Betfair to Racing: 'Shrinking Margins Not Our Fault'

2 December 2003

Betfair attempted another step in supplanting itself as the world's leading betting exchange and an advocate for the entire P2P industry when it released a comprehensive study into the funding aspects of betting exchanges.

"We want to get the argument onto the issues that matter, and if people want to show why the argument is wrong and show the numbers they think are right, we'd be happy to see them."
- Mark Davies

Opponents of exchanges, namely traditional bookmakers and some in the horseracing industry, have long argued that online exchanges give commercial bookmakers an easy way to lay horses, or back them to lose, thus balancing their books.

Bookmakers like William Hill and Ladbrokes who oppose Betfair, argue that this is unfair because commercial bookmakers are using the site for business purposes without having to pay a proper tax levy.

Betfair has never hidden the fact that a great deal of its business comes from commercial bookmakers, but with the release of its "The Funding Question" report, the company now has statistics on how many individuals use the site.

The report aims to address the effects of both the change "in basis of general betting duty from turnover to gross profits and the increasing competition in the gambling industry, on horserace betting in Great Britain.

Using data on the starting price of every horse in every race over the last eight years, the reports concludes that the biggest single impact on race betting margins has been the change in tax basis introduced in October 2001.

According to the report, punter tendencies changed after its passing in ways that were unpredictable. Among the other main finds in the report:

  • Differently-priced horses have been affected in different ways. There is now more betting on short-priced favorites, which are a lower-margin product than outsiders.

  • Less sophisticated, and less price-sensitive, punters have moved away from horseracing, leaving racing with the most intelligent and most price-sensitive segment of the betting-consumer base.

  • The growth in new products being offered by conventional bookmakers has ensured that there is no longer 100 percent recycling of horserace bets into horseracing.

  • For horseracing to maintain the level of funding it wanted, a 95 percent increase in turnover from pre-tax-change levels was required, not the 45 percent often quoted within the industry.

  • Margins on favorites are unchanged since the arrival of betting exchanges, and in 2003 are above their eight-year average.

  • The incremental turnover that has been brought to racing by exchanges has been grossly underestimated. More than 50 percent of Betfair turnover comes from 'trading,' and approximately 10 percent is from in-running bets--neither of which could go through a traditional outlet. In addition, 25 percent of Betfair's business comes from abroad, representing new business to the UK market.

"It is clear that Betfair's analysis is selective and far from objective."
- Nigel Smith
British Horseracing Board

Mark Davies, communications director for Betfair said the report was distributed to all of racing's major interest groups and to the Parliamentary Committee set up to scrutinize the gambling bill.

He said the initial feedback has been universally positive with the small exception of those who are against Betfair. To those that have tried to say the study is nothing more than Betfair spinning its numbers for its own benefit Davies said he is done debating the issue.

"We want to get the argument onto the issues that matter, and if people want to show why the argument is wrong and show the numbers they think are right, we'd be happy to see them," he said. "This is not a point-scoring exercise; it's an attempt to get to the issues that matter, instead of talking about irrelevant metrics like over-round per runner."

The report argues that claims from bookmakers that exchanges have caused SP margins to shrink or unfounded.

The average margin was 5.9 percent from January 1996 to October 2001, when betting duty was abolished, and 5.7 percent since. The margin reached a low of 4.5 percent in 1999, linked to the reform of racecourse betting rings, before Betfair was launched, and although margins were below average at 5.4 percent in 2002, they have recovered to 5.9 percent this year.

"If the bookmakers' hypothesis that betting exchanges are the cause of margin change is correct, why is it that the horses on which the exchanges do 65 percent of their business are unaffected?" the report asks. "The increased use of betting exchanges by on-course bookmakers is not distorting the SP markets."

According to the report, racing's problems stem from the industry's failure to anticipate the way in which punters would change their betting behavior as a result of the abolition of deductions.

"It was assumed that punters would recycle 100 percent of their returns from horseracing bets on horseracing, leading to the belief that turnover needed to increase by only 45 percent to produce an increase in levy income from £55 million to £97 million a year under a system based on gross profits instead of turnover," the report claims. "In fact, turnover needed to increase by 95 percent. This is because punters now concentrate more on single bets on low-margin favorites."

The BHB's commercial managing director Nigel Smith said he is leery of any finding released from Betfair.

"It is clear that Betfair's analysis is selective and far from objective," he said. "The report also appears to makes some questionable assumptions and its findings are inconsistent with our own."

Click here to view the full report.

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