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Betfair flotation may give potential shareholders a sinking feeling 14/09/2010
Greg Wood
The betting exchange firm could struggle for growth unless it cracks the American market

The men who founded Betfair are gamblers at heart, and reports over the weekend that they intend to press ahead with a float suggest that their appetite for a punt has not diminished. An oft-quoted estimate of the exchange's value is £1.5bn. These are uncertain times, but if it raises much less than that, it will be seen as a gamble gone astray.

It is entirely possible that Andrew Black and Ed Wray, who own 25% of the business, are so confident about Betfair's long-term prospects that the immediate possibility of a double-dip recession is of little concern. Alternatively, it is conceivable that Betfair, in their opinion, is now as valuable as it is likely to get, and so it is time to cash in without delay.

A little over two years ago, a personal view would have been that the former explanation was much the more plausible. Now, I'm not so sure.

This is not to suggest that Betfair has been anything but an extraordinary success since it was founded 10 years ago, or that there have not been countless punters – this one included – whose love of racing and betting has been reborn thanks to the freedom and flexibility of punting on an exchange. A sense of community too was a powerful bond, in the early years at least. Betfair inspired intense brand loyalty among its users, who then acted as evangelists to recruit more. For years, the benefits and the fun of punting the Betfair way were so overwhelming that no one thought much about the potential drawbacks. The day when doubts started to creep in was 8 September 2008, when the exchange introduced a "premium charge" for consistent winners.

The premium charge was a clear admission that a tiny percentage of Betfair's users were sucking out a grossly disproportionate amount of the money. A flat-rate tax, though, probably just made them suck a little harder, albeit with Betfair trousering some of the proceeds. It did not address the fox-versus-chicken problem that may – repeat, may – come to be seen as exchange betting's major flaw.

Betfair, in this analysis, is a chicken house inhabited by several million birds and a handful of foxes. Some chickens are better than others at avoiding their inevitable fate – some indeed simply offer themselves up for slaughter – but no matter how much you run or hide, Mr Fox will get round to you in the end. Then, one day, there are no more chickens, and the foxes eat each other, or starve.

Some punters simply don't care. Like Foghorn Leghorn after an encounter with a lawnmower, they retrieve their tail-feathers, puff out their chest and return to the unequal struggle. And of course, there will always be a few new chickens that enjoy the warmth and free food, and believe – unwisely – that the house is so big and the foxes so few that their chances are pretty good.

As a result, Betfair will continue to be a major player in the betting market for the foreseeable future, assuming there is no serious competition at any rate. But shareholders demand more than that. Shareholders, particularly in a 10-year-old business, demand year-on-year growth, and it is getting more difficult to see where that will come from. Betfair might crack America, but then again, it might not.

Meanwhile, most punters who play Betfair's UK racing markets on a daily basis will agree that liquidity has flattened out – and perhaps even started to decline - over the last 12 months. Football business is still showing strong growth, but if it follows the apparent pattern of racing, for how much longer?

Betfair remains the most important innovation in betting for the last half-century, and its float could well be a roaring success. But it is no longer quite the no-brainer investment that it appeared in August 2008.