SBC News Comment : Alex Johnson - Betfair gets the basics right

Comment : Alex Johnson – Betfair gets the basics right

betfairtrading

It’s often said that the secret of any good business is to get the basics right. Two years ago, the world’s biggest betting exchange, Betfair, laid out its strategy for growth and for improvements in margins – and the company is demonstrably achieving its aims.

At that time, the company announced its intention to pursue a more focused strategy which would address the various challenges the business faced whilst exploiting what it saw as new market opportunities.

The regulatory environment was seen as challenging, but the company also recognised that its strengths lay in its unique product offering and its strong brand affinity, particularly in the UK. The company decided to simplify its main product offering and to reach a wider audience to help accelerate revenue growth.

The company immediately began to achieve this and this fact didn’t go unnoticed by the wider market as Betfair was the subject of a possible takeover in April 2013 – though this proposal was later rejected.

The proof of the pudding is in the eating, though, and from Betfair’s most recent set of accounts, the figures to the half year ending 31st October 2014 showed improvements across the spectrum of the UK-listed company’s operations.

Revenue was up by 26 per cent, partially driven by the company’s customer-base growth and real success in cross-selling its new gaming activities – the Holy Grail for providers of sports betting and / or casino operations. This is something few companies have so far managed to achieve to any significant degree – a genuine crossover of customers from one side of the fence to the other – in either direction. So this has made the industry sit up and take notice.

deustchland
The World Cup was a success for betting firms

Of course, the half year was also given a huge boost by the world’s biggest single sporting and gambling event – the World Cup in Brazil. But whilst the figures may, therefore, have been slightly anomalous, there are wider signs that Betfair’s strategy is beginning to pay off in other areas.

by  upeters  Caption: The World Cup was a success for betting firms

Even taking the anomaly of the World Cup out of the equations, along with the first half’s equally anomalously high gross winning margins, revenues for the company were still ahead by 12%. Other figures in EBITDA and underlying free cash flow were also favourably compared with previous years. But it’s the underlining changes in customer behaviour and in customer acquisition that are either plain interesting or distinctly worrying for the rest of the gambling industry, depending on the individual’s viewpoint.

Perhaps most notably of all, Betfair’s “active” customer base grew by a whopping 50%. The company now boasts more than a million active users after record customer acquisitions and customer loyalty was driven by its signature “Cash Out” and Price Rush customer offerings.

You only need to see the TV ads from the major UK bookmakers to understand how important this aspect of Betfair’s business has become as the big bookmaking boys play a game of “me-too” catch-up.

Perhaps more predictably, Betfair’s mobile revenues are also quickly growing – more than doubling in the first half of the year compared with the same period in the previous year. This aspect of the Betfair business now represents 70% of the company’s sportsbook revenue. Of course, we all know this to be true from what we see with our own eyes. These days, at football, rugby, cricket and other games, as well as at the racetracks, half the crowd seems to be focussed on a mobile device – and you can safely bet they aren’t all reading their emails and text messages! Nevertheless, it’s interesting to see some real data based on our intuition.

Betting on sports like darts with Betfair and other traditionally second-tier gambling sports, including American football, basketball, ice hockey and so on, have all seen increases in activity. The PDC World Darts Championship over Christmas and the New Year, for example, will have been a hotbed for betting – particularly with Gary Anderson shocking Phil Taylor in a thrilling final. But it’s the customer transitions into complementary gambling areas that is perhaps the most interesting development.

bullseye
Caption: Betting firms have hit the bullseye

Overall, Betfair’s gaming revenues were also up markedly, by an impressive 44%, due to a 63% hike in the number of the companies’ sports customers deciding to start gaming for the first time.

Again, this is of particular interest to the industry. All the big providers are trying to get this sort of traction through customer loyalty programmes and introductory offerings, but few are managing it quite as successfully as Betfair.

As a result of this marked overall success, the company was able to up its dividend whilst simultaneously announcing a return of capital to its shareholders. This is always a sign of a robust business and one that puts the interest of those who actually own it up there alongside those who run it. Sadly, this is a relatively rare phenomenon in today’s world – so it’s refreshing to see a company of Betfair’s size doing the right thing.

Overall, Betfair has clearly demonstrated its ability over the last couple of years, to run a highly valued and sustainable gaming operation in what is both a highly regulated and highly competitive market. The company has achieved this through its clear focus on sustainable and innovative marketing – and customer acquisition. But its in-house development and tight control of margins have also clearly helped Betfair to make the progress it has.

Perhaps what sets Betfair apart from most of the competition (i.e. in addition to the fact that most competition aren’t exchange-based) is its focus on the supportive technology and its continual development. Ask any senior executive at the company whether Betfair is primarily a gambling / gaming operation or a technology company and they will invariably tell you it’s the latter. But what answer would you get to the same question at any of the big-name bookmakers?

Betfair is managing to differentiate its offering through improved and enhanced marketing capability in what is a massively crowded market-place. Specifically, its new and ground-breaking products, such as the afore-mentioned Cash Out and Price Rush, along with its Cash Back Extra and its relentless programme of advertising and promotions have combined to enable the company to both acquire and to retain record customer numbers.

Others in the industry could surely learn from the clean simplicity of this approach – though it may already be too late for that?

 

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