11/12/2009 12:00AM

Betfair deals have got U.S. tracks' attention

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The British-based company Betfair is continuing to enlarge its presence in the U.S. racing industry despite controversy over the company's betting exchange business model and the way betting exchanges generate revenue for racetracks and horsemen.

Betfair's expansion into the U.S. began earlier this year with its purchase of Television Games Network, the country's biggest account-wagering service. Recently, a few tracks and the Breeders' Cup made individual deals with Betfair that underline the desire of the U.S. racing industry to tap into foreign markets and a budding acceptance of betting exchanges, which allow customers to set their own odds and bet against each other on horse races and other sporting events. But many U.S. racing officials are concerned that racing's revenue streams would decline if the business model that Betfair uses to compensate tracks and horsemen in the United Kingdom and Australia were ever to take hold in this country.

Betting exchanges like the one pioneered by Betfair are illegal in the U.S. because of restrictions on Internet gambling and bookmaking. Though many racing officials believe that current efforts to legalize betting exchanges have slim chances of success, other officials believe that federal legislation already introduced by Rep. Barney Frank to legalize, regulate, and tax online gambling would open the U.S. up to betting exchanges and fundamentally change the competitive environment for racing.

Betting exchanges have become enormously popular in the countries in which they are legal by allowing patrons to act as bookmakers at a very low cost per transaction. Betfair, for example, typically charges its customers 5 percent on the bets they win against other customers, although that number can vary widely depending on a customer's activity. As compensation to racetracks in the U.K., Betfair hands over 10 percent of that commission to the racing industry.

Although the vast majority of Betfair's business is generated by betting on U.K. sporting events, the service has always allowed its customers to offer bets on U.S. races, despite objections from some U.S. tracks. This year, however, Betfair reached agreements with Keeneland, Del Mar, and the Breeders' Cup to compensate them for bets by customers on their races, the first time Betfair has reached deals with U.S. racing entities. In addition, Betfair has reached agreements with more than a dozen tracks to allow its customers to wager into North American commingled pools, including the New York Racing Association, Oak Tree at Santa Anita, and Breeders' Cup.

The precise terms of the betting-exchange deals are not known, but according to several racing officials, Betfair has been offering to give tracks 10 percent of the company's gross profits on a 6.5 percent charge on winning wagers, an amount that is well below the rate that tracks receive for simulcast bets and far below cuts for bets at their racetracks. By some calculations, in fact, the rate is equal to approximately 0.5 percent of the handle, compared to the 20 percent take the racing industry shares on a typical wager.

Craig Fravel, the executive vice president of Del Mar, would not provide exact details about the track's deal with Betfair or the amount of money wagered by its customers on Del Mar's races during the track's six-week meet this year. But he said that handle was "minimal" and that the one-year deal was more of an experiment than a business decision.

"As a practical matter, they would have [allowed betting on Del Mar] without paying us anything," Fravel said. "We just wanted to get our toes in the water and learn a little bit about it. I have to admit that I wouldn't disagree with the people who think we need to be very cautious about where we are going here."

Gerard Cunningham, the president of Betfair USA, also would not discuss the current business deals or handle figures. However, he said that comparisons between Betfair's business model and U.S. racing's practice of using approximately 20 percent of the handle to fund its myriad operations displayed a "fundamental misunderstanding" of how betting exchanges could benefit U.S. racing by introducing a stock-exchange type of wagering that would draw an entirely new class of bettor to the sport.

"One of the great misunderstandings, something that I hear quite often, is, 'Gosh the takeout on exchange bets is so low,'" Cunningham said. "And when you hear that you understand that they don't appreciate that we present a very different experience for the consumer. They're very much more engaged, and that's why we are successful in bringing in a new, different type of consumer who is interested in that engagement but might not be interested in horse racing."

To many racing officials, controversy over the Betfair business model harkens back to the emergence of simulcasting in the late 1970s, when a glut of racetracks eagerly sold their signals to a small number of out-of-state outlets for three cents on the dollar in order to get a foothold into markets that had previously been the sole territory of the local racetrack. At the time, racetracks viewed the three-cent dollars as "free money," but since then, simulcasting has come to provide 90 percent of all the revenue to the U.S. racing industry, and many officials wish they could turn back the clock to reset the rates that racetracks accepted.

"Everyone thought that was newfound money," said Dan Metzger, the president of the Thoroughbred Owners and Breeders Association. "That certainly hasn't turned out to be the case. It's the lifeblood of our business. So when you look down the road [at betting exchanges], you need to look at the whole picture."

Though Betfair does not release handle figures, the company has been enormously profitable since launching in 2000, according to the company's annual reports. In fiscal year 2009, ending on April 30, Betfair had net income of $55 million on $503.8 million in revenue. Its accumulated cash reserves were $221.4 million, and that's after using $50 million of its reserves to purchase TVG in January (all figures converted from pounds using the Nov. 6 exchange rate).

Betfair does not release handle figures in part because some activity on the site does not fit neatly into traditional definitions of handle. For example, many customers will offer a horse at a set price, say 6-1, and, if possible, will then bet an equal amount on the horse at 7-1 with another customer in order to lock in either a wash or small profit depending on the race's result.

In the annual report, Betfair makes no secret about its intentions for buying TVG, which, by handle, is the market-leading account-wagering company in the U.S.

"The TVG acquisition ensures Betfair is well placed to take advantage of any legislative change in the U.S.," Betfair's chief executive, David Yu, wrote. Separately, Yu added, "We continue to work with governments worldwide to push for a regulated approach to the further liberalization of gambling markets."

In fact, earlier this year, Cunningham and other Betfair officials met with California legislators. Although some racing officials said that the meeting was a direct attempt to lobby for state approval of bet exchanges, Cunningham called the meeting a response to overtures by California lawmakers to explain how betting exchanges work.

Harvie Wilkinson, Keeneland's vice president, said that Betfair's ownership of TVG influenced the track's decision to deal with Betfair on exchange-type betting, citing Keeneland's "strong relationship" with the account-wagering and broadcasting company. However, he also said that the track did not believe that the deal it struck this year with Betfair would be indicative of future agreements.

"We're going to spend a lot of time studying what an appropriate revenue model is between now and the spring," Wilkinson said. "We're going to have a very deliberate approach when we sit down next spring to talk again."

Charles Hayward, NYRA's president, cautioned that comparisons between Betfair's compensation model and the pricing of simulcast signals may not apply.

"You can draw a distinction between betting-exchange customers already operating outside of our reach and dealing with a domestic customer," Hayward said. "And sometimes getting something is better than getting nothing."

Citing racing's economic problems, Cunningham said the U.S. racing industry would regret turning its back on betting exchanges.

"I understand fear of change," Cunningham said. "But right now I would suggest that an industry that is declining 10 percent a year should be embracing change and looking for new ways of doing things. Otherwise it will be a long, slow slide."