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Ladbrokes need to go cut-price with Betdaq to compete with Betfair 09/01/2013
Greg Wood
Bookmakers takeover of betting exchange should prompt radical rethink of strategy

If a business with a near-monopoly on the supply of its product suddenly receives a threat of serious competition, you would expect its share price to take a hit. Betfair's share price scarcely wavered on Thursday when it was confirmed that Ladbrokes has taken over betdaq.com, Betfair's only worthwhile rival in the betting exchange market, which might suggest that, even with one of the most famous brands in gambling behind it, Betdaq still does not rate as serious competition. .

And in the short term at least, it does not. The market now values Betfair at £700m, way below the figure of £1.3bn when it floated in the autumn of 2010, but that is still a great deal more than the £20m Ladbrokes has paid for Betdaq. Despite all the money that Dermot Desmond has thrown at it, Betdaq has been more of a spectator than a player while Betfair has changed the face of betting over the past decade.

Betdaq never really recovered from a horribly ill-conceived launch in September 2001, a little over a year after Betfair matched its first bet. Betdaq pitched itself as the betting site for high-rollers, with markets that were listed in dollars to make it feel more "international", but which also condescended to give the rest of us a chance to take on the big boys like Desmond's associate, JP McManus.

Many potential customers weighed up this opportunity to match their puny wads against that of the mighty – and impeccably well-informed – McManus, and decided to pass. Betfair, which already had a five-length advantage from the off as the first mover in the market, gained another 10 because Betdaq was facing in the wrong direction. From that point on, the slow starter has never really threatened to close the gap.

Ladbrokes, of course, has much more experience and skill in terms of appealing to the mass market, though its precise intentions for Betdaq remain unclear. It may be more interested in Betdaq's hedging capabilities or its technology than it is in becoming a realistic competitor to Betfair.

But if Ladbrokes is serious about mounting a serious challenge to Betfair's near-monopoly on exchange betting, there is only one way they are likely to be able to do it. It can plough as much money as it wants into marketing, in an attempt to attract new customers to exchange betting while stealing others away from Betfair, but the clients it really needs are not susceptible to advertising.

The serious money that underpins Betfair's liquidity in its main markets on racing and football is provided by a relative handful of its millions of clients (no more than a few hundred, according to one estimate). Their money is not sentimental, nor is it necessarily loyal by choice. It is there because Betfair is the best and also the cheapest place to be, and it is not going to evaporate and repool under Betdaq's purple flag without a compelling reason to do so.

The obvious way to attract the biggest players is to make Betdaq even cheaper. Both Betfair and Betdaq have similar sliding scales for the commission they charge on winning bets, from 5% for small fry down to 2% for the biggest players of all, although Betfair also levies a significant – and much-resented – "premium charge" on accounts which are substantial and consistent winners. Unless Betdaq launches a price war via its commission rates, it is likely to carry on bumping along the bottom forever.

One reason that the premium charge was introduced in the first place, though, is the gravitational pull that the biggest bankrolls in an exchange exert on the smaller players. The charge is, to some extent, the fee that the regular winners on Betfair pay to guarantee a continued supply of losers for them to beat, via Betfair's promotional efforts and expansion into new markets.

And there is a similar force at work in the exchange market as a whole. The pull of the overwhelming liquidity in Betfair's markets is difficult to resist, and it extends to the in-running markets too, where its clients enjoy the chance to lay off liabilities. It will take an immense and sustained effort on commission rates to persuade enough of the heavy hitters to shift their business across to a new home, and that will cost plenty.

It could also prompt Betfair to respond in kind, of course, and competition can only be a good thing for punters, although turning a monopoly into a duopoly is not quite the same as creating a multiplicity of choice. And since the money that really matters here is at the top end of the market, whether the punters paying 5% can ever hope for a permanent reduction to four or three is doubtful, to say the least.

But it would be fascinating to see how it all played out. The exchange market is still relatively young, there is no reason to think that it is close to being mature and the imposition of the premium charge was an indication in itself that exchanges can develop in unexpected ways. Betfair's share price did not miss a beat on Thursday, but a return from £6.80 to the heady days of the £13 launch price - when even Paul Roy, the chairman of the British Horseracing Authority, was a buyer – now seems to have receded even further into the far-off future.

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