Introduction to Betfair
Andrew Black, a one-time professional gambler, and Edward Wray an ex-JPMorgan derivatives trader founded Betfair in August 1999. Today Betfair is the world’s largest international online sports betting company and the world’s biggest betting community.
The company has over three million registered users who bet on sports events and play online games including poker. Betfair is the world’s largest betting exchange handling 1,000 bets a second and completing 5m transactions a day, which is more than all European stock exchanges, combined.
Unique value drivers
1. Peer to peer betting exchange
The key difference to traditional gambling is that instead of betting against bookmakers Betfair customers bet against each other.
Betfair was built on a stock exchange model (similar to Nasdaq) where odds functioned as the share prices. This enables bettors to trade in and out of positions on sporting events, much like trading in and out of positions on stocks. Betfair’s early product was hugely innovative in the UK sports betting markets, enabling people to “lay” or bet against sports for the first time. It also created a new type of gambler that took advantage of market trading dynamics, without needing to have an opinion on the outcome of the sporting event itself.
Of the 2,000 people working at Betfair, 600 are IT engineers. The exchange technology used by Betfair is proprietary and, as well as being protected by copyright, is the subject of patent protection in various jurisdictions.
2. No risk exposure on bets
Betfair differs from traditional gambling companies in that it does not bear the risk of the bet. It connects punters to each other and then pays out winnings rather than offering odds that it stands to win or lose. It makes its money by taking a commission on any winnings of between 3 and 5 per cent. A small percentage of consistent winners pay a “premium rate”.
This also creates an inherent cost advantage relative to the traditional bookmaker model in the UK. Because a bookmaker takes risk on the outcome of the race, this cost is built into the bookmaker odds offered to the public. Therefore the odds that the public sees on Betfair are more reflective of true market, resulting in most cases, in higher odds.
3. Liquidity of transactions
Betfair says that much of the success of the product is dependent on maintaining high levels of liquidity, a significant proportion of which is generated by Betfair’s sophisticated and high-spending “Heartland Customers”.
Early on Betfair recognised that the key to creating a successful betting marketplace was to improve the chances that any reasonable bet placed, would be matched. In essence, Betfair needed to balance supply and demand the same way that a stock exchange does. They solve this by encouraging volume betting, and marketing to high volume players. As mentioned previously Betfair’s betting exchange enabled a new type of bettor – people looking for arbitrage opportunities. These bettors move large volumes of bets to lock-in a very small profit regardless of the outcome on the race, providing liquidity to the exchange.
The network effects from its leadership provide sustainable competitive advantages. A highly liquid exchange for bettors is a difficult barrier to entry to overcome, unlike most gambling sites (such as online poker or casinos) that has very few barriers to entry. Creating the critical mass to have an effective betting exchange is difficult and costly, and this is reflected by the almost non-existent competition.
- A near monopoly in peer to peer betting exchanges
- A growing and cash generative business model (which allows for large dividend payments)
- An outstanding management team with a track record of operating within a measured and prudent regulatory approach and investing for long-term growth
- Large and growing online sports betting and gaming market
- Unique, disruptive Exchange Platform technology. £300m invested on the IT platform since it launched 10 years ago, with a recent major revamp to improve speed and prevent downtime during large sporting events
- Good relationships with many sporting associations and high profile sporting clubs (such as FC Barcelona and Manchester United FC)
- The betting exchange provides better pricing than bookmakers, which results in greater levels of customer loyalty and higher customer satisfaction rates.
- The regulation and legality of online betting and gaming and varying enforcement
- Changes to the taxation of online betting or the imposition of other levies, duties or charges
- Hacking attempts and security related concerns for high profile Internet businesses. Reputation can be severely compromised if security is taken lightly
- Competing against large established bookmakers such as PaddyPower, William Hill and Ladbrokes
- Negative publicity about gambling, match fixing and corruption in sport
- The liquidity levels in the online exchange
- The importance/ reliance on Betfair’s Heartland Customers (high volume bettors)
 Betfair Makes Online Odds on AC Milan, Hillary Clinton, Weather,” Bloomberg News, September 6, 2005.
 Customer satisfaction results from April 2010 TNS UK syndicated case study
 Betfair IPO prospectus p.14
 The Directors are adopting a progressive dividend policy with a pay out ratio of approximately 20 per cent of profit after tax. IPO Prospectus p.3. At present no dividends are paid.
 In 2006 US Congress unexpectedly passed anti-online gambling laws, which caused several companies lose most of their share value http://www.theregister.co.uk/2006/10/02/us_outlaws_gambling/