COMMENTS ON THE ORAL EVIDENCE GIVEN TO
THE COMMITTEE BY BETTING EXCHANGE OPERATORS ON 22 JANUARY 2004
THE CONTRIBUTION
OF BETTING
EXCHANGES TO
RACING
1. Mr Davies (Betfair) agrees that all operators
should be charged on an equitable basis. BHB's data licence to
bookmakers is based on gross profits. This mechanism was adopted
because of the relatively stable relationship between turnover
and gross margin which had existed. This relationship was broken
by betting exchanges which were the direct cause of a lowering
of bookmaker gross margins.
2. The gross profit model is unusual in
charging for a product, the purpose of BHB's data licence. It
is inappropriate where the relationship between turnover and gross
margin dramatically alters, as is the case with a business which
seeks to operate on low margins. It confers an unfair advantage
on the low cost operator and creates an unwelcome market distortion.
A supplier does not price his product lower simply because his
customer is a low cost operator. In the case of low cost airlines,
the example chosen by Mr Davies in his evidence, Ryanair does
not get a pricing advantage on fuel over BA simply because it
has adopted a low cost model.
3. It is BHB's contention that betting exchanges
and their customers should pay on the basis of the enjoyment they
derive from the use of the racing product without which the exchanges
would not exist. The absurdity of their argument in support of
the amount which is currently paid in levy, based as it is solely
on commission, is demonstrated by the effect on racing's income
if the commission charged by betting exchanges were to be driven
lower, as a result of, for instance, competition between betting
exchanges. In Mr Davies's world, as commissions tumble in an effort
to maintain market share, racing's income would dramatically decline
without any necessary compensation—a £6 billion industry
would have been created which then pays little or nothing for
its core product.
4. It is therefore equally important in
the use of BHB's data to distinguish between the betting exchange
and its users. A useful analogy is a stock exchange and the traders
which use it. Betfair is akin to a stock exchange which has no
interest in the underlying prices which traders, or in this case
punters, trade at. The betting exchange and the punter both make
use of BHB's data and both should make payment for their use on
the basis that there are two economic transactions going on—one
between the betting exchange and its user and the other between
the two traders, or punter and layer, similar to the principle
which taxes both a stock exchange and its traders on the profits
they make.
5. BHB is currently developing a charging
mechanism which captures the very distinct nature of a betting
exchange and the use made of it by its customers. This can be
provided to the Committee in confidence if it so wishes.
INCREASE IN
THE FREQUENCY
OF UNUSUAL
BETTING PATTERNS
6. Evidence was placed before the Committee
by Mr Reams of Racefax of the increased number of unusual betting
patterns. We are not aware of evidence brought by Mr Davies to
the contrary. Mr Davies quotes the number of drifters who go on
to win in support of his argument that there is no reason to be
concerned by the number of drifters which lose. This argument
has as much relevance as saying that the existence of good people
proves that there are no bad. They are simply very different things—Mr
Reams' evidence was not based on mere drifters but drifters about
which there were carefully selected criteria which, when taken
together, indicated that an unusual event had taken place.
7. Mr Hartnett (Betdaq) bases his confidence
in betting exchanges on the audit trail which is left. The Committee
will recognise that this is of use only when the audit trail can
be properly investigated, not at the choice of the betting exchange,
which is the case with the Memorandum of Understanding, but as
a matter of right by an appropriate regulatory body.
8. Mr Hartnett believes that it was always
possible to lay a horse by backing all others and Mr Davies believes
that therefore betting exchanges create no new regulatory problems.
Mr Hartnett may be right in theory but in practice there was little
activity of this sort. It is the fact that betting exchanges now
allow the laying of horses in an unfettered and easy way which
did not exist before, creating the need for a different regulatory
regime. This can be seen from the sheer scale of the business
which Betfair has created, which did not exist before, according
to his arguments.
9. Mr Hartnett and Mr Davies would have
us believe that the many and frequent reports of unusual betting
patterns are the imagination of journalists—the evidence
and common sense tells us otherwise.
Betfair is not a Bookmaker
10. A business is commonly defined by the
operations it undertakes, not what operations it could, in theory,
undertake nor by any label attached to it. The granting of a bookmaker's
permit does not signify that the business which that person carries
on is bookmaking—it merely authorises that person to conduct
a bookmaking business. Betfair profess themselves as different
to a bookmaker in that they take no risk and it is Betfair's customers
who set the prices. This distinction was made by one of Betfair's
founders, Mr Ed Wray, in an address to the US Racing Industry
in December 2003. A fundamental characteristic of bookmaking is
the taking of risk and its relationship to price. It is also fundamental
in bookmaking that the customer knows with whom he is betting.
In neither of these ways does Betfair act as a bookmaker, no matter
what they choose to call themselves.
11. The Gambling Bill is well placed to
make a clear distinction between a bookmaker and a betting exchange
and the regulations which should apply to each, taking into account
their many differences.
12. Betfair claimed in early 2002 to BHB,
when BHB's data licence charge was to be based on turnover that
they were not a bookmaker and were at pains to explain why, based
on its business model. "Betfair is not a bookmaker"
is a declaration not a promotional slogan, which no longer suits
them.
13. Betfair demonstrate in their evidence
that very few users of their service, less than 0.71 per cent,
make significant profits. Taken together with Mr Davies' claim,
that there has been no increase in the number of unusual betting
patterns as a consequence of the emergence of betting exchanges,
this demonstrates that betting exchanges should have no difficulty
with stronger regulation and the need for the licensing of non
recreational users of betting exchanges (however defined), in
order to maintain the integrity of the sport which gives them
their livelihood, as these two factors indicate that such stronger
regulation and licensing would have no material adverse effect
on their business.
March 2004
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