PAULICK REPORT FORUM brought to you by Breeders’ Cup: BETFAIR HAS ITS SAY

by | 11.17.2010 | 12:48am

By Ray Paulick

When the exchange wagering giant Betfair entered the U.S. market through its $50-million purchase of TVG in January 2009, it was only a matter of time before the company would push for legalization of this popular yet controversial form of player vs. player online betting featuring low takeout or commissions. Exchange wagering legislation first advanced in New Jersey earlier this year, but last week's introduction of an amendment to California Assembly Bill 2414 authorizing the licensing of exchange wagering companies by the California Horse Racing Board is a more significant step. AB-2414 also includes language increasing takeout on traditional pari-mutuel bets like exactas, trifectas and superfectas. That amendment was pushed by racetracks and horse owners.

Stephen Burn, the president of TVG and Betfair's global director of horseracing, discusses the legislation and some of the controversies surrounding exchange wagering in this week's Paulick Report Forum. Burn, who oversees TVG and Betfair's worldwide horseracing interests from TVG's headquarters in Los Angeles, has been with the company since 2003. Prior to joining Betfair, he worked in TV for ten years and was executive producer of Channel 4 Racing in the UK, the country's leading terrestrial broadcaster of the sport.

What impact do you believe exchange wagering would have on American racing and breeding?

A positive impact. Exchange wagering is not a silver bullet to provide a solution to all the challenges of the industry, but it is a useful and innovative tool offering a real opportunity to attract a new type of bettor and to win back players who have moved offshore or who have left the sport. It seems as though racing has focused on assistance or subsidies from other sorts of gambling, and while that's understandable we think it is important for racing to find new ways to draw interest to and generate revenues from its own product. Exchange wagering is one of the few successful innovations that is proven to help racing draw new interest and generate revenues from the racing product itself.

There are concerns that exchange wagering with its low commissions would cannibalize existing pari-mutuel pools. What does Betfair's internal tracking say about the demographics of exchange bettors vs. the traditional horseplayer or punter?  Are they horseracing fans or online traders?

I understand the concerns, but the evidence we've seen from countries where Betfair operates suggests the concerns will not be born out. In the UK, for example, the state-owned pari-mutuel operator (Tote) has seen dramatic rises in its turnover since Betfair's inception–52% growth. If we are ever licensed in the U.S., our intention is to sit the exchange alongside the high-margin pari-mutuel products and cross-sell those products to exchange players. Doing this has introduced numerous new bettors to tote betting in the UK who would otherwise not have engaged with the product. Earlier this month, Betfair accounted for more than 40% of all new money bet into the nationwide Tote pool on a “pick six” bet, boosting that pool to an all-time record.

Typically, Betfair attracts a much younger customer than the traditional pari-mutuel products–only 19% of our racing customers are over age 50–but our expectation is that we will be able to find a way for the two products to complement each other rather than compete. After all, Betfair owns TVG and has a significant interest in ADW revenues and wants to see them grow too. We believe an exchange is one way of helping those markets attract new players. One of the unique qualities of the exchange is its ability to appeal to skilled horseplayers and casual fans but also sophisticated financial day traders who see the benefits of competitive pricing and true value odds. Those types are not engaged with the pari-mutuel product today.

But, in saying all that, if the racing industry and its regulators do not like what they see, if and when an exchange is out there then they have full veto rights – under the proposed California legislation – to turn exchange wagering off. We have to find the right pricing model for the industry here because ultimately the long-term success of any exchange is dependent on the long-term success of the sport. I believe that means the operator being prepared to take a little but often in return for making sure a fair return goes to those providing the product and to the players.

People like former British Horseracing Board chairman Peter Savill and France Gallop executive Louis Romanet, and racing associations around the world have criticized betting exchanges or tried to prevent them from getting a foothold because they believe the exchanges do not contribute enough—10% of gross profits from the 5% commissions–to the tracks and horsemen. Do you have any facts to discount this position?

The 10% of gross profits figure you refer to I presume is reference to what we pay in the UK. We are required, by statute, to pay that figure in the UK just like every other betting operator, on revenues from customers based in the UK. However, we go beyond what most other betting operators do and also ensure that money goes directly back to the sport from customers outside the UK betting on British horseracing product. We are the only major betting company to do this and paying an international voluntary contribution to the sport reinforces our commitment to it. Additionally, we are the second biggest sponsor of UK horseracing with only the Tote – which is obliged to put all of its profits back into racing – contributing more.

Louis Romanet used to run a state-owned monopoly in France, the PMU, and his comments about betting exchanges and all other betting operators other than PMU should be seen in that light. The French liked the status quo of not allowing any competition and only allowing their citizens to bet on a product with large take outs guaranteeing high revenues for the operator and poor value for the customer. We believe that model is out-dated.

But, in any case, the commercial terms of how an exchange might operate in the U.S. will be defined in concert with the racetracks and horsemen.  That is the model that has been proposed in California. If the pending bill that would authorize exchange wagering passes, exchange wagering still cannot take place until there is a contract in place with the applicable racetracks and horsemen specifying the return to racing from exchange wagering. If they are not satisfied, the exchange wagering will not be available. Despite this significant risk, Betfair is prepared to take a leap of faith and build a betting exchange unique to the U.S. market at a cost of millions of dollars in the expectation that mutually acceptable terms can be reached.  We are not proposing to bring the same model that operates in the UK into California.

Did Betfair strategically wait until the last minute to have the exchange wagering amendment added to Assembly Bill 2414 in California in order to avoid public comment on the issue? If not, why was the amendment added so late in the legislative session?

Betfair did not wait until the last minute to do anything. We have been working all year with forward thinkers in California racing and our involvement was kick-started at a meeting in Sacramento way back in February. At that meeting were the chair and representatives of the California Horse Racing Board, the owners, trainers, tracks and fairs as well as other interested parties. Throughout, we have continued to work with racing in the state to try and work through the political process and at each step we have done what we were asked to do by those driving the legislation forward. In addition to multiple meetings and conversations, the first draft of the bill was circulated widely to the racing industry in April and each subsequent draft was also circulated widely within the industry. Those who are expressing opposition have had the language and been in discussions on this matter for some time and for them to say anything other than that is disingenuous and doesn't ring true.

AB-2414 is a bold piece of legislation that allows racing to try and put its own house in order without requiring the politicians to do it for us. The exchange element of the bill is simply an enabling piece of legislation that empowers racing and potentially gives it another tool to go to war with. We would welcome the opportunity to provide that tool but have no interest in doing so if the financial terms are not acceptable to the industry and to the customer.

Why put this piece of legislation together with one increasing takeout on exotic bets and supported by the Thoroughbred Owners of California? It's my understanding TOC is neutral on the exchange issue but still supports the bill because owners are desperate for purse revenue.

My assumption is that the legislature seeks to craft consensus legislation and this bill is supported by almost all participants within the California racing industry. Unfortunately, in a democratic society it is difficult to get everybody to support a consensus bill, but every effort to do so has been made. We worked closely with the TOC to ensure that sufficient safeguards to protect the interests of horsemen were included in the bill. It was an in-depth process, but we agreed with them that horsemen having a firm seat at the table to craft the business model is essential to the success of the exchange wagering product. We also worked closely with the racing associations and fairs to ensure an equal level of comfort. In fact, should this bill be enacted, Magna, which is against it, will receive the same rights as all of the other racing associations and fairs.

We also recognize the purse money crisis in California racing and support the need to immediately increase purse revenue for California horsemen that AB-2414 provides.

One of the more interesting components of exchange wagering is “in-race” betting. From a technology standpoint, considering that there are delays in transmission because of the industry's use of satellite technology to broadcast races, how can Betfair make that happen with certainty that no “past posting” takes place?

Betfair has the most sophisticated audit trail of any wagering company and we would welcome the opportunity to bring that technology to the United States. Of course, we will only do so if the racing regulators are comfortable that all customers have a level playing field.

Are you surprised by the organized efforts of CDI and MI Developments to block the bill or by criticism, from me and others, that we need more dialogue on the issue before moving forward with legislation?

No, I am not surprised. The two companies you mention, understandably, have the interests of their shareholders at heart and not California racing. Both own businesses that directly compete with TVG in the ADW space and I believe they see the possible arrival of a betting exchange as being a threat to their market share. As for criticism elsewhere, I hope that when people take time to read the bill and see the safeguards built into it they will come to understand that the time for dialogue is once the legislation has been passed and not prior to its passing. AB-2414 explicitly provides that applicable racetracks and horsemen must agree to the business model before exchange wagering can occur.

Since you've come to the U.S. to run TVG and Betfair's international horse racing division, what has surprised you the most about American racing? What do you think distinguishes us—in a good or bad way—from racing in the UK and Europe?

The factionalism and fear that is eating away at the heart of American racing is what has surprised me the most. It's upsetting to see because there is absolutely no need for it. US racing is an amazing, exhilarating and life-affirming product at its best and there is no reason for those days to be behind us. The passion and enthusiasm the genuine horse fans have for the sport is great to see. We need to find a way for all that is good about racing to be conveyed to a younger generation than those of us who typically occupy the seats or place wagers.

I don't believe the sport, in the long-term, should be depending on slots or limited betting products to guarantee its future. Racing here has an opportunity to embrace innovation and we would like to use TVG and anything Betfair can do to help with that innovation.

Obviously our industry has some serious challenges. What are some of the steps you think we need to take to meet those challenges?

I am such a new boy in town that any remarks I make have to be seen in that context. Much better minds than mine will have better answers to that question and I am in no position to offer anything other than a personal opinion.

First and foremost, I would start to think about the customers more. The customers to me are the folks who go to the track and wager on the sport but also those people who do that from home too. They are also the owners and others who put the sport on for our benefit and it is all those constituencies that we need to serve. It isn't easy to satisfy everybody but that doesn't mean it isn't worth a shot.

We need to look at new ways of marketing and start speaking to people in ways that the younger generation can understand. We have a number of articulate and passionate people who are great at selling racing but we don't give them the right channels to do that to a modern audience.

Putting on good quality product when the public want to see it and to bet on it is key as well and working with TV companies and other media outlets to determine how best to get the sport in front of people is absolutely key to our future success.

I certainly don't have all the answers but I do work for a company that does have a TV channel, a first-class ADW product and a world-class betting exchange. We'd like the opportunity to play our part in returning racing to a place that captures the public imagination and has people wanting to engage with us.

Copyright © 2010, Blenheim Publishing, LLC

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