Prospects for P2P's Seemingly Impenetrable Top Tier

The P2P sector finds itself at a crossroads coming into 2005. Behemoth Betfair.com remains the leading exchange across the globe, with a market share pushing 90 percent. Numerous competing sites have come and gone over the last two years, and while the number of betting exchanges continues to grow, only a handful of viable exchanges remain in operation.

Is there room for new major players in the betting exchange industry?

Some would say no, based on two years passing without new industry leaders emerging. The startup and player acquisition costs are high in the P2P space, and the industry is more mature than the explosive Internet poker industry.

But no one would argue that there isn't still room for significant growth in P2P, and some say that immediate success for new entrants is still attainable.

Anthony Novac, founder of 1Xinc, believes the key is capturing the U.S. market. 1Xinc developed BetBug, a site modeled after music download site Kazaa and billed as the world's first "peer-to-peer" betting exchange. Novac believes the concept could fly in the United States, but he acknowledges the many barriers to making it happen. Aside from the legal restrictions on sports betting in the States, American bettors don't typically embrace new concepts.

But there's no denying the advantages of betting exchanges (namely the prices) over traditional sports books, and Novac says 1Xinc has positioned itself well to capitalize. The 1Xinc business model, he says, is shielded from the legal risks that would be incurred by leading exchanges Betfair and Betdaq if they went after the U.S. market. (Betfair is based in the United Kingdom and Betdaq is based in Ireland.)

"Both (Betfair and Betdaq) have architectural/operational barriers that make them susceptible to prosecution under the Wire Act," Novac said. "Are they sufficiently insulated given their corporate structure? Maybe, but can they afford the risk?

"We think BetBug.com, of course, is well suited to experience Betfair-like success in the U.S. It gets around the Wire Act and is not an exchange, per say, but a network of bettors."

Betfair, meanwhile, appears content focusing on markets outside the United States, where company spokesman Mark Davies believes most of the growth in the near future will occur.

"The U.S. remains a very attractive market, (but) there are more uncertainties there than elsewhere," Davies explained. "So for the moment, you will see the majority of growth coming from other markets."

This year could tell whether one of those markets will be the United Kingdom, where Parliament is expected to pass its long-awaited Gambling Bill. The bill would overhaul the country's gambling policies, and for the moment, it does not call for restrictions on betting exchanges. Traditional bookmakers, however, are trying to change that, and the recent proposal of amendments to land-based casino provisions exemplifies Parliament members' capacity to change course.

But even beyond the United Kingom and the United States, Davies said, there are still avenues for growth.

"If the (U.K.) bill goes through unchanged, it will secure the U.K. marketplace as the center of the exchange market for some years to come," Davies said. "If, as some are hoping, it gets amended to include some kind of provision for U.K. exchange users to be licensed, it will kill the model in the U.K. inside a year. All the punters in the U.K. who are unfairly told they need a license above some kind of arbitrary threshold will simply take their business to one of the offshore operators. And it seems that Australia is just months away from issuing its first exchange license."

So Betfair will push forward even if the United States remains untapped and P2P operators are forced out of the United Kingdom.

The big question is whether competing exchanges can make a serious run at Betfair's seemingly overwhelming market share.

Davies acknowledges that staying ahead of the competition is a daunting task.

"We always need to stay on our toes," he said. "We have some clear advantages over other operators, not least in our technology and our liquidity, but unless we continue to innovate, we can't just hold the lead."

But he also pointed out that the importance of liquidity means the industry will never be able to support more than a few major players.

"The economics of an exchange dictate that whoever is the leading exchange will always be multiples larger than the next largest, who will in turn be multiples bigger than the next--as is true of the stock exchanges in the world--but who is that number one player depends on whether we continue to work to stay there," Davies explained said. "I think we will remain the leading player for the foreseeable future--not because we believe we deserve to be there, but because we are working flat out to make sure we stay there, and offer the best product."

But Novac is quick to point out that there are bigger fishes in the sea.

"Betfair, albeit wildly successful, still cannot compete with the profitable bigs," Novac said. "Any thinking that Betfair holds the same level of customers or dominance or position as a Ladbrokes or Will Hill is folly. People think this because of the massive Betfair turnover numbers. But comparing those numbers is like comparing apples and oranges.

"If the 'bigs' opted to go after Betfair with their own exchanges, I think they could compete, and not even have to do so on pricing." "Will they?" he asked. "That's a political question I'm not in a position to know the answer to."