Betfair has written to its customers informing them of a change to its terms and conditions that will come into effect on the 22nd of September 2008. The company said that from this date it will be introducing a new charging mechanism ("Premium Charge") that will affect the top 0.5% of its customers.

A Betfair customer will be considered for the Premium Charge if, over the previous 60 weeks, he has satisfied the following criteria;

• His account is in profit;
• Total charges paid are less than 20% of gross profits;
• He bets in more than 250 of Betfair's betting markets markets.
  
  

  Customers who meet all of the conditions set out above will be charged the lesser of :

• The difference between 20% of the previous week’s gross profits and the total charges paid during the week;
• The difference between 20% of the previous 60 weeks’ gross profits and the total charges paid during that period.
  
  

  The introduction of this new premium charge raises a number of interesting issues.

  In the first instance, the problem is one of definition. Betfair purport to be an exchange and yet they do not act like one.

  Exchanges exist to lower transaction costs. They achieve this, through economies of scale, which arise when the cost per trade on the exchange declines as the number of trades that are executed on it increases.

  In a posting on his own blog, Andrew Black seemed to suggest that whilst Betfair enjoys near monopoly status, it is not managing to reap said economies of scale....Accordingly, one is left to conclude that the exchange model as applied to sports betting is flawed!

  A second point, specific to exchanges, is that the core objective that all traders seek from an exchange is the minimization of their trading costs. Moreover, in that the primary goal of all exchanges is to attract order flow, it is tautologous to note that it is in the exchange's interest to meet this need....something that Betfair is clearly not doing in this instance.

  So why has Betfair, a company that has long resisted the notion of an additional tax on betting exchange users (representatives of the company have spoken of the "considerable drawbacks of introducing an inequitable tax structure among UK-based operators") decided to levy what is effectively an indirect tax upon its super users (who according to Andrew Black are characterised by the fact that they win all of the time.)?

  It is common knowledge that traditional bookmakers and the powers that run British Horse Racing have long criticised the taxing formula that is applied to the betting exchanges, with many bookmakers proclaiming that individual layers on the betting exchanges should be subject to a Gross Profits Tax;

  "All that we are asking for is that anyone who lays bets on an exchange should be subjected to the same regulation and taxation issue as any other licensed bookmaker.........We would welcome any step forward that is made to address the imbalance that has been allowed to arise in what is traditionally the best-regulated gambling industry in the world."

  In November 2007 the British Horseracing Authority (BHA) put forward a case to the Department of Culture, Media and Sport for a greater contribution from the betting industry in the 47th levy. The BHA also called for betting exchanges to contribute to the levy on a new and equitable basis, stating that the contribution made by betting exchanges to the Levy should increase from the £6m paid in 2006-07 to £20m. This figure would be achieved, the BHA said, through the imposition of a 1.25% Levy on the net profits of punters on betting exchanges .

  Taking part in hour-long question-and-answer session on the their forum on Wednesday, Betfair said; "We balance the demands of all stakeholders in the business: customers, employees, shareholders and industries which derive a percentage of our profit, like the racing industry. Our profit margins are not excessive and our profits are a fraction of those of other large gambling companies." Of greater interest, Betfair said that the horse racing levy would get ten per cent of the premium charge "before we take any of the money from (it) and do anything with it".

  One suspects that the primary motivation behind the premium charge, is that Betfair are seeking to sweeten up the horse racing industry ahead of a bid for the Tote's racecourse operations; whilst of course, at the same time putting in place a measure that will finally put to bed the notion that all individual layers on the exchange should be made to the pay a Gross Profits Tax.

  An alternative explanation, sees the company scrambling around looking for ways to ensure that it hits its 30% growth target.

  When announcing their results for 2007, Betfair said that that it was in a "Very strong cash position with 180m stg of corporate funds at the year end in addition to 174m of client funds held on trust in seperate ring fenced accounts." One must assume, all things being equal, that the 174m is now nearer the 200m mark. 200m sitting in a bank for a year, would, with an interest rate of 5.9% would yield Betfair 11.8m.

  Surely that would be sufficient to cover the additional transaction costs that Betfair is allegedly incurring because of the activities of its so called super users? Or, perhaps this money could be paid towards the levy ...something that I am sure Betfair's users would not mind.

  Betfair, a company that has long argued that all of its customers should be treated the same, has now moved to discriminate against a class of said customers. This leaves the strong impression that there is one law for Betfair and another law for everybody else. Moreover, there is a strong case to be made that banking your clients money and living of the interest, whilst charging them more to use your exchange, is far from equitable.

  It is a sad fact, however, that lack of competition in the betting exchange sphere, ensures that Betfair pretty much can (and will) do as they please. Until such times that a serious competitor should arise to challenge Betfair's dominant market position, Betfair's customers will remain nothing more than pawns in a much larger game.
  

  

  
  
  

  
  
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