06/30/2010 11:00PM

Jersey pushes for exchange betting


An all-out effort by racing and betting interests to obtain authorization for exchange wagering in New Jersey is raising some intriguing possibilities for Thoroughbred racing. Racing officials are optimistic a bill can be passed to make New Jersey the first U.S. racing jurisdiction to offer exchange betting.

Legislation giving the state-owned New Jersey Sports and Exposition Authority a license to conduct exchange wagering unanimously passed out of the assembly on June 28 and was sent to a senate committee for consideration.

If the bill passes the senate and is signed by the governor, and if it can survive scrutiny from federal prohibitions on bookmaking, it would have a dramatic impact on nearly every aspect of the racing industry, from the way betting is conducted, marketed, and regulated to the business model that underlies the game's declining financial position. In addition, it would introduce new concerns about the integrity of racing by giving gamblers the ability to bet on a horse to lose, an option that is unavailable in parimutuel markets.

Supporters, which include the state's racetrack operators, horsemen, and the world's largest exchange-wagering company, Betfair, contend that concerns about the business model and the integrity of races can be adequately addressed and more than offset by the benefits of allowing the practice. According to supporters, exchange wagering will dramatically expand the number of betting options and introduce new customers to horse racing through an Internet-based system that allows players to post their own prices on horses and take wagers from any other willing bettor -- even after the gates have opened.

"Betting exchanges have the potential for racing to do something it hasn't done in a very long time, and that is become a market leader with something very innovative and to galvanize a whole new set of bettors," said Stephen Burn, the director of Betfair's U.S. operations.

Enormously popular in the United Kingdom and Australia, Betfair has been attempting to build support for its business in the U.S. In 2009, it bought Television Games Network, at the time the largest account-wagering operator in the U.S.; it is now the second-largest because of a recent merger between Youbet.com and Churchill Downs Inc. The TVG acquisition gave Betfair the legal standing to lobby state and federal legislatures, but progress in getting the racing industry on its side has been slow. Many racetracks are wary of betting exchanges because of the relatively slim percentage of betting revenue typically returned to racing industries in the exchange business model.

However, Betfair has found willing partners in New Jersey, where racetrack operators and horsemen have been searching for new ways to resurrect the state's moribund industry. The most recent example is the bold experiment of offering $50 million in purses in 50 racing days at Monmouth Park. New Jersey track operators and horsemen believe they have little chance of receiving legislative approval for slot machines because of the political power of the Atlantic City casino lobby, and so they've turned to the possibility of betting exchanges.

"At this point, we have to put together whatever we can to get a competitive advantage," said Dennis Drazin, an owner and breeder who is the former counsel to the New Jersey Thoroughbred Horsemen's Association. "New Jersey, unfortunately, does not have some of the advantages its neighbors have in slots legislation. We're trying to be innovative."

The bill would restrict exchange wagering to customers in New Jersey and limit betting to horse races. The only license would be issued to the New Jersey Sports and Exposition Authority, which owns and operates Monmouth Park and the Meadowlands. Under the bill, the NJSEA could contract with an outside operator like Betfair to run the exchange.

Under the interpretation of supporters, the restriction limiting exchange wagering to New Jersey residents would apply to only one side of the bet. This would allow New Jersey residents to bet against a resident of the United Kingdom or other places where exchange betting is legal. Such an interpretation would be critical in ensuring a critical mass of players to be matched.

The more important interpretation, however, is whether exchange wagering is bookmaking or parimutuel betting. Nearly all forms of bookmaking are banned under the Professional Amateur Sports Protection Act, which grants a federal exemption to parimutuel wagering on horse racing and jai alai.

Betfair argues that exchange wagering is a derivative of parimutuel wagering, but the company currently prohibits U.S. players from signing up for its international exchange.

"It's just a modern-day variant on a parimutuel bet," Burn said. "There's a total pool, and we only manage the customers and connect them to each other in that pool and facilitate the exchange of money on the bet."

Regardless of the legal interpretation, betting exchanges will continue to face resistance from some tracks. The U.S. industry relies almost entirely on a 20 percent cut of each parimutuel betting dollar.

In the U.K., and in contracts that U.S. racetracks have signed with Betfair over the last several years, the company returns 10 percent of the profit from the betting on a racing signal to the racetrack operator. By some estimates, that share works out to 1 or 2 percent of the takeout.

"The industry's not going to accept a 2 percent takeout rate," said Chris Scherf, the executive vice president of the Thoroughbred Racing Associations, a racetrack trade group that has studied betting exchanges. "If you're going to do an exchange, it has to be less than the current takeout to make it work. But it can't be based on the British model."

Although the current legislation directs 50 percent of betting-exchange revenues to horsemen, it does not establish the revenue share returned to the racing industry. If the bill passes, the NJSEA plans to issue a request for proposals to take bids on the operation of the exchange, said Alex Dadoyan, the assistant vice president of racing development and distribution of the NJSEA. The NJSEA has not yet decided whether to set the revenue percentage returned to the industry in the request or to allow interested companies to make their best offers.

"That's step two or step three," Dadoyan said.

Dennis Dowd, a former NJSEA executive who is now a consultant, said the Betfair revenue model would be a hard sell to the cash-strapped U.S. racing industry. But he also said that current takeouts need to come down to make parimutuel wagering competitive with other U.S. gambling products and that a betting exchange could put downward pressure on takeout rates while introducing new players to horseracing. Although that could result in less revenue to the racing industry over the short term, it could be in the industry's best interests over the long haul.

"The takeout is reducing the churn because the house is taking too much," Dowd said. "The hope is that you would have players migrate to the betting exchange, and that they would bring a lot more players into the game."

Burn recites the same contention. At TVG, Burn said, the leading demographic is men over age 45 whereas at Betfair, the leading demographic is men between 25 to 40. A betting exchange -- which restricts its customers to win betting -- would work for the U.S., Burn said, by introducing younger players to horse racing and then leading them into the parimutuel system's high-takeout exotic pools.

"It's the same way at your grocery, where you sell milk and bread at no profit," Burn said. "You do that as an approach to get them in the shop. You can have the best of both worlds. You've got to find that new breed of customer out there."

Andrew Beyer, the handicapping author and betting specialist, counts himself as a proponent of betting exchanges. Pointing to estimates by racing groups that win betting makes up approximately 20 percent of the handle in the U.S., Beyer said fears that exchanges would cannibalize the industry's handle are overblown.

"In the U.S., betting to win is almost an anachronism," Beyer said. "So why not work a deal with Betfair and let them have that part of the business, which they've already proven they could do more effectively and efficiently, in a way bettors love? The world will still want to bet exotics. If there's one lesson in U.S. parimutuel betting over the years, it's that you have to offer people good betting opportunities."

Beyer said he had one big concern over the operation of exchanges -- betting on a horse to lose.

"It certainly creates an opportunity for larceny," Beyer said.

Burn counters that Betfair cooperates with investigative agencies in the countries in which it operates, alerting them to suspicious betting patterns.

"We're confident we can address all those concerns," Burn said. "We've done it already, in countries around the world. And we believe that what we do works. If we can't get the U.S. on board today, we're patient. We'll take our time."