Betfair's Earning Potential Questioned in Australia

9 January 2006

A new report by investment bank Morgan Stanley suggests that leading betting exchange Betfair's Australian operation will fall way short of the government's revenue projections, and Betfair is denouncing the findings.

During Betfair's long, drawn out battle last year to obtain an operating license in Tasmania, Premier Paul Lennon said the company would bring in about $50 million per year by 2010, based on figures provided by Betfair. But Morgan Stanley analyst Michael Nolan, who authored a report titled "TabCorp Holdings Limited TAS Govt. Decision on Betfair Licence Award Likely to Leave a Bitter Aftertaste," said the projections were overestimated and unrealistic. His analysis of the figures, also provided directly to him by Betfair, said the company would more likely bring in around $25 million.

Nolan said in the report that out of four categories of figures provided by Betfair--race wagering, sports betting growth, racing revenue share and sports betting revenue share-- the only sector given a reasonable growth target was sports betting, which was projected to have a 4 percent annual growth rate.

Nolan said Lennon's projection of a 5 percent annual growth rate for racing, on the other hand, was unrealistic considering that the industry has grown at an average rate of 2.5 percent annually since 1991. (Only three times since '91 has the annual rate exceeded 5 percent.)

Lennon also said Betfair would achieve a 4 percent market share in racing by 2010, but Nolan said that for the company to reach that goal and deliver returns to the racing industry, it would have to reach 43 percent of its potential market in Australia.

Nolan added that it was optimistic to assume that Betfair would achieve a 20 percent share of the national sports betting revenue by 2010. He said that even 10 percent is optimistic, but more attainable.

Betfair maintains, however, that Nolan, who is an analyst for Betfair's Australian competitor TabCorp, failed to take into consideration several relevant factors, such as the United Kingdom's experience with betting exchanges and other jurisdictions' success with lowering commissions.

"The U.K. experience has been that lower prices have led to markedly higher turnover, and both Hong Kong and Singapore are looking to cut take-out and move onto gross profits-based charging in order to stimulate revenue," Betfair Director of Communications Mark Davies explained. "Moving from a turnover charge to a GPT in the U.K. massively stimulated growth and revenue in the industry, where the take from betting in 2004 was double what it had been in 1999."

The Tasmanian Thoroughbred Racing Council, an outspoken opponent to exchange betting, is nevertheless standing behind the report.

But the way to know what the company's true returns will be is to play the wait-and-see game.

"They're projections, and in our opinion conservative ones," Davies said. "Only time will prove one argument or the other."

Emily Swoboda is the senior staff writer at IGamingNews. She lives in St. Louis, Mo.