal Lynch and Darren Williams were acquitted by the jury on the direction of trial judge Mr Justice Forbes,who said; "There is simply no case to answer. None of the strands of evidence individually or collectively amount to a case to answer. The evidence presented by the prosecution when properly analysed has demonstrated that Kieren Fallon was not a party to a conspiracy to defraud."
Also in 2007 Betfair suspended payments following a tennis match between Martin Arguello and Nikolay Davydenko; "Betfair has suspended settlement of the match-odds market on this afternoon's second-round match of the ATP Orange Prokom Open in Poland between Martin Arguello and Nikolay Davydenko, pending consultation with relevant regulatory authorities." This represented the first time that Betfair had suspended payouts in an event after the conclusion of the event. Neither Argüello nor Davydenko were formally charged with any offence by the ATP.
In June 2010, the professional punter Harry Findlay, who had been one of Betfair's most vocal supporters, had a six-month disqualification imposed on him by the British Horseracing Authority yesterday for twice laying one of his own horses in two separate races.
The BHA accepted that Findlay had no corrupt motive when he laid the horse at Exeter on Oct 21 2008 and at Chepstow on Oct 10 last year. His win bets significantly outweighed his 'lay' bets.
Although Findlay subsequently had his six-month ban from horse racing reduced to a £4,500 fine on appeal, he did not let matters rest there. Indeed, he went on to claim that investigators from the BHA's security department "gave me permission to lay any other horses in the yards that I've got," adding: "Betfair have done nowhere near enough to stand by me. They know that I'm whiter than white, they know that I'm cleaner than clean and all they're worried about is going and selling their shares. That's why I'm a wreck, it's a miracle I'm still alive."
In 2011 five jockeys and two owners were charged with "serious breaches" of the rules of racing,in relation to horses that were laid to lose on the betting exchanges. Jockeys Paul Doe and Greg Fairley were banned from racing for 12 years for "not riding a horse to its merits". Kirsty Milczarek was banned for two years (later overturned on appeal), whilst Jimmy Quinn received a six-month sentence. Owners Maurice "Fred" Sines and James Crickmore were banned for 14 years for betting on their own horse to lose. Five others - Nick Gold, Peter Gold, Shaun Harris, David Kendrick and Liam Vasey - were also found guilty of "corrupt or fraudulent practice".
The advertising of betting exchanges
In 2003 the traditional William Hill objected to a Betfair national press advertisement that ran;
"You get better odds at Betfair" and included a table of the odds available from Betfair and three other bookmakers. The table was headed "West Indies v New Zealand" and claimed "West Indies Betfair 1.82 William Hill 1.66 ... New Zealand 2.2 William Hill 2.1 ...".
William Hill objected that:
Firstly, that the comparison was not clear and fair, because the advertisers offered a different betting medium from the competitors named in the advertisement and because the advertisers'' odds were subject to limited availability and a maximum stake;
Secondly, that the comparison was not clear and fair, because the advertisers charged commission on the quoted odds.
Thirdly, that the advertisement denigrated its business.
Concerning the first objection Betfair said that members of the public could place bets on their website, at specified fixed odds, in the same way as they could place bets with a conventional bookmaker. They said the complainants'' odds were, like theirs, subject to limited availability and maximum stakes.
The Authority understood that the complainants would accept bigger stakes and a bigger risk exposure than the advertisers, for the event referred to in the advertisement. It concluded that the comparison was not clear and fair.
Concerning the second objection Betfair said that they charged a commission, on the whole event, of between 2% and 5% of net winnings. They said they were willing to mention their commission in future comparative advertisements.
The Authority considered that, because the advertisement did not state that the advertisers charged commission on their advertised odds and the complainants did not, the comparison was not clear or fair. It asked the advertisers to state, in future advertisements, that they charged commission on net winnings and to ensure that comparisons were clear and fair.
Referring to the third complaint Betfair said the advertisement did not refer to the complainants except to state their odds. They said that was a factual statement and was not denigratory.
The Authority considered that the advertisement did not denigrate the complainants' business.
Betfair aired a television advertisement in October 2007, containing the lines;
"Next time you're looking to place a bet, go to Betfair. Unlike traditional bookmakers Betfair punters bet against each other and matching a bet means they can chose their own odds."
A complaint was subsequently made to the Advertising Standards Authority questioning the notion that Betfair punters do actually "bet against each other."
It was suggested that as bookmakers and spread betting companies also make use of betting exchanges, the notion that Betfair punters bet against each others was misleading, in that it suggested that Betfair was a pure play person to person betting exchange, when in fact it was not.
The Advertising Standards Agency responded to the complaint as follows;
"We have assessed the ad and your complaint and consider that there are insufficient grounds for ASA intervention at this time. You do not state in your complaint why you believe that big companies are involved in the betting process on Betfair, and on the information we have obtained we have no reason to belive that this is the case. In any case, as customers decide on their own odds for their bets, there does not appear to be any consumer detriment in the bet being matched by a bookmaker instead of a member of the public - the odds have already been decided by the person placing the bet."
In March 2008, Betfair became the first betting company to advertise during the commercial breaks around C4 racing. The Betfair ads went with the byline; "Because you are betting against other punters, "you could" get better value."
A TV ad for Betfair that ran on UK TV towards the back end of 2010, had featured two men in a pub having a discussion about a sporting event. A third man pushed between them and began to act as a go-between, passing comments back and forth between them before being punched in the face by an animated mouse cursor. The two men then shook hands. The voice-over stated "On Betfair, you cut out the middle man, which means you could win bigger ...". On-screen text stated "T&Cs apply. 18+ Based on revenue".
The Advertsing Standards Authority received 23 complaints, with all 23 viewers challenging whether the suggestion in the ad that Betfair operated without a middleman was incorrect and misleading, whilst six viewers challenged whether the ad was misleading because it failed to clarify that Betfair took commission on winning bets.
The ASA considered that the portrayal of the traditional bookmaker in the ad as a character that acted as an intermediary between two individuals who wished to bet directly against each other was not an accurate representation of the traditional bookmaker and that the subsequent removal of the character was likely to confuse the consumer about the advantages of the Betfair service. It also said that Betfair's Commission structure for facilitating bets "could be understood by viewers to be another version of the "middleman" role."
The ASA concluded that the ad and the voice-over "At Betfair we cut out the middleman" were therefore confusing and misleading. It ruled that on this point the ad breached CAP (Broadcast) TV Advertising Standards Code rules 5.1.1 and 5.1.2 (Misleading advertising). The ASA also concluded that the ad was misleading because it did not clarify what exactly Betfair's role was in the betting transaction that took place on its exchange.
Betfair are forced to change their Grand National SP
Betfair were forced into performing a massive volte-face, when, after the suspension of its 2008 Aintree Grand National win market the company noticed that the returned Betfair Starting Prices on the race, were, in its words, "not appropriate to the race". In other words, in what is the world's biggest horse race, the Betfair starting price on the favourite Comply or Die, was significantly lower than the industry returned Starting price.
Accordingly, Betfair took the decision to reverse the procedure and manually determined the BSP using "methods at its disposal";
"The reconciliation of the Betfair SP for the Grand National win market resulted in prices which we believe were significantly unfair for backers of some horses, most obviously the winner. Therefore we unreconciled the Betfair SP to return what we believe were fair prices. As a result of unreconciling bets after the race, some matched bets (which would have been winning bets for customers) became unmatched bets. In addition, some customers may have traded in-play based on bets they believed had been matched. If you believe that you have been disadvantaged as a result of this, please contact us at email@example.com. We will look at our records to determine the amount you should be due and provide compensation accordingly. Please be aware that this may take some time and it is unlikely that we will be able to address all enquiries until next week."
Commenting on his blog, Andrew Black, one of the owners of Betfair said;
"I think (hope) that this is a one-off. The BSP was, bizarrely, a victim of its own success - having moved along quietly doing relatively little turnover for a few months it suddenly burst into flame. The win market for the National yesterday was nine times bigger than any BSP market we have ever had before, and almost all the new business was business to back. It was always going to be big but the BF planner didn?t envisage or plan for this sort of scale (it would have been easy to have alerted more layers). The demand for Comply or Die bust a hole in the tissue and the price died. This was a mistake - no question - but I have some sympathy as the numbers were way higher than my expectations too. Hopefully the guys can paper it over - BF will surely be the financial loser here and not the customer. I see it as a one-off mistake - BF must learn from it and make sure it doesn?t happen again."
A Betfair forumite going by the name of Pablo, summed up the feeling of many punters when he wrote;
"It simply beggars belief that people can have had matched bets removed from their account when nothing has gone wrong. Will there be a new department to judge the fairness of the sp returned in every race every day ?
What is unfair ? Under the official SP ? Or 20 % under ? or 30 ,40,50 % under? Surely a bet that is matched is sacrosanct unless something has gone wrong,like a late suspension. Why do people have to email in to have their accounts adjusted back to the right amount ? Surely it should be automatic."
At 12.05 on the 07 Apr 2008 Betfair Customer Services issued the following statement;
"Following our decision to roll-back the initial Betfair SP reconciliation for the Grand National win market, some customers were left in a worse position than had that initial SP stood. We are in the process of assessing which customers were disadvantaged by the roll-back and by how much. All affected customers will receive payments from Betfair to reflect this. In other words, if a customer would have been in a better position had the initial SP reconciliation stood, then a payment will be made by Betfair to the customer to reflect this, irrespective of whether the customer has contacted Betfair. No customer will be left in a worse position following the roll-back than would otherwise have been the case."
They then went on to explain the reasoning behind the roll-back;
"The decision to roll-back the initial SP reconciliation was taken following extremely high level of demand from Betfair SP backers in the Grand National win market. Had the initial SP stood, the prices returned on several horses for those backers would have been much reduced from what they could reasonably have expected. As a result, Betfair made the decision to roll-back after the race, to reflect an SP overround as close as possible to 100%, which is typical of the Betfair SP in the normal course. We believe that this was an exceptional case and don't anticipate a reoccurrence, but obviously the result of the roll-back was that some other customers were left in a worse position than had the initial SP reconciliation stood."
The Poker Heist
The Poker Heist involved a glitch in Betfair's Poker software that saw all players at a table
getting paid, with the delivery of each winning hand. It was alleged that the heist was to the
tune of 1.4m and that the central architect of it was a player going by the name of Chillindude.
The then infamous PokerQ, a leading contributor to the Betfair Poker Forum, went on the record
to deny her involvement in the heist. It is not known whether Betfair retrieved all of the money
lifted during the heist.
Betfair are forced to bow to forum pressure and say sorry
Betfair got a little more than it had bargained for, when it introduced a new match betting system, that led to the company accruing monies over and above the commission that comes from matched bets. A large number of Betfair users voiced their displeasure at both the new system and the manner in which it had been introduced, and Betfair was accordingly forced to suspend a part of the new service.
Betfair posted the following message on its own forum;
"Clearly if bets are matched where a price improvement would theoretically be possible, but which the current process can?t provide, then matching those bets will result in Betfair accruing the difference..... In response to customer feedback, we will suspend matching bets across selections when an applicable market is turned in-play. For the time being, bets will be matched on in-play markets as they were prior to the change. Matching across selections will be reintroduced only when we can offer best execution or its equivalent."
In a later question and answer session on the matter, Betfair also said; "We have recognised that we should have communicated this issue to the customer base more broadly, a misjudgement for which we can only apologise, and we are committed to doing a better job of communicating similar issues in future."
Concluding the matter, on October 17 2008 Betfair Customer Services issued the following statement;
"The directors of Betfair would like to express their regret for not notifying customers in advance of the introduction of a new technical process called cross matching in February of this year. Cross matching enables increased opportunities to get bets matched by taking into account betting activity on different selections within the same market. Betfair General Betting Limited (a company within the Betfair group) is licensed - and has been nominated by The Sporting Exchange Limited - to act as counterparty to bets so as to enable cross matching to occur.
"Cross matching functionality remains in operation and continues to provide our customers with enhanced certainty of securing the bets they request at the same or better odds. We would like to assure our customers that, in future, they will be notified of changes such as this in advance by forum announcement, banners on the site and/or email unless our Terms & Conditions clearly permit a change to be introduced without prior notification".
The online casino Happy Hour debacle
On November 13th, 2010, the newly floated Betfair faced its first major PR disaster. It was alleged that Betfair Casino had offered unlimited Happy Hour bonuses with a relatively low wagering requirement of 10x. It was further alleged that Betfair lost so much money from the promotion that they decided to end it and to take back winnings from those that had already cashed out.
Betfair wrote to one customer; "Certain customers attempted to profit from the promotion through adopting gaming patterns and activity in contravention of Betfair Casino?s Standard Terms and Conditions. As a result, we have withheld both bonus funds and winnings derived from such activity on those customers? accounts, of which yours is one."
Betfair in this instance relied on the following clause; "If Betfair becomes aware of a customer who, in the course of participating in a promotion or offer, has become able to guarantee wins and/or profits with no or only minimal risk, and/or benefits from a promotion or offer by participating through more than one Betfair account, and/or displays irregular or unusual playing or betting patterns which Betfair deems to be abusive, Betfair may in its absolute discretion elect to do any one or more of the following: (i) close the customer?s account(s); (ii) invalidate the transactions or game play which was in contravention of this term; and/or (iii) withhold the customer?s winnings from such transactions or game play."
Regardless of the legal rights and wrongs, the PR fallout for Betfair from the Happy Hour debacle was immnense, not least following the news that the Betfair Casino was marked down as a "Rogue" casino the highly influential website Casinomeister.
Premium Charge - How to lose friends.
In September 2008, Betfair introduced a "Premium Charge" on those bettors who it deemed had not/were not
paying sufficient commission relative to their winnings. In June 2011 Betfair raised its Premium Charge to 60% for some customers. On both occasions Betfair came under heavy criticism, and their handling of the matter was seen to constitute a significant strategic own goal; with articles on the subect appearing in The Guardian,and Betfair users launching a Facebook campaign and posting anti-Betfair videos on YouTube.
The strange case of Roger Duncan.
Roger Duncan was the pseudonym of Betfair employee exposed on the Midas Oracle prediction market blog.
He had been defending Betfair in the face of criticism regarding the new cross matching system. Some suggested that he was Andrew Black, others,that he was a Betfair lawyer who was posting on other forums.
His uncovering raised a few eyebrows, not least, in that it exposed the extent to which Betfair felt on the backfoot vis a vis criticism that was levelled against it. Now that Betfair is a listed company, such
behaviour by a company employee would of course be illegal.
Voler La Vedette - A unique set of circumstances?
The year 2011 ended badly for Betfair with the news that the company had been forced to void a horse race at Leopardstown, following a technical glitch which allowed a layer on the betting exchange to position himself such that he was facing liabilities of £600m on the winning horse Voler La Vedette. Whilst Tony Calvin, Betfair's spokesman was prepared to acknowledge that the episode had been "highly embarrassing and an unacceptable betting experience for people", he said that "there was a unique set of events that allowed this to happen".
Internationalisation - Betfair try to crack Australia and the US.
In November 2005, the Tasmanian Parliament approved amendments to the Gaming Control Act 1993 to allow the licensing and regulation of betting exchanges in Tasmania. The first betting exchange licence granted by the Tasmanian Gaming Commission was to Betfair Australia in January 2006.
Betfair Australia, a 50/50 joint venture between Betfair UK and the Australian company PBL, commenced full operations from a purpose built data centre in Hobart at the end of August 2006.
In filed accounts, PBL said that the business was continuing to build critical mass in its first full year of operations, and that its share of after tax losses for the year was $2 million (875,000 stg). Whilst Betfair in filed accounts, for the year ended 30 April 2007,
said that total revenue for Betfair Australia for the year, had been 8m stg.
Regarding the development of its Australian betting exchange Betfair said;
"We built a fully functional exchange in Australia. The technical requirement behind this work was huge, with over twenty man years of development time spent on the project. This investment puts the Joint Venture in a prime position to continue to develop the Australian market for the exchange business. This new distributed infrastructure represents what we believe to be a unique capability
within betting exchanges and possibly even amongst non-gaming exchanges."
Betfair currently pays the Tasmanian government 15% tax for every dollar that it makes on Australian horse racing and sporting events and a 20% levy on every dollar that it make on Australian horse racing. In its first 12 months of operation, the company said that this had amounted to a payment of $10 million.
In 2007 Betfair had its application to publish Western Australian race fields information rejected, by the Western Australian government. The decision was taken in line with new legislation that prohibited the operation of betting exchanges in Western Australia, on the grounds that they posed a significant threat to the integrity of horse racing in the State;
"The State Government?s legislation is not specifically about Betfair, but about betting exchanges generally whereby punters can back a runner to lose....The integrity of the racing industries has to be protected at all costs....After serious consideration of these matters, I am of the view that it is not in the public interest to approve the application by Betfair."
Betfair appealed against the ban and in a unanimous verdict, the High Court of Australia on 27 March 2008, declared void the two provisions of the legislation that had purported to ban betting exchanges and to prevent Betfair from publishing racecards.
However, in March 2012, Betfair Australia was unsuccessful in its appeal to the High Court of Australia, against a deision by Racing New South Wales to implement a race fields fee of 1.5% of betting turnover on all New South Wales races. Betfair had claimed that the fee was discriminatory in nature and protectionist in its purpose. Following the court's decision, Racing Victoria announced thatit would now introduce a turnover based race field fee of between 1.5% and 2%.
Betfair then said that the low margin nature of the exchange model meant that some customers betting on races in these states would become unprofitable, and that it would acordingly implement an increase in commission on Australian racing markets, with the base rate rising from 5% to 6.5%.
In the financial year ending April 2012 Betfair said that the joint venture had achieved a breakeven result for the first time, with Betfair's share of the venture's net operating profit being £4.3m.
When it released its interim results for the six months ended 31 October 2012, Betfair said that Betfair Australia had been impacted by a trend amongst states to adopt a turnover based approach to race field fees. Betfair noted that this development was now putting an increasing pressure on the joint venture's profitability. Betfair said that its share of operating profit from Betfair Australia was £0.9 million (H1 FY12: £0.4 million).
In January 2008, Betfair entered the US market through the acquisition of Macrovision's Television Games Network interactive TV horserace wagering service for $50 million in cash.
In October 2009 Betfair it was announced that the Breeders Cup and Betfair Group Ltd had reached an agreement permitting common-pool wagering on this year?s World Championships Nov. 6-7 during the Oak Tree at Santa Anita Park meet. For the first time bets placed by Betfair customers would be commingled into Breeders? Cup pools.
In November 2009 The New York Racing Association, Inc. (NYRA) announced that it had reached an agreement with Betfair Games Limited to permit common-pool pari-mutuel wagering on its races to Betfairs global customers.
An attempt to rush through an exchange betting rule in California in Septmeber 2010, was stalled, with a compromise having been reached to postpone until May of 2012. Horse Racing Board Chairman Keith Brackpool said that the delay would "give everyone in the industry time to work through their issues and come up with regulations."
However, on 1 June 2012 Betfair suffered a severe setback with regard to their US plans, when the
Thoroughbred Owners of California (TOC) said that they had decided to defer a vote on the introducction of betting exchanges in the state until 2013. The TOC said;
"The concept of exchange wagering has been a polarizing issue among the stakeholders in California racing, and this action [of delaying a vote until 2013] will give us additional time to study this betting alternative and consider if it is in the best interests of the industry in our state. We have not slammed the door closed on the concept of exchange wagering, but are simply putting this contentious issue on the back burner until we can analyze it further and, hopefully, build a consensus within the industry."
In its preliminary results for the 12 months ended 30 April 2012 Betfair said;
"TVG had a good year and continued to grow its share of the US market. Handle was up 7% and overall revenue up 5% (both in local currency terms) driven by increases in both actives and ARPU. On a standalone basis, TVG generated a positive EBITDA performance as a result of the revenue growth as well as operational efficiencies, but this was offset by investment in the Exchange and business development. Overall, Betfair US adjusted EBITDA improved by £0.8m to a loss of £0.4m."
When it released its interim results for the six months ended 31 October 2012, Betfair said that the cash flows generated by TVG were now expected to be below the level needed to support the goodwill carrying value, resulting in an impairment of £13.5 million;
"Betfair acquired TVG in 2009 as part of an entry strategy into the US gambling market. The goodwill arising on this acquisition was $53 million. After a strategic review of the business, we have impaired the carrying value of this goodwill by $21.7 million, or £13.5 million."
Also regarding the U.S. betting market, Betfair said that uncertainty around the prospects for exchange based wagering in California had also resulted in the impairment of the carrying value of its US exchange technology. This impairment totalled £10.4 million.
Betfair's march into Europe has been curtailed somewhat, by both cultural and regulatory barriers and high taxation,in those countries where it has been allowed it to operate.
On 17 December 2009, The Attorney General of the European Court, Yves Bot, give a not unexpected ruling in the case of Betfair and Ladbrokes gainst the Dutch state monopoly De Lotto.
Bot essentially reconfirmed (again) that providing a State's gambling policy is designed to protect consumers through the prevention of fraud, and providing that the measures taken to achieve this are proportional, then the state is entitled to pursue a monopoly solution.
Moreover, he concluded that the monopoly provider may introduce new games and enage in the advertising of them, providing that measures were put in place that took account of the potential for gambling addiction. Bot also said that a member state was not obligated to recognise licences which betting operators had acquired in other European countries, regardless of the merit of such licences.
Bot also said that whilst in principle there should be a competitive tender procedure when gaming licences were being extended, the national court has the right to overrule this stipulation, with an eye on such matter as public order, the protection of consumers or the prevention of fraud.
On 14 May 2010 Betfair posted the following message on its forum;
"On 6 April the French parliament passed a law relating to online gaming which came into effect on the 13th May, 2010. This law prevents us from allowing customers to access www.betfair.com and associated sites from France. We are considering our options for the future but in the meantime, as a result of this change in legislation, we can no longer accept bets from France or any of its territories. Please note that this restriction also applies to customers that may have accounts registered in a different location but attempt to use their Betfair account whilst they are visiting France."
In his blog, former Betfair man Mark Davies pointed out an example of the opposition to Betfair from traditional bookmakers, when they were asked to make submissions to European government's ahead of the planned liberalisation of European betting markets. Davies provides the following submission to the Greek government from Sportingbet:
"Betting exchanges may be the source of a series of illegal activity. It is known that several recipients of illegal betting hedge some of their bets at the exchange. It is also obvious that given that an exchange gives its customers the opportunity to offer bets, this creates a clear and distinct flaw in the legislation. This will give the opportunity to people who are not licensed as betting providers to do so through the exchange. Lastly, the exchanges provide the opportunity (and with minimal cost) for money laundering because two people can pass unlimited amounts between them with one person winning and the other person losing. We believe it is inappropriate to regulate betting exchanges, and propose a ban on hedging of bets. Moreover, betting exchanges have not been included in any other recent laws in other European countries."
In January 2012, Betfair received a licence to operate all of its products in Denmark; with the company paying a tax rate of 20% of GGR.
Also in January 2012 the Italian Government notified a Ministerial Decree to the European Commission that would establish the regulation of betting exchanges. Betfair has said that it is hopeful that this regulation will come into effect in the second half of FY13, allowing it to operate its Exchange on its betfair.it. website in due course.
In May 2012 Betfair said that it had been awarded a licence to operate its betting exchange in the German state of Schleswig Holstein, for the purposes of sports betting. Under the terms of the deal Betfair will pay 20% of Gross Gaming Revenue derived from its German customers to the state of Schleswig Holstein. Betfair said that based on current revenue run-rates it is envisaged that this payment would reduce its core gross margin by approximately one percentage point.
In June 2012 Betfair was awarded an online gambling licences in Spain, enabling it to offer sportsbook and casino products. Betfair said that it would pay a Gross Gaming Revenue tax of 25% on its Spanish operations. Following the receipt of the initial licences, Betfair was forced to make its betting exchange produt unavailable to its Spanish customers, until such time that it were to be granted a betting exchange
Betfair also said that in a deal with the Spanish tax authorities, in respect of operations between January 2009 and May 2011, it had made a one-off payment of £6.4m.
As recently as July 2012 the Cypriot Parliament introduced gaming legislation outlawing online casinos, online poker and betting echanges;"designed to facilitate the receipt or acceptance of bets between players". In FY12, Core Betfair said that it had generated approximately 4% of revenue from Cyprus and this revenue had made a contribution of approximately £9 million before allocation of central costs.
In September 2012 Betfair announced that it had made a formal complaint to the European Commission, on the grounds that the attempted ban by Cyprus of betting exchanges was a discriminatory and disproportionate breach of EU law.
Commenting on the complaint, Martin Cruddace, Chief Legal and Regulatory Officer at Betfair said:
“Having played a constructive role in the preparatory phase of a draft Cypriot law, we were disappointed with the inclusion of elements within it which could unfairly discriminate Betfair and in any event are clearly incompatible with EU law. We have therefore asked the Commission to review the matter and engage with the Cypriot authorities, with the aim of addressing the concerns raised in our complaint. Betfair is a transparent and responsible operator, with a track record of working cooperatively alongside governments in any jurisdiction in which it operates. Current Cypriot law goes against European free market principles and we look forward to working with the Commission and the Cypriot government so we can continue to provide our Cypriot customers with Betfair’s best-in-class Exchange product and odds value.”
In its most recent annual report(to April 2012) Betfair alluded to the high costs associated with
trying to breakdown the walled gardens of the European betting market;
"Corporate costs increased in the period to £46.9m (FY11: £42.0m),primarily due to investment in legal and public affairs resources as part of our regulatory efforts in European countries, higher bonuses and additional costs relating to the move of the UK licence offshore and of being a listed company."
At the end of June 2012, Betfair’s then interim chief executive, Stephen Morana, told the Financial Times;
"Italy and Spain are two of our key markets and after some finalisation of regulation with both of them then we will push on aggressively......The caveat is regulation ... there will be new one-off [taxation] hits [as we expand] but if you pay more tax in the short term it allows you to grow your business in the long term."
On 11 September 2012 Betfair released its Q1 FY13 Interim Management Statement. Noting that it had made its exchange unavailable to customers in Spain, until exchange licences are issued, and that it had been forced out of the market in Cyprus, Betfair said that it expects that the on-going impact from these regulatory changes on revenue would be c.£1.5 million per month on a run-rate basis.
Regarding the German market, Betfair said that the introduction of a 5% Federal turnover tax in July, threatened to make its current betting exchange model unviable. Betfair noted that in FY12, approximately 4% of its revenue came from Germany, delivering a contribution of approximately £6 million before costs.
In September 2012 Betfair announced that it had made a formal complaint to the European Commission, on the grounds that the attempted ban by Cyprus of betting exchanges was a discriminatory and disproportionate breach of EU law. Martin Cruddace, Chief Legal and Regulatory Officer at Betfair said regarding the action;
"Having played a constructive role in the preparatory phase of a draft Cypriot law, we were disappointed with the inclusion of elements within it which could unfairly discriminate Betfair and in any event are clearly incompatible with EU law. We have therefore asked the Commission to review the matter and engage with the Cypriot authorities, with the aim of addressing the concerns raised in our complaint. Betfair is a transparent and responsible operator, with a track record of working cooperatively alongside governments in any jurisdiction in which it operates. Current Cypriot law goes against European free market principles and we look forward to working with the Commission and the Cypriot government so we can continue to provide our Cypriot customers with Betfair’s best-in-class Exchange product and odds value."
In a fascinating interview in Computer Weekly (October 4 2012), Betfair's chief technology officer Tony McAlister highlighted some of the technological challenges facing the company as it sought a slice of the European betting market;
"I have to make changes in the systems where customers’ information and money is kept to allow for unique things like the national ID cards in Spain, which I don’t have to account for in Italy, for example. There have been numerous situations where the IT team has needed to support regulatory changes, such as Italian regulators wanting to see bets taking place in real time so they can approve them, which meant establishing communications between Betfair and the authorities in Italy. Authorities in Denmark want information on bets to be placed in a safe location in case the government needs to access it, and authorities in Spain are going down the same route."
Noting that having to deal with these changes could easily have consumed all of Betfair’s resources and budget McAlister went on to describe how the company had to build what it calls a “jurisdictional architecture”, a project that broke the Betfair's IT architecture down into various country-related components...enabling independent deployments and changes, depending on what has to be presented to the customer." In a nutshell; a very costly exercise.
On 7 November 2012 Betfair announced that it was going to exit from the German betting market;
"As previously indicated, in July 2012 Germany introduced a law that applies a 5% tax on stakes on sports betting in the country. A tax at this rate, if applicable, would make Betfair's current exchange model unviable. Following detailed opinions provided by its legal and tax advisors, Betfair believes that, in regard to bets placed on its exchange, it is not an organiser of sports betting under the tax law and is not, therefore, liable for the tax.
Betfair has been working with the relevant tax authorities to seek clarification on interpretation of the law and its applicability to exchanges. The company is disappointed, however, that to date the tax authorities have not been able to agree to an interpretation of the law that would allow Betfair to continue to offer the exchange product. Consequently, Betfair has decided to withdraw its exchange product from the German market.
Following this decision, on-going contribution from Germany is expected to be de minimis and Betfair is reviewing its operations in this market. In FY12, approximately 4% of Core Betfair revenue came from Germany and this revenue delivered a contribution of approximately £6 million before the allocation of central costs.
The company believes that it has fulfilled all of its obligations under German law, including the filing of necessary tax returns. Discussions are continuing with tax authorities regarding the potential tax liability, if any, arising from bets placed on its exchange since the law came into effect."
On 26 November 2012 Betfair announced that it was also going to leave the Greek betting market, citing a lack of clarity on the regulatory front.
Betfair said that the associated fiscal conditions attached to new betting permits, included payments of taxes on historical revenues, and that this made the Greek betting market economically unattractive to it.
Betfair said that it had expected to generate £13 million of revenue and £7 million of contribution from the Greek betting market in the current financial year.
When it released its interim results for the six months ended 31 October 2012, Betfair said that it was now going to address "regulatory uncertainty" by ceasing marketing and other investment in countries which lacked regulatory visibility. In total, it said, these countries had contributed 24% of Group revenue in the first six months of the year, with Cyprus, Germany and Greece accounting for 8%.
LMAX - leveraging the technology.
LMAX was established by Betfair in late 2007 in an attempt to leverage some of the technology and intellectual property underlying Betfairs Betting Exchange into the online retail financial trading sector.
In July 2010 LMAX received authorisation from the FSA to commence trading and it currently plans a launch of its exchange platform in the final calendar quarter of 2010. LMAX is currently 73.5 per cent. owned by Betfair, 12.5 per cent. by Goldman Sachs and 14 per cent. by
In its most recent annual report Betfair said regarding LMAX;
"Customer traction has improved throughout the year, leading to strong volume growth in FY12. In the year LMAX matched $85bn of foreignexchange volume (FY11: $9bn), delivering an annualised run-rate of
c.$300bn in April 2012. The number of trades on the platform has increased from 4,000 a month to 300,000 a month over the period. LMAX now ranks in the top 30 retail FX providers globally and has firmly established proof of concept for its exchange technology in this market."
As regards the profitability of LMAX and investment costs, Betfair said;
"Revenue from the (LMAX) platform increased from £0.1m to £1.0m, with over 70% of this delivered in the final quarter. LMAX generated an EBITDA loss of £6.0m (FY11: £5.8m) reflecting
continued investment in the business and expansion of its sales capability."
The 2012 annual report also included the following reference to LMAX;
"Free cash flow from Other Investments was an outflow of £11.9m (FY11: £16.3m), reflecting continued investment in the development of the US exchange and LMAX."
When it released its interim results for the six months ended 31 October 2012, Betfair announced that it had decided to give up its majority holding in LMAX venture, which it had established in late 2007 in an attempt to leverage some of the technology and intellectual property underlying its betting exchange into the online retail financial trading sector.
The Betfair Flotation
On 22 September 2010 Betfair announced its intention to apply for admission to the premium listing segment of the Official List of the UKLA and to trading on the main market of the London Stock Exchange and to proceed with an initial public offering of Shares. Betfair does not intend to issue any new Shares as part of the Offer. The offer price was set at between £11.00 and £14.00 per Share, which was equivalent to an equity value for the company of between approximately £1.16 billion and £1.48 billion.
Shares in the company started conditional trading in London on Friday 22 October, opening at a price of £13.00, which valued the company at £1.390bn. Following the exercise of an overallotment option, by Morgan Stanley Securities Limited, acting as stabilising manager, 49,256,353 ordinary shares in the Company will be held in public hands, representing a free float of approximately 46.1 per cent of the issued share capital of the Company.
Within half an hour of trading, shares in the company were changing hands at £15.50, and during the course of the day they recorded an intra-day high of £16.09, before closing at £15.50. It was anticipated that shares in the company would remain strong in early trading, following squeezed institutional demand, and this was indeed the case, with the likes of Newsmith Capital Partners, founded by Paul Roy, the Chairman of the British Horseracing Authority and a member of the Horseracing Betting Levy Board, snapping up shares in the company.
At the close of business on October 27, the day that the retail punter was able to get his hands on shares in Betfair, they closed down almost 3% at £15.01. It will not be in Betfair's long term interest to see the ordinary punter getting shafted as a result of this share issue, as such a happening could negatively impact customer loyalty. Alas, for Betfair's legion of small shareholders this worst case scenario looked set to unfold when on Friday 29 October shares in the company fell back to £1,435.00 a fall of 55p, or 3.69% on the day.
At the close of business on Friday 05 November 2010 shares in Betfair closed at £13.81, their lowest level since flotation. Betfair shares then went into freefall hitting a post-flotation low of £11.40 on 03 December; leaving many small retail investors nursing a near 20% loss. On 1 December 2010 the Daily Telegraph reported;
"Having been brought to market in October at £13 a share, Betfair closed below its float price for the first time as Morgan Stanley initiated with an ?equal-weight? rating and a £14.80 price target, while Goldman Sachs began coverage with a ?neutral? rating. Another adviser, Barclays Capital was equally lukewarm with a £13.60 price target. The three banks were amongst the brokers and law firms who trousered £15.7m in fees at Betfair?s much-trumpeted listing."
On 2 December 2010 Liberium began coverage on Betfair and wrote; "Betfair is overvalued ? SELL, £10.50 target price. Betfair?s growth is strong (24% CAGR in EBITDA from FY10-13), but this partly reflects a fall in profit in FY10 (CAGR is 12% using FY09 as a base). Part of the growth comes from more commoditised areas, and higher risk non-regulated markets. The yield is almost non-existent (<1%), and the excellent growth rate is clearly not a secret, reflected in a CY11 PE of 33x and EV/EBITDA of 15x (pre non-core loss makers)."
Many noted with interest (and humour) the news that Betfair finance director Stephen Morana had bought £100,000 worth of shares in the betting exchange operator following the significant fall in the company's share price on the back of its poor interim figures. Morana bought 9,641 ordinary shares at a price of 1037.14p. The total holding of Stephen Gavin Morana when aggregated with the holding of a connected person (his spouse, Louisa Morana) was 13,550 ordinary shares - 0.0126%. A slightly better punt by Martin Cruddace, Betfair Chief Legal and Regulatory Officer, who acquired 2600 shares at 1017p. The total holding of Martin John Cruddace when aggregated with the holding of a connected person (his spouse, Caroline Angela Cruddace) was 7,831 ordinary shares - 0.0072%. With Betfair shares trading at 968p on December 29th 2011, both men had banked a tidy Post-Xmas loss, and were accordingly taught a salient lesson by the only market that really counts.....
In its annual report for the 12 months ended 30 April 2012 Betfair said that returns to shareholders totalled £59.8m in the year, with £50.2m through the share buyback and dividends of £9.6m.
On the morning of 16 August 2013 Betfair shares were still over 50% below their flotation price, trading at £6.70.
Betfair's interim results for the six months ended 31 October 2012 included the news that Betfair, following a review of its balance sheet at 31 October 2012, had impaired goodwill totalling £34.6 million. In Core Betfair, the impairment included goodwill arising on the acquisitions of Timeform in 2002 , the PokerChamps platform in 2005 and Betfair TV, which owns technology that allows betting via internet connected TV sets, in 2008.
Betfair said that it had sold its minority stake in social gaming company Kabam for $30 million.
Kabam was founded in 2007 as Watercooler and funded by Betfair and Canaan Partner, who took part in a $5.5 million Series B funding round. Betfair's US president, Gerard Cunningham said at the time;
"Our investment is further proof that Betfair believes the fantasy sportsmarket is a tremendous opportunity in the US and around the world," said Cunningham. "Watercooler's strong team and its proven ability to execute an innovative approach to social networking and sports, is extremely compelling as we continue to build Betfair's global portfolio of sports and social media offerings."
For the six months ended 31 October 2012, Betfair reported a loss after tax from continuing operations of £59.7 million (H1 FY12: profit after tax of £24.8 million).
Betfair results for 2004 - 2012
For the 12 months ended 30 April 2012 Betfair reported underlying Group revenue up 5.5% at £389.7m (FY11: £368.6m), compared with revenue growth of 8.4% at Ladbrokes and 14% at William Hill. This represented the fourth consecutive year of declining revenue growth for the company. Profit increased
by 32% to £33.9m, but was still below that achieved in 2009.
Betfair Group ended the year with a cash balance of £135.4m (30 April 2011: £155.0m); a decline of 13%. Customer funds held off balance sheet in separate ring fenced accounts were £288.3m (30 April 2011: £305.6m); a decline of 6%.
Betfair said that revenue from the management of customer funds held on deposit reduced by 10% to £3.0m "primarily reflecting a reduction in the average rate of interest earned on these deposits from 1.1% to 1.0%." The fact that funds on deposit had declined by 6% may also have contributed somewhat.
During the year, Betfair said total active customer numbers had fallen by 10% to 852,000 due to the acquisition of 96,000 fewer customers during the first three quarters of the year. Betfair atrributed the decline to a strong comparative period (the World Cup), but also to a "more targeted acquisition and retention strategy as well as the later phasing of marketing spend".
Betfair acknowledged a hole in the betting exchange model accepting that there were still some betting markets in which the Betting Exchange "may not have sufficient liquidity to offer an optimal betting experience, notably in ante post and ancillary markets". Former CEO YU had previously also said; "We want to be a one-stop shop for betting and at the moment, if you are going to bet on the next ace in tennis, it's better to go to a fixed-odds bookmaker."
In response to this lack of liquidity across some of its betting markets, and in an attempt to stop its customers migrating to the traditional bookmakers, Betfair,in May 2012, introduced risk based fixed-odds betting on singles markets in certain sports.(In effect, the company that had once proudly proclaimed the death of the traditional bookmaker,itself became a fully fledged bookmaker.) Betfair said that its fixed odds offering would "complement the Exchange and would not be trying to compete with it on price once liquidity has formed."
In so far as a central tenet of the betting exchange model was about reducing risk, Betfair's further incursion into fixed odds betting, has raised more than a few eyebrows. This has been compounded by the
news contained in company's recent annual report that risk sports (multiples),which contribute 7% of
sports revenue,had seen a 12% decline in revenue to £18.1m (FY11: £20.6m) "as a result of adverse sporting results in Q1, which particularly affected margins in our telephone betting business". Betfair also said that the overall margin for the year in this area had decreased from 8.7% in FY11 to 6.8% in FY12.
In the Games segment, revenue declined by 5% following a 17% reduction in active customers,whilst the
Poker segment saw a decline in active customers of 9%.
Administrative expenses increased by 9% to 221.8m and represented 63.5%of revenue(FY11: 61.4%).
Commercial and marketing spend was £87.5m (FY11: 79.3m) and represented 25% of revenue. Operations costs were 6% higher and corporate costs increased in the period to £46.9m (FY11: £42.0m).
Source = Betfair annual reports and accounts and Betfair Annual Review.
Betfair: from disruptive upstart to limping laggard.
The euphoria that greeted the arrival of betting exchanges has long faded. The traditional bookmaker lives on, and Betfair, the company that once promised to kill him off, has moved to shore up holes in its betting exchange model by embracing fixed odds betting.
Betfair has meanwhile failed in its attempt to globalise the betting exchange model, and it has also failed in its attempt to leverage betting exchange technology into other markets (selling off its majority stake in financial market company LMAX, having incurred an estimated £30m in costs).
Memories of a disastrous IPO continue to haunt the company. On their first day of trading shares in Betfair touched an intra-day high of £16.09, before closing back at £15.50. Today they are priced at £6.70 a mere 57% below their all time closing high.
It has become clear that there are significant holes in the betting exchange model. Despite dominating the betting exchange market for ten years, Betfair was unable to deliver a sufficient pool of liquidity aross all of the betting markets that it offered. Secondly, Betfair's forced exit from a number of European betting markets, highlights the fact that the low margin nature of the betting exchange business makes it highly vulnerable to "taxation hits" and regulatory shock in general.
Lack of first mover advantage will weigh heavily upon Betfair in countries such as Spain and Italy, not to mention the high cultural barriers that it will have to overcome when it does eventually get to launch its betting exchange in these markets, and the poor economic conditions that currently prevail in both countries.
As regards entry into the US market, Betfair acknowledged that the license fee structure for betting exchanges in California "should reflect uncertainties in the model". Now the company has taken impairment charges against both its TVG arm and its California venture.
In its 2012 Annual Report Betfair said that "investment in legal and public affairs resources as part of our regulatory efforts in European countries" had contributed to a rise in corporate costs to £46.9m (FY11: £42.0m). Betfair continues to take legal action against those countries that seek to exclude it from their betting market; most recently Greece and Cyprus.
The launch of a fixed odds betting service, not only exposes Betfair to greater risk, but also, and, perhaps most importantly, serves to dilute its core proposition of being the company that offers the punter a platform upon which to bet without the bookie.
The possible entry of Ladbrokes into the betting exchange space
could not have come at a worst time for Betfair, which is currently seeking to refocus itself under new management.
The betting exchange model has failed and those that were foolish enough to buy into the Betfair IPO story are nursing big losses and bruised egos.
The history of the betting exchange industry, is essentially the story of Betfair, and how it went from being an arrogant disruptive upstart into becoming a limping laggard. A company that threatened to topple the established order, but that ended up being forced to take significant impairment charges across its entire portfolio, and to unravel itself from a regulatory quaqmire, that was very much of its own making.
A company with global ambitions, that was forced to return to basics. A company that has been forced to
embrace the very thing that it set out to destroy; traditional fixed odds betting.
To cite this article: Niall O'Connor "A History of the Betting Exchange Industry." (Published on Bettingmarket.com 2013. All Rights Reserved.)