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Market will decide if Betfair's high-risk punt pays dividends

Tomorrow sees the introduction of Betfair's controversial new premium charge. Whilst not quite Bastille Day, it spells another landmark for a market leader that by its very nature has never gone quietly about its business.

Betfair is increasing the charges on its most successful users to as much as 60% of gross win from tomorrow in a move it says will protect smaller players using the site.

In spite of this claim, the increase has provoked an outcry that continues to echo around Betfair users, media, blogosphere and racing chat-rooms. However, if Betfair is used to anything, it is used to making noise. It took the Roman Empire about 500 years to reach the peak of its powers; it took Microsoft 17 years -- Betfair went from inception to IPO in a decade.

Upon arrival it was apparent we were witnessing a disruptive threat to a conservative, monopolistic industry. The joint brainchild of a JP Morgan trader (Ed Wray) and a professional gambler (Andrew Black), it used the simple idea of bet-matching using emerging technology with the promise of offering better odds than traditional bookmakers delivered through the convenience of your PC.

By the time Betfair married with Flutter in 2002 to become the market's exchange of choice, bookmaker opposition to the exchange concept was in full flight. After all, since the merger of Hills and Mecca in 1989, the big three (Ladbrokes, Hills and Coral) enjoyed a cosy dominance of the betting industry covering 60% of all UK turnover with 42% of the high-street betting shops. The advent of the internet posed a threat in itself, but the exchange that rode in on the wave was a potential game-changer. Bookmakers sought every means to stamp it out. They accused exchanges of enabling unlicensed individuals to act as bookmakers; questioned how tax on the exchanges was levied; and, most audibly, claimed that exchanges were an incitement for the unscrupulous to cheat.

Racing's governing body was equally uncomfortable and viewed the exchange phenomenon with pronounced suspicion.

Meanwhile, as its membership and revenues grew relentlessly, so too did tolerance and acceptance. In a few short years Betfair migrated from industry pariah to business media and City darling as it prepared for a different type of exchange -- the Stock Exchange.

Owing to the recession, the lack of private to public offering had swelled the market's appetite and when Betfair finally launched in October last year shares became like Willy Wonka golden tickets and resulted in a market capitalisation, ironically, that was greater than both Ladbrokes and Hills. The U-turn in the industry's view was complete when BHA chairman Paul Roy's asset management company NewSmith was revealed to have applied to acquire £40m in shares (ultimately getting £5m).

However, the exchange's performance subsequently has disappointed shareholders to such an extent that its share price has, in less than 10 months, almost halved in value, plummeting to all-time lows last week.

Betfair has during that time encountered difficulties in the area of regulation in some European jurisdictions and their move away from the traditional exchange model with certain new products has not been as successful as anticipated. Furthermore, their current CEO of six years, David Yu, is soon to depart, while it is now a year since one of the Betfair founders and chief spokesperson Mark Davies left the business. In a recent blog he says he "hopes that people both internally and externally rediscover the love for it that for various reasons many seem to have lost".

Love isn't a word often mentioned in a business context but it does seem amongst members on the various racing forums and chat-rooms that the milk is turning sour with the sentiment that Betfair seems to be neglecting its founding principles in favour of shareholder value reflected in remarks like 'set up by people who knew what they were doing and now accountants come in and ruin it' and 'the heart of the company has gone forever'.

The increase of the premium charge (first introduced in September 2008) from tomorrow is cited as further evidence for the prosecution. However, Betfair defends the move on the basis of fairness. Firstly, it claims only to affect approximately 500 of its 3.8 million members and specifically those who "currently pay a rate of commissions and charges that does not reflect the benefit they gain from the Betfair eco-system".

What this means is that a small portion of Betfair players are professionally -- often with the assistance of software 'bots' -- routinely taking massive profit from a system made up of other punters via a platform provided to them by Betfair.

Although the increase affects only a small percentage of Betfair users, these users represent a much larger percentage proportionately of Betfair's overall liquidity. And the keystone to the whole exchange model is of course liquidity. The exchange claims to only break even on this group of users under the

present commission structure and, as it spends more on improving the platform and gaining new customers, it seems only fair that those who benefit should pay their share.

Of course, it also makes commercial sense at a time when the share price is under fire and it needs desperately to sell some form of growth story to the City, and with roughly 90% of the exchange market, where else are the big hitters going to go in any case? Mark Butterly, chief executive of Oddsfutures.com, reckons it could open the door for other exchanges: "Hard-nosed 'quant' teams, who operate quantitative trading models using bots, will be looking at the other exchanges."

On the back of Betfair's increase, rival Betdaq report being busy with inquiries both from groups and individuals about its intention around its lower 2.5% commission. "We certainly don't intend going down the route of premium charges as we don't think it's fair," says marketing director Shane McLaughlin. Instead, Betdaq is focused on upgrading its capacity and providing incentives to major players to increase liquidity.

Betfair has taken a calculated risk in increasing its premium charge from tomorrow. Time, and the market, will tell if it has called this one right.

Sunday Indo Sport