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Last Updated: Sunday, 15 June, 2003, 14:09 GMT 15:09 UK
The gamble that paid off
By Nick Edser
BBC News Online business reporter

This is how the internet boom was supposed to work.

A couple of people set up a company in an attic room, and within a three years it employs 200 people and turns over 50m a week.

Vodafone Derby winner Kris Kin (right)
Punters can choose to either lay or place bets
For most firms this proved to be an impossible dream - but not for betting exchange Betfair.

The company's rise has revolutionised the betting industry, and led to the High Street bookies calling foul.

Guaranteed winner

The casual punter, more used to being relieved of a fiver on Grand National day, is unlikely to have come across 'the exchanges' - as Betfair and other similar websites are referred to.

But these sites have seen business grow rapidly over the past couple of years.

What the exchanges do is allow people to offer, or 'lay', odds, as well as place bets in the normal way.

Betfair matches up the layers and the backers and takes up to 5% of the net winnings of either side, and so "every bet for us is a winning bet" says Betfair's spokesman Mark Davies.

Because ordinary people are offering the odds, Betfair says you can get prices that are, on average, 20% better than with a traditional bookmaker.

Net winner

Launched in June 2000, by co-founders Andrew Black and Edward Wray, the site has enjoyed phenomenal growth.

Betfair co-founders Andrew Black (left) and Edward Wray (right)
The honest punter has nothing to fear from this, because the information is not going to be given out willy nilly

"It took us nine months to start matching 1m of bets a week and now we're doing well in excess of 50m of bets in a week," says Mr Davies.

And the company's existence is purely down to the internet.

"It couldn't happen without the internet because what we're doing is putting in touch with each other thousands of people minute by minute."

The site's technological achievements were recognised earlier this year when it won a Queen's Award for Enterprise in the Innovation category

Rivals

Betfair is not the only betting exchange but it dominates the market, claiming to have 90% global market share.

[The exchanges] are trying to interpret the rules to say people can bet without a license... we think that's illegal
David Hood, William Hill

And this size is a key advantage according to Mr Davies.

"Liquidity is the key to what we do - it's no use us saying to you 'you can get a price that is better than with a traditional bookmaker on average' if when you come to us you don't get your bet on."

While Betfair is by some way the biggest exchange, other companies - some of whom charge lower commission - are looking to grab a slice of the action.

Last month TradingSports - a company which supplies technology to betting exchange sites - floated on the AIM market in the UK.

And there have been reports that another exchange, Sporting Options, is considering a 25m AIM flotation in the autumn.

'Illegal'

But while Betfair and the betting exchanges have become increasingly popular over the past couple of years, High Street bookmakers have monitored their rise with barely disguised fury.

The Betfair office
Can Betfair see off the competition?
They say the exchanges are flouting betting law in the way they operate.

"If someone wishes to lay a bet [under betting law] he has to pass a fit and proper persons test and acquire a betting permit," says David Hood of William Hill.

"What the exchanges allow is people - anonymously - to go onto an exchange and lay a bet without passing a fit and proper persons test.

"[The exchanges] are trying to interpret the rules to say people can bet without a license. Well we think that's illegal."

Mr Hood also says the integrity of betting is at risk.

"You've got anonymous individuals laying bets - you don't know who they are, you don't know if they have a criminal element, and you don't know their motives for wanting to lay a bet."

Transparent

But the allegation of illegality is dismissed as "completely untrue" by Betfair's Mark Davies.

"What makes you a bookmaker, and the reason that you need to be licensed, is because you are dealing with the public.

"You're dealing with the public's money and you are effectively guaranteeing that you will be paying the public back.

"That is precisely what we do. We are a licensed bookmaker - we have been a licensed bookmaker since day one."

He also denies that Betfair is threatening the industry's integrity.

"The audit trail we have on our site allows us to track every single bet and every single person on the site so we can see exactly who's doing what."

Last week, Betfair and rival exchange Sporting Options struck a deal to give the Jockey Club access to their clients' records.

The agreement means officials can track who has been placing bets if fraudulent activity is suspected.

Regeneration

One thing that both Betfair and the High Street bookmakers agree on is that the arrival of exchanges has expanded the betting market.

William Hill points to its recent record turnover of 140m as proof that its traditional market remains strong.

"What we are seeing is a regeneration of the business - we're working to a lower margin but our profits are being sustained," says Hills' Mr Hood.

But if the exchanges have discovered such a profitable niche - why aren't the High Street bookies following suit?

"We've looked at the success and the popularity of exchanges, but I don't think it's feasible for us to do while there are still legal questions to be answered," says Mr Hood.

Late movers

But the High Street bookies may not have to wait too long, as on the legal front reform is in the air.

A new gambling bill is planned in an attempt to bring up to date current regulations.

In a position paper published in May by the Department for Culture, Media and Sport, the government said it did "not agree that exchange users need to be licensed".

It also rejected the integrity argument, saying "the threat of corruption would be present even without the exchange model".

A new law may be two-edged sword for the exchanges, on the one hand clarifying their legal position and ending the debate about their legitimacy, but also opening the floodgates to competition from the likes of William Hill, Ladbrokes et al.

Betfair is convinced that the High Street brands will soon be moving onto their turf.

"I have absolutely no doubt... I think they will set up a betting exchange within the next year," says Mr Davies.

And then Betfair will discover whether its head start in the market is sufficient to see off competition from more high profile brands.




SEE ALSO:
Bookie pays for 'crooked punter'
28 Mar 03  |  Business
Wheeler to sell IG Group stake
20 Jan 03  |  Business
Bookies new betting games in court
30 Dec 02  |  Business


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