The brevity of the statement for the proposed merger of Betfair and Paddy Power stood in contrast to the magnitude of the deal. Among the questions left unanswered by the announcement of a gaming and betting giant with combined historic revenues of £1.1bn are what it would mean for the Betfair betting exchange business….Scott Longley examines
________________________
Though it is there by inference in the talk of the combined entity’s “scale and capabilities”, it is interesting to note that there is not one mention of the term betting exchange in the official stock market news release.
It was left to the analysts to explain where the likely opportunity lay in “utilising the distinctive and complementary brands”. Patrick Coffey at Barclays said the dual-brand strategy would aim to attract customers from the broad spectrum of online gambling consumers. “The Paddy Power brand appeals to recreational customers; Betfair’s exchange appeals to sophisticated customers.”
But notably this cross-customer segment approach has already come in for criticism from one of the key groups in question. On Friday last week the sophisticated punters on the Betfair exchange’s books took to the company’s own Betfair Forums message-board to voice their discontent.
Having already been hit in recent years by the introduction of a premium charge and watching with disdain from the sidelines as Betfair itself leapt into the sportsbook arena itself in 2013, some of the more voluble exchange users were quick to suggest the latest news was a further betrayal the company’s founding ethos.
“It was not supposed to be like this,” ran one post. “(Founder) Andrew Black set out to revolutionise betting not become a bookmaker.”
Permission to disrupt
A lot of water has flowed under Hammersmith Bridge in the 15 years since Betfair first launched. But at heart it remains one of the few truly disruptive forces in the betting industry, to the extent that it is commonly believed to exert almost complete control of the betting exchange market. Competitors have come and gone, but the Betfair powerhouse has continued to dominate to an extent that even eclipses the stranglehold PokerStars/Amaya has on the online poker market.
“The space is Betfair’s to lose,” says Mark Davies of Camberton PR, one of Betfair’s first-ever employees and subsequently managing director before it went on to IPO in 2010.
“They would have to mess up royally to lose their predominant position,” he says. “Good luck to anyone that wants to try and get into the market; but I honestly think they are on a hiding to nothing. It would have to be a dramatically different offering to succeed. It’s like trying to take on Apple of Google. There will come a day, I suppose, when Betfair will be vulnerable. But not at the moment. They are the Apple of the exchange market.”
Yet, even Davies admits that the ranks of the disgruntled among the exchange customers is growing, so it should be no surprise that Betfair’s competitors are viewing the news of the possible merger with Paddy Power as an opportunity to make up some ground.
“It’s big news for us,” says Ian Noctor, Growth Director at Matchbook. “It provides us with a major opportunity. It would not appear that the focus of the merger is on the exchange – it’s all about the sportsbook. And we think that leaves a gap for us to offer something different to the exchange customers.”
According to some analyses, the launch of the sportsbook in 2013 marks the point at which the Betfair exchange business began suffering from a lack of attention and focus.
“Betfair has already begun promoting their sportsbook over the exchange,” says Jason Trost, Founder and CEO at another exchange contender Smarkets. “They haven’t made much improvement nor spent money advertising it. I think they want to put their exchange on autopilot and focus on the sportsbook product. Betfair moving away from the exchange has been a boon to our business.”
It’s the eye-off-the-ball factor which the rival exchanges will be hoping to exploit further should the merger proceed. As David Jennings, analyst at Davy Stockborkers in Dublin, said in a note to clients last week integration projects could lead to a reduction in underlying growth and product development.
But Noctor says the uncertainty of the merger – even if it doesn’t come to fruition – is “great for us” and suggests the company already has solved some of the liquidity issues which have bedevilled other upstart contender exchanges.
“We figure we already have liquidity on the markets that we offer – a lot of that is US sports because that is our background,” he says. “We want to attract the higher-end customers and also the committed betting types. Those who want more than just the average sportsbook experience. The advantage we think we have is that we own the technology. We are going to be offering a really personalised offering. We won’t be pushing punters away.”
Similarly believing the liquidity nut can be cracked is Trost at Smarkets. “I think liquidity can be managed well by working closely with market makers,” he says. “People worried about liquidity forget that sports betting has a very important property: fungibility. A bet on one site is the same as a bet on another site. Liquidity providers can transfer their activity from site to site, in our case from Betdaq and Betfair to Smarkets.”
For liquidity we can read scale – which is the single most important determinant behind the Betfair Paddy Power merger in the first place. Trost says Smarkets has seen a doubling of revenues in the last six months, and any of the contenders will need to see those kind of trends continue ahead of and beyond the merger if they are to stand any hope of knocking Betfair off its perch.
Noctor remains optimistic: “The future is bright for exchanges,” he says. “The idea of exchange betting existed before Betfair. It is an open, transparent for of betting. We can put our hands on our hearts here; it has integrity.”
_____________________________
Betting business strategies and models will be discussed at the Betting on Football Conference – 10 September