12/08/2009 12:00AM

Betfair lobbies for U.S. allies

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TUCSON, Ariz. - The world of entertainment has changed rapidly in the last 15 years, and the racing industry will need to adopt new betting models to compete or face a slow death, the chief executive of the British bet-matching company Betfair told the racing industry during Tuesday's opening session of the University of Arizona Symposium on Racing and Gaming here.

Gerard Cunningham, the U.S. representative for Betfair, said that younger generations have grown up in a world in which data-rich entertainment options and social networks are de rigueur, a dynamic that he said threatened racing's current business model. In addition, Cunningham said, other gambling options such as slot machines and poker give bettors a bigger bang for the buck, allowing those games to steal market share from racing by merely tapping bettors out over a longer haul.

Cunningham then invited racing industry officials to meet with him to discuss the legalization of betting exchanges, a type of market-based betting pioneered by Betfair that allows customers to bet against each other. Betting exchanges are illegal in the U.S. because the government believes that they allow customers to act as bookmakers.

"My concern is that if we don't do this, I don't know what the future looks like for us in racing," Cunningham said.

The comments underlined Betfair's efforts to ally the U.S. racing industry to its cause so that it can go hand-in-hand with horsemen and racetracks to lobby for the legalization of betting exchanges. Earlier this year, as part of that effort, Betfair purchased the account-wagering company TVG, giving the company a U.S. foothold for its operations.

For the most part, racetracks and horsemen have resisted partnering with the company because of concerns about whether betting exchanges would cannibalize more traditional forms of handle and cut into racing's existing revenue streams.

However, several racing companies, including Keeneland, Del Mar, and the Breeders' Cup, signed deals with Betfair this year that cut themselves into a share of Betfair's matched bets. Though the three racing companies have publicly declined to provide details of the agreements, officials have said the deals entitle the racing companies to 10 percent of Betfair's 5 percent commission on winning bets - an amount that is roughly 1/20th the industry's current share of betting through mutuel takeout. In addition, more than two dozen tracks have reached deals allowing Betfair's customers to wager into their commingled pools.

While most racing officials viewed Betfair as a sizeable threat just five years ago, support for betting exchanges has been building over the past year, in part because of the agreements with the racing industry, but also because U.S. handle on races has slipped from $15.2 billion in 2003 to an estimated $12.3 billion this year, with much of that decline occurring in the last 18 months. Many top racing officials believe that handle will stagnate at the new number even after the recession ends.

Cunningham's comments capitalized on those fears, and he said the industry had no option but to embrace new business models in order to reverse its declines.

"Some people say we can consolidate, make it less bad for the survivors," Cunningham said. "I've spent time with companies that are shrinking their way to greatness. It doesn't work. All you do is shrink the next year too."

Ken Kirchner, the simulcasting consultant for Breeders' Cup, said Betfair customers placed $25 million in matched bets on the event's 14 races this year, compared with $741,000 in commingled bets. Though that discrepancy is enormous, Kirchner cautioned that the industry cannot view the $25 million in matched bets the same as it does more traditional handle.

"A lot of it is day-trading and arbitrage," Kirchner said. "We're talking about people who are comfortable making $100,000 in bets to lock in $100 in profit."

Cunningham said that Betfair's ability to attract non-traditional customers would ultimately benefit U.S. racing, but he also acknowledged that racing officials have had difficulty accepting a business model that returns far less revenue from each bet to the tracks that provide the product. In several interviews after the presentation, racing officials said that Betfair still has not presented adequate explanations for how the racing industry is supposed to pay its bills if betting exchanges cannibalize some of the wagering market.

Cunningham countered that Betfair's research shows that recreational gamblers are willing to lose a certain amount of money each month, and the racing industry should focus on making certain that gamblers are losing their money on horse races instead of other gambling games. He also said that if betting exchanges were legalized today, only 5 percent of current U.S. betting would be at risk of cannibalization, because that's the portion of betting that is placed online on win, place, or show wagers, the only type of betting allowed on Betfair.

In the meantime, Cunningham said the industry should try to develop a business model that both sides can accept, but his comments also illustrated the difficulties in that negotiation - each side is unwilling to give into the other because the revenue model will be almost impossible to nudge in either direction once an industry standard is set, as the racing industry learned the hard way with simulcasting.

"That's a problem I can't solve," Cunningham said, referencing the proper revenue splits. "We can only solve that problem by working together and focusing on growth."TUCSON, Ariz. - The world of entertainment has changed rapidly in the last 15 years, and the racing industry will need to adopt new betting models to compete or face a slow death, the chief executive of the British bet-matching company Betfair told the racing industry during Tuesday's opening session of the University of Arizona Symposium on Racing and Gaming here.

Gerard Cunningham, the U.S. representative for Betfair, said that younger generations have grown up in a world in which data-rich entertainment options and social networks are de rigueur, a dynamic that he said threatened racing's current business model. In addition, Cunningham said, other gambling options such as slot machines and poker give bettors a bigger bang for the buck, allowing those games to steal market share from racing by merely tapping bettors out over a longer haul.

Cunningham then invited racing industry officials to meet with him to discuss the legalization of betting exchanges, a type of market-based betting pioneered by Betfair that allows customers to bet against each other. Betting exchanges are illegal in the U.S. because the government believes that they allow customers to act as bookmakers.

"My concern is that if we don't do this, I don't know what the future looks like for us in racing," Cunningham said.

The comments underlined Betfair's efforts to ally the U.S. racing industry to its cause so that it can go hand-in-hand with horsemen and racetracks to lobby for the legalization of betting exchanges. Earlier this year, as part of that effort, Betfair purchased the account-wagering company TVG, giving the company a U.S. foothold for its operations.

For the most part, racetracks and horsemen have resisted partnering with the company because of concerns about whether betting exchanges would cannibalize more traditional forms of handle and cut into racing's existing revenue streams.

However, several racing companies, including Keeneland, Del Mar, and the Breeders' Cup, signed deals with Betfair this year that cut themselves into a share of Betfair's matched bets. Though the three racing companies have publicly declined to provide details of the agreements, officials have said the deals entitle the racing companies to 10 percent of Betfair's 5 percent commission on winning bets - an amount that is roughly 1/20th the industry's current share of betting through mutuel takeout. In addition, more than two dozen tracks have reached deals allowing Betfair's customers to wager into their commingled pools.

While most racing officials viewed Betfair as a sizeable threat just five years ago, support for betting exchanges has been building over the past year, in part because of the agreements with the racing industry, but also because U.S. handle on races has slipped from $15.2 billion in 2003 to an estimated $12.3 billion this year, with much of that decline occurring in the last 18 months. Many top racing officials believe that handle will stagnate at the new number even after the recession ends.

Cunningham's comments capitalized on those fears, and he said the industry had no option but to embrace new business models in order to reverse its declines.

"Some people say we can consolidate, make it less bad for the survivors," Cunningham said. "I've spent time with companies that are shrinking their way to greatness. It doesn't work. All you do is shrink the next year too."

Ken Kirchner, the simulcasting consultant for Breeders' Cup, said Betfair customers placed $25 million in matched bets on the event's 14 races this year, compared with $741,000 in commingled bets. Though that discrepancy is enormous, Kirchner cautioned that the industry cannot view the $25 million in matched bets the same as it does more traditional handle.

"A lot of it is day-trading and arbitrage," Kirchner said. "We're talking about people who are comfortable making $100,000 in bets to lock in $100 in profit."

Cunningham said that Betfair's ability to attract non-traditional customers would ultimately benefit U.S. racing, but he also acknowledged that racing officials have had difficulty accepting a business model that returns far less revenue from each bet to the tracks that provide the product. In several interviews after the presentation, racing officials said that Betfair still has not presented adequate explanations for how the racing industry is supposed to pay its bills if betting exchanges cannibalize some of the wagering market.

Cunningham countered that Betfair's research shows that recreational gamblers are willing to lose a certain amount of money each month, and the racing industry should focus on making certain that gamblers are losing their money on horse races instead of other gambling games. He also said that if betting exchanges were legalized today, only 5 percent of current U.S. betting would be at risk of cannibalization, because that's the portion of betting that is placed online on win, place, or show wagers, the only type of betting allowed on Betfair.

In the meantime, Cunningham said the industry should try to develop a business model that both sides can accept, but his comments also illustrated the difficulties in that negotiation - each side is unwilling to give into the other because the revenue model will be almost impossible to nudge in either direction once an industry standard is set, as the racing industry learned the hard way with simulcasting.

"That's a problem I can't solve," Cunningham said, referencing the proper revenue splits. "We can only solve that problem by working together and focusing on growth."