Gone Tomorrow?

The findings in a report from the Commonwealth Bank of Australia spell gloom and doom for betting exchanges Down Under.

The report, titled "Betting Exchanges: Here Today, Gone Tomorrow" and released in August 2003, draws three key conclusions:

1. Competition from betting exchanges can lower the TABs' valuations by up to 30 percent.

2. The government and the racing industry will lose up to AU$240 million per annum in taxes if betting exchanges are permitted to freely operate in Australia.

3. The government will likely ban betting exchanges within 12 months.

The first key finding is based on information provided by the Australian Betting Exchange Taskforce's estimation that 20 percent of TAB turnover was at risk of being transferred to betting exchanges if exchanges were to operate freely.

Assuming that betting exchanges would operate untaxed, the report concludes that betting exchanges would contribute no funding toward the government or horse racing industry, which together would stand to lose $256 million per year.

The report also considers a hypothetical situation (the "low case scenario") in which betting exchanges would become legal in Australia and would contribute the same amount of their revenue toward the government (15 percent) and the horse racing industry (15 percent) as leading betting exchange Betfair now does in the United Kingdom.

Based on the assumption that the betting exchanges were to stimulate no further demand, the government and betting industry would then lose around $234 million annually. This is due to the facts that:

1. betting exchanges take out a lower percentage of turnover (3 percent versus 16 percent TABs); and
2. betting exchanges offer a lower share of take-out to government and racing (30 percent versus 64 percent for the TABs).

In yet another hypothetical situation (the "high case scenario"), the report assumes a circular-flow theory of gambling so that legal betting exchanges that contribute 30 percent of their income could stimulate enough demand (5.5-fold) so that gamblers lose as much money with the betting exchange as they would have with the TABs. In this case, the government and racing industry would still lose about $136 million (due to lower share of takeout).

Betfair's director of communications, Mark Davies, finds the report absurd.

"To be honest," he said, "the report is so embarrassingly riddled with inaccuracy and false premise that it's a little surprising the bank hasn't withdrawn it."

The first thing Davies pointed out is that the report's analysis is based upon what Betfair pays in the United Kingdom, which he said is a completely irrelevant number. Betfair pays what it does in England because that's what it's asked to pay. If Betfair were to be licensed in Australia, it would most likely be required to pay the same 64 percent tax on revenue that the TABs pay. In that case, Davies said, the projected number from the report is false.

So the obvious question now is, how could a company that collects just 3 percent of turnover survive a tax regime that requires it to contribute 64 percent of its revenue?

Davies explained, "We believe the model works perfectly in Australia, and the fact that some say it doesn't is indicative of how little they understand our business. But even if the doomsayers are right, then we only face the exact same challenges of any company launching in a second country and have the same options: Either we run our business on a smaller margin in that country for the advantage of having a second office in a properly-rated jurisdiction, or we assess the price we charge for the product. I don't believe either will be necessary, but our business is flexible and we can triple our cost to the customer while still representing the cheapest option to the customer."

If Davies is right, then the report is not indicative of what could happen in Australia, at least as far as the government and racing industry are concerned.

Tim Ryan, the executive officer for the Australian Bookmakers' Association, agrees that the report is riddled with inaccuracies; however, he feels the errors are in Betfair's favor.

"The authors have made an assumption that $1 leaving the TAB pool becomes $1 on the betting exchange; this is not correct (though the effect varies depending on the 'professionalism' vs. 'recreational-ism' of punters). The authors have assumed that the commission rate is 3 percent of this turnover; this also not correct. It is about 3 percent of "backers' stakes," but of total stakes (including the "layer's" matching bet) its only about 0.75 percent.

"These two assumptions basically cancel each other out; viz. more "turnover" (stakes) would be generated, but a lower effective commission rate would apply."

Ryan added that Betfair only pays 10 percent of its commission revenue to racing, not the 15 percent figure used in the report. Thus, he said, the report overestimates Betfair's racing contributions by 50 percent.

To Davies' claim that a licensed Betfair would pay the betting taxes required by the Australian government, Ryan replied, "This is a remarkable concession from Betfair, which to date has steadfastly refused to make any comment about what it would pay in tax or racing product fee." In Ryan's opinion, "It's too little, too late.”

He added, "They may have been able to have done a deal like that six months ago, but now there is a greater understanding of betting exchange operations and a realization that 'commission' represents only a fraction of "punters' losses," which is the key figure when comparing exchanges to other wagering operators.

"The basic problem is that takeout is a deduction from total stakes, whereas commission is unrelated to total stakes; e.g. in the simplest case where a punter has a single bet in an exchange, he pays no commission or fee in respect to his own stake.

"Unfortunately, the pari-mutuel and exchange business models are incompatible. This is just simple economics because the takeout or commission structure ultimately determines the odds offered to the punter."

Click here to view a copy of the report.