Betting on sports in Britain has been big business since 1963 when it was legalized. Bookmaking shops opened throughout Britain but the activity was not glorified.
The premises were dingy by government decree; the 1963 Betting, Gaming & Lotteries Act mandated that licensed betting offices could not encourage loitering and the bettors were expected to enter, place a bet, and leave with the alacrity and discretion of a politician entering a sleazy motel.
The betting shops had a high margin on the bets, which today would be laughed at by most punters. For example, soccer games often had a vigorish of 33 percent.
The activity flourished, however, and the U.K. government quickly learned that there was great money to be made by taxing the bets. And given that this was essentially a "sin tax," there was little outcry from the public; they simply paid a 9 percent tax on all winning bets to the government.
Things seemed to be going well up until the 1980s. The bettors could essentially wager on their favorite sports, the bookmakers could make a decent wage and the government benefited from taxes. But in the 1ate '80s, a few British bookmakers tried to expand their horizons by taking telephone bets from North America (with the permission of the U.K. government) and ads for places like Bowmans International appeared regularly in North American media. However, these places were small potatoes, and the United States paid little attention. The U.S. government did suggest that this type of betting by U.S. citizens was illegal, but didn't pursue it because it wasn't very lucrative and wouldn't be worth the cost.
But around that time, a major development was occurring that would change the face of bookmaking throughout the world, although it wouldn't be realized for about another half decade. That change was the invention and growth of the Internet.
A few smaller operations, such as wagernet out of Belize, started up first, but it was clear that they didn't have the money to actually run a sports book and they quickly died.
In the early 1990s, Intertops (an Austrian sports book), created an Internet division and marketed to the world, and particularly North America. Again bettors had to pay a 10 percent Austrian betting tax on winnings, but many didn't seem to mind doing so (especially in North America), as this was the only legal place to bet aside from Nevada.
Several additional Internet operations soon opened up in the Caribbean, and the market became so lucrative that Web sites started showing up to help the bettors identify reputable sportsbooks from the scams. Still, while sports books started operating tax free in the Caribbean, the British big shots, such as Ladbrokes and William Hill, didn't pay much notice, nor did the U.K. government. After all, very few Brits were interested in signing up with unknown entities even if they could avoid paying a tax on winnings. Besides, most of these Internet sports books were offering American sports exclusively.
By 1997, however, it was clear that the Internet was going to be a major entity with many shops opening up in the Caribbean and offering tax-free betting. There was some nervousness among sports bettors when a few sports books (Top Turf, Dial-A-Bet and Rich's Sportsbook and others) went under, but these proved to be the exception rather than the rule.
Things really changed in 1998 when Intertops moved its operations from Austria to Antigua to offer tax free betting and many well know phone sports books, such as WWTS, started offering Internet wagering. Furthermore, Bowmans, realizing it couldn't compete in the U.S. market with the betting tax, moved its wagering centers to Mauritius and The Isle of Man to avoid the tax.
The large British operations took note and asked the government to wave the tax, but the government shunned the idea stating that it wasn't in their interest to do so and British citizens would still only bet at land-based British shops when given the choice. This proved to be short sighted, as many U.K. citizens opened up accounts offshore and places like Ladbrokes and William Hill started to lose market share.
Worse yet, the big shops were looking to capitalize on Internet wagering in the North American market and they realized this wasn't possible with the betting tax. In 1999, Ladbrokes consequently set up a division under Hilton in the Isle of Man and Channel Islands to offer tax free betting. Likewise, William Hill set up shop in the Isle of Man and even took out a betting license in Antigua a year later.
Ladbrokes eventually threatened to move all their operations offshore unless the government cut the tax rate from 9 percent to 3 percent--a disaster for England and a boon for the Isle of Man, Gibraltar, Malta and other nearby jurisdictions offering tax havens to sports books.
The U.K. government realized it was backed into a corner and came up with a solution, which took effect at the start of 2002. The government waved the 9 percent betting tax and implemented a 15 percent tax on gross winnings. In return, the books had to agree to operate in Britain. To make sure this happened, the government reminded the bookmakers that their companies were registered in Britain and trading on the stock exchange may never be possible if they don't follow rules.
The tactic worked. The major bookmakers returned and British bettors came out of the woodwork. William Hill and Ladbrokes also abandoned their plans to offer wagering to Americans, as it was clear that doing so could get them into future legal proceedings with which they'd rather not get involved.
Things were again looking rosy for the mainstream shops in Britain, but there was another problem on the horizon: person-to-person betting exchanges.
P2P Exchanges
To understand betting exchanges, one needs to understand how a traditional bookmaker operates. The book puts up an opening line, which has a percentage (the vig) built in for the bookmaker (usually around 10 percent). In a perfect book involving a wager between two teams, there's equal action on both teams. Thus, regardless of which team wins, the bookmaker profits from the vig.
Rarely, however, is the book perfect, and more often than not, the bookmaker will assume a position on a team (or a golfer, or tennis player or horse etc.). If the lines are good, then the wins will offset the losses and in the end the book will end up with the vig anyway.
Traditionally this was not a problem, as the bookmakers had more knowledge than the bettors. But in recent years, the Internet, a friend to bookmakers, soon became their enemy as well; bettors could easily get the same information that was once really only readily available to the books. Consequently the bettors have become sharper.
To make matters worse, odds comparison sites have popped up all over the Internet. Now bettors have an easy way of comparing the lines at various operations and can decide which shop offers the best lines. Books were becoming stuck with more and more positions because if they were the best on one side then some other place was better on the other side. Oftentimes they would not get the action from the other side of the line, especially among the larger bettors who are always shopping for the best price on their team. To overcome this, many places are offering more unique and non-traditional type bets as well as bonuses to make sure the players will bet with them.
A few companies quickly realized something and took advantage of it. While its not the first operation to offer person-to-person betting, Betfair.com is by far and away the most popular, likely due to a great marketing campaign.
Unlike with traditional bookmaking, person-to-person betting enables bettors to become bookmakers. The betting company (Betfair, Betdaq, Tradingsports, etc.) puts up the games offered, but it's up to the bettors to decide on a line. Bettors set a line and a trade is only executed when another player takes the other side of the line. The winning bettor is then charged a small commission on his bet.
Unlike a traditional bookmaker, there is absolutely no risk to the betting exchange company. The bet is only executed if there is a bettor taking the line that another player has laid. Consequently the book never assumes a position.
Bettors love it because bets are executed without vig, so the cost is only the commission (which generally comes out to about 20 percent less than what they would pay in usual vig).
The betting exchange loves it because they don't have to assume a position and they can operate with fewer employees and overhead than traditional bookmakers. Further, it allows the bettors to wager on a game while it is taking place (also known as betting in the run).
The traditional bookmakers, spearheaded by Ladbrokes, claim this isn't fair because the bettors are acting as bookmakers and hence should be required to obtain a bookmakers license and pay the 15 percent tax on their winnings. Further, they argue that it is dangerous to the industry because bettors are anonymous and could bet against their teams or horses without anyone knowing about it, effectively undermining the integrity of the sport. They also suggest it is an easy way to conduct money laundering, and because the company does not need to monitor trades, any suspicious or criminal activity would go unnoticed.
But at the Global Interactive Gaming Summit & Expo this summer in Montreal, Betfair's spokesman stated that they do indeed have someone that monitors all trades and that any suspicious trades are flagged and reported immediately. He also suggested that requiring bettors to obtain betmaking licenses is ridiculous, as the bettors are not bookmakers, but rather people betting with each other in a barter-type format. The betting exchange, he said, is simply a platform that enables people to bet with one another.
What cannot be argued is the profitability of Betfair, which is higher than that of William Hill's or Ladbrokes' online sports book divisions.
The U.K. government's position seems to be that it will try to close the loophole that enables Betfair to operate without paying the 15 percent tax, but it will not try to shut down the company. This would go against the spirit of the deregulation program for England's betting industry, as outlined in their white paper, "Safe Bet for Success." Further, they recently introduced the 15 percent gross profits tax system to boost industry competitiveness, and it would seem hypocritical to shut down an innovative business that's trying to do the same.
Betfair has argued that it does indeed pay taxes to the government (and hefty ones at that), and it isn't their fault that the type of service they offer doesn't fit into the traditional bookmaking model.
Ladbrokes and other U.K. bookmakers, it appears, will not be happy unless the companies are either shut down or the bettors are required to obtain betting licenses like all other bookies. The matter remains before the courts.
Ladrokes' Other Legal Battles
Ladbrokes also finds itself in court elsewhere in Europe. In February of this year, the Dutch courts ruled in favor of De Lotto (the country's sports betting monopoly), thereby forbidding foreign sports books from accepting bets from Dutch residents.
In March 2003, the Danish government outlined a set of proposals designed to prevent offshore bookmakers from placing their advertisements in the Danish media. They would also make it illegal for offshore companies to employ persons in Denmark to act as their agents.
Ladbrokes has placed a block on their sports Web site for Danish residents, but has appealed the ruling to the Economic Congress stating that it goes against the spirit of free trade in the European Union.
Other European Union countries, namely Greece, Italy and Finland, also tried to stop Ladbrokes from targeting bettors from their countries. In the case of Greece and Italy, the courts found that there was nothing in their laws forbidding foreign companies from targeting their citizens.
Finland is another matter altogether. The Finnish courts in 2002 issued a similar judgement to those of Greece and Italy, but last month the Finnish Ministry of the Interior put up blockades to stop Ladbrokes from easily advertising their Website in Finland.
As such, Ladbrokes finds itself back in court trying to stop obstacles put up by the Finnish Ministry of the Interior.
The whole set of lawsuits and arguments does bring up an interesting question: If Ladbrokes is correct that the laws in the European Union clearly state that any bookmaking operation has the right to operate anywhere in the Economic Union without reprisal, and also has the right to market its products accordingly, then why are they trying so hard to shut down Betfair?