bettingmarket

Opposition to Betting Exchanges

Regulatory Matters

Taxation of betting exchanges

Integrity Issues

In 2003 the traditional William Hill objected to a Betfair national press advertisement that ran;

"You get better odds at Betfair" and included a table of the odds available from Betfair and three other bookmakers. The table was headed "West Indies v New Zealand" and claimed "West Indies Betfair 1.82 William Hill 1.66 ... New Zealand 2.2 William Hill 2.1 ...".

William Hill objected that:

Firstly, that the comparison was not clear and fair, because the advertisers offered a different betting medium from the competitors named in the advertisement and because the advertisers'' odds were subject to limited availability and a maximum stake;

Secondly, that the comparison was not clear and fair, because the advertisers charged commission on the quoted odds.

Thirdly, that the advertisement denigrated its business.

Concerning the first objection Betfair said that members of the public could place bets on their website, at specified fixed odds, in the same way as they could place bets with a conventional bookmaker. They said the complainants'' odds were, like theirs, subject to limited availability and maximum stakes.

The Authority understood that the complainants would accept bigger stakes and a bigger risk exposure than the advertisers, for the event referred to in the advertisement. It concluded that the comparison was not clear and fair.

Concerning the second objection Betfair said that they charged a commission, on the whole event, of between 2% and 5% of net winnings. They said they were willing to mention their commission in future comparative advertisements.

The Authority considered that, because the advertisement did not state that the advertisers charged commission on their advertised odds and the complainants did not, the comparison was not clear or fair. It asked the advertisers to state, in future advertisements, that they charged commission on net winnings and to ensure that comparisons were clear and fair.

Referring to the third complaint Betfair said the advertisement did not refer to the complainants except to state their odds. They said that was a factual statement and was not denigratory.

The Authority considered that the advertisement did not denigrate the complainants' business.

Betfair aired a television advertisement in October 2007, containing the lines;

"Next time you're looking to place a bet, go to Betfair. Unlike traditional bookmakers Betfair punters bet against each other and matching a bet means they can chose their own odds."

A complaint was subsequently made to the Advertising Standards Authority questioning the notion that Betfair punters do actually "bet against each other."

It was suggested that as bookmakers and spread betting companies also make use of betting exchanges, the notion that Betfair punters bet against each others was misleading, in that it suggested that Betfair was a pure play person to person betting exchange, when in fact it was not.

The Advertising Standards Agency responded to the complaint as follows;

"We have assessed the ad and your complaint and consider that there are insufficient grounds for ASA intervention at this time. You do not state in your complaint why you believe that big companies are involved in the betting process on Betfair, and on the information we have obtained we have no reason to belive that this is the case. In any case, as customers decide on their own odds for their bets, there does not appear to be any consumer detriment in the bet being matched by a bookmaker instead of a member of the public - the odds have already been decided by the person placing the bet."

In March 2008, Betfair became the first betting company to advertise during the commercial breaks around C4 racing. The Betfair ads went with the byline; "Because you are betting against other punters, "you could" get better value."

A TV ad for Betfair that ran on UK TV towards the back end of 2010, had featured two men in a pub having a discussion about a sporting event. A third man pushed between them and began to act as a go-between, passing comments back and forth between them before being punched in the face by an animated mouse cursor. The two men then shook hands. The voice-over stated "On Betfair, you cut out the middle man, which means you could win bigger ...". On-screen text stated "T&Cs apply. 18+ Based on revenue".

The Advertsing Standards Authority received 23 complaints, with all 23 viewers challenging whether the suggestion in the ad that Betfair operated without a middleman was incorrect and misleading, whilst six viewers challenged whether the ad was misleading because it failed to clarify that Betfair took commission on winning bets.

The ASA considered that the portrayal of the traditional bookmaker in the ad as a character that acted as an intermediary between two individuals who wished to bet directly against each other was not an accurate representation of the traditional bookmaker and that the subsequent removal of the character was likely to confuse the consumer about the advantages of the Betfair service. It also said that Betfair's Commission structure for facilitating bets "could be understood by viewers to be another version of the "middleman" role."

The ASA concluded that the ad and the voice-over "At Betfair we cut out the middleman" were therefore confusing and misleading. It ruled that on this point the ad breached CAP (Broadcast) TV Advertising Standards Code rules 5.1.1 and 5.1.2 (Misleading advertising). The ASA also concluded that the ad was misleading because it did not clarify what exactly Betfair's role was in the betting transaction that took place on its exchange.

Betfair were forced into performing a massive volte-face, when, after the suspension of its 2008 Aintree Grand National win market the company noticed that the returned Betfair Starting Prices on the race, were, in its words, "not appropriate to the race". In other words, in what is the world's biggest horse race, the Betfair starting price on the favourite Comply or Die, was significantly lower than the industry returned Starting price.

Accordingly, Betfair took the decision to reverse the procedure and manually determined the BSP using "methods at its disposal";

"The reconciliation of the Betfair SP for the Grand National win market resulted in prices which we believe were significantly unfair for backers of some horses, most obviously the winner. Therefore we unreconciled the Betfair SP to return what we believe were fair prices. As a result of unreconciling bets after the race, some matched bets (which would have been winning bets for customers) became unmatched bets. In addition, some customers may have traded in-play based on bets they believed had been matched. If you believe that you have been disadvantaged as a result of this, please contact us at bets@betfair.com. We will look at our records to determine the amount you should be due and provide compensation accordingly. Please be aware that this may take some time and it is unlikely that we will be able to address all enquiries until next week."

Commenting on his blog, Andrew Black, one of the owners of Betfair said;

"I think (hope) that this is a one-off. The BSP was, bizarrely, a victim of its own success - having moved along quietly doing relatively little turnover for a few months it suddenly burst into flame. The win market for the National yesterday was nine times bigger than any BSP market we have ever had before, and almost all the new business was business to back. It was always going to be big but the BF planner didn?t envisage or plan for this sort of scale (it would have been easy to have alerted more layers). The demand for Comply or Die bust a hole in the tissue and the price died. This was a mistake - no question - but I have some sympathy as the numbers were way higher than my expectations too. Hopefully the guys can paper it over - BF will surely be the financial loser here and not the customer. I see it as a one-off mistake - BF must learn from it and make sure it doesn?t happen again."

A Betfair forumite going by the name of Pablo, summed up the feeling of many punters when he wrote;

"It simply beggars belief that people can have had matched bets removed from their account when nothing has gone wrong. Will there be a new department to judge the fairness of the sp returned in every race every day ? What is unfair ? Under the official SP ? Or 20 % under ? or 30 ,40,50 % under? Surely a bet that is matched is sacrosanct unless something has gone wrong,like a late suspension. Why do people have to email in to have their accounts adjusted back to the right amount ? Surely it should be automatic."

At 12.05 on the 07 Apr 2008 Betfair Customer Services issued the following statement;

"Following our decision to roll-back the initial Betfair SP reconciliation for the Grand National win market, some customers were left in a worse position than had that initial SP stood. We are in the process of assessing which customers were disadvantaged by the roll-back and by how much. All affected customers will receive payments from Betfair to reflect this. In other words, if a customer would have been in a better position had the initial SP reconciliation stood, then a payment will be made by Betfair to the customer to reflect this, irrespective of whether the customer has contacted Betfair. No customer will be left in a worse position following the roll-back than would otherwise have been the case."

They then went on to explain the reasoning behind the roll-back;

"The decision to roll-back the initial SP reconciliation was taken following extremely high level of demand from Betfair SP backers in the Grand National win market. Had the initial SP stood, the prices returned on several horses for those backers would have been much reduced from what they could reasonably have expected. As a result, Betfair made the decision to roll-back after the race, to reflect an SP overround as close as possible to 100%, which is typical of the Betfair SP in the normal course. We believe that this was an exceptional case and don't anticipate a reoccurrence, but obviously the result of the roll-back was that some other customers were left in a worse position than had the initial SP reconciliation stood."

The Poker Heist involved a glitch in Betfair's Poker software that saw all players at a table getting paid, with the delivery of each winning hand. It was alleged that the heist was to the tune of 1.4m and that the central architect of it was a player going by the name of Chillindude. The then infamous PokerQ, a leading contributor to the Betfair Poker Forum, went on the record to deny her involvement in the heist. It is not known whether Betfair retrieved all of the money lifted during the heist.

Betfair got a little more than it had bargained for, when it introduced a new match betting system, that led to the company accruing monies over and above the commission that comes from matched bets. A large number of Betfair users voiced their displeasure at both the new system and the manner in which it had been introduced, and Betfair was accordingly forced to suspend a part of the new service.

Betfair posted the following message on its own forum;

"Clearly if bets are matched where a price improvement would theoretically be possible, but which the current process can?t provide, then matching those bets will result in Betfair accruing the difference..... In response to customer feedback, we will suspend matching bets across selections when an applicable market is turned in-play. For the time being, bets will be matched on in-play markets as they were prior to the change. Matching across selections will be reintroduced only when we can offer best execution or its equivalent."

In a later question and answer session on the matter, Betfair also said; "We have recognised that we should have communicated this issue to the customer base more broadly, a misjudgement for which we can only apologise, and we are committed to doing a better job of communicating similar issues in future."

Concluding the matter, on October 17 2008 Betfair Customer Services issued the following statement;

"The directors of Betfair would like to express their regret for not notifying customers in advance of the introduction of a new technical process called cross matching in February of this year. Cross matching enables increased opportunities to get bets matched by taking into account betting activity on different selections within the same market. Betfair General Betting Limited (a company within the Betfair group) is licensed - and has been nominated by The Sporting Exchange Limited - to act as counterparty to bets so as to enable cross matching to occur.

"Cross matching functionality remains in operation and continues to provide our customers with enhanced certainty of securing the bets they request at the same or better odds. We would like to assure our customers that, in future, they will be notified of changes such as this in advance by forum announcement, banners on the site and/or email unless our Terms & Conditions clearly permit a change to be introduced without prior notification".

On November 13th, 2010, the newly floated Betfair faced its first major PR disaster. It was alleged that Betfair Casino had offered unlimited Happy Hour bonuses with a relatively low wagering requirement of 10x. It was further alleged that Betfair lost so much money from the promotion that they decided to end it and to take back winnings from those that had already cashed out.

Betfair wrote to one customer; "Certain customers attempted to profit from the promotion through adopting gaming patterns and activity in contravention of Betfair Casino?s Standard Terms and Conditions. As a result, we have withheld both bonus funds and winnings derived from such activity on those customers? accounts, of which yours is one."

Betfair in this instance relied on the following clause; "If Betfair becomes aware of a customer who, in the course of participating in a promotion or offer, has become able to guarantee wins and/or profits with no or only minimal risk, and/or benefits from a promotion or offer by participating through more than one Betfair account, and/or displays irregular or unusual playing or betting patterns which Betfair deems to be abusive, Betfair may in its absolute discretion elect to do any one or more of the following: (i) close the customer?s account(s); (ii) invalidate the transactions or game play which was in contravention of this term; and/or (iii) withhold the customer?s winnings from such transactions or game play."

Regardless of the legal rights and wrongs, the PR fallout for Betfair from the Happy Hour debacle was immnense, not least following the news that the Betfair Casino was marked down as a "Rogue" casino the highly influential website Casinomeister.

In September 2008, Betfair introduced a "Premium Charge" on those bettors who it deemed had not/were not paying sufficient commission relative to their winnings. In June 2011 Betfair raised its Premium Charge to 60% for some customers. On both occasions Betfair came under heavy criticism, and their handling of the matter was seen to constitute a significant strategic own goal; with articles on the subect appearing in The Guardian,and Betfair users launching a Facebook campaign and posting anti-Betfair videos on YouTube.

Roger Duncan was the pseudonym of Betfair employee exposed on the Midas Oracle prediction market blog. He had been defending Betfair in the face of criticism regarding the new cross matching system. Some suggested that he was Andrew Black, others,that he was a Betfair lawyer who was posting on other forums. His uncovering raised a few eyebrows, not least, in that it exposed the extent to which Betfair felt on the backfoot vis a vis criticism that was levelled against it. Now that Betfair is a listed company, such behaviour by a company employee would of course be illegal.

The year 2011 ended badly for Betfair with the news that the company had been forced to void a horse race at Leopardstown, following a technical glitch which allowed a layer on the betting exchange to position himself such that he was facing liabilities of £600m on the winning horse Voler La Vedette. Whilst Tony Calvin, Betfair's spokesman was prepared to acknowledge that the episode had been "highly embarrassing and an unacceptable betting experience for people", he said that "there was a unique set of events that allowed this to happen".

In November 2005, the Tasmanian Parliament approved amendments to the Gaming Control Act 1993 to allow the licensing and regulation of betting exchanges in Tasmania. The first betting exchange licence granted by the Tasmanian Gaming Commission was to Betfair Australia in January 2006.

Betfair Australia, a 50/50 joint venture between Betfair UK and the Australian company PBL, commenced full operations from a purpose built data centre in Hobart at the end of August 2006.

In filed accounts, PBL said that the business was continuing to build critical mass in its first full year of operations, and that its share of after tax losses for the year was $2 million (875,000 stg). Whilst Betfair in filed accounts, for the year ended 30 April 2007, said that total revenue for Betfair Australia for the year, had been 8m stg.

Regarding the development of its Australian betting exchange Betfair said;

"We built a fully functional exchange in Australia. The technical requirement behind this work was huge, with over twenty man years of development time spent on the project. This investment puts the Joint Venture in a prime position to continue to develop the Australian market for the exchange business. This new distributed infrastructure represents what we believe to be a unique capability within betting exchanges and possibly even amongst non-gaming exchanges."

Betfair currently pays the Tasmanian government 15% tax for every dollar that it makes on Australian horse racing and sporting events and a 20% levy on every dollar that it make on Australian horse racing. In its first 12 months of operation, the company said that this had amounted to a payment of $10 million.

In 2007 Betfair had its application to publish Western Australian race fields information rejected, by the Western Australian government. The decision was taken in line with new legislation that prohibited the operation of betting exchanges in Western Australia, on the grounds that they posed a significant threat to the integrity of horse racing in the State;

"The State Government?s legislation is not specifically about Betfair, but about betting exchanges generally whereby punters can back a runner to lose....The integrity of the racing industries has to be protected at all costs....After serious consideration of these matters, I am of the view that it is not in the public interest to approve the application by Betfair."

Betfair appealed against the ban and in a unanimous verdict, the High Court of Australia on 27 March 2008, declared void the two provisions of the legislation that had purported to ban betting exchanges and to prevent Betfair from publishing racecards.

However, in March 2012, Betfair Australia was unsuccessful in its appeal to the High Court of Australia, against a deision by Racing New South Wales to implement a race fields fee of 1.5% of betting turnover on all New South Wales races. Betfair had claimed that the fee was discriminatory in nature and protectionist in its purpose. Following the court's decision, Racing Victoria announced thatit would now introduce a turnover based race field fee of between 1.5% and 2%.

Betfair then said that the low margin nature of the exchange model meant that some customers betting on races in these states would become unprofitable, and that it would acordingly implement an increase in commission on Australian racing markets, with the base rate rising from 5% to 6.5%.

In the financial year ending April 2012 Betfair said that the joint venture had achieved a breakeven result for the first time, with Betfair's share of the venture's net operating profit being £4.3m.

When it released its interim results for the six months ended 31 October 2012, Betfair said that Betfair Australia had been impacted by a trend amongst states to adopt a turnover based approach to race field fees. Betfair noted that this development was now putting an increasing pressure on the joint venture's profitability. Betfair said that its share of operating profit from Betfair Australia was £0.9 million (H1 FY12: £0.4 million).

In January 2008, Betfair entered the US market through the acquisition of Macrovision's Television Games Network interactive TV horserace wagering service for $50 million in cash.

In October 2009 Betfair it was announced that the Breeders Cup and Betfair Group Ltd had reached an agreement permitting common-pool wagering on this year?s World Championships Nov. 6-7 during the Oak Tree at Santa Anita Park meet. For the first time bets placed by Betfair customers would be commingled into Breeders? Cup pools.

In November 2009 The New York Racing Association, Inc. (NYRA) announced that it had reached an agreement with Betfair Games Limited to permit common-pool pari-mutuel wagering on its races to Betfairs global customers.

An attempt to rush through an exchange betting rule in California in Septmeber 2010, was stalled, with a compromise having been reached to postpone until May of 2012. Horse Racing Board Chairman Keith Brackpool said that the delay would "give everyone in the industry time to work through their issues and come up with regulations."

However, on 1 June 2012 Betfair suffered a severe setback with regard to their US plans, when the Thoroughbred Owners of California (TOC) said that they had decided to defer a vote on the introducction of betting exchanges in the state until 2013. The TOC said;

"The concept of exchange wagering has been a polarizing issue among the stakeholders in California racing, and this action [of delaying a vote until 2013] will give us additional time to study this betting alternative and consider if it is in the best interests of the industry in our state. We have not slammed the door closed on the concept of exchange wagering, but are simply putting this contentious issue on the back burner until we can analyze it further and, hopefully, build a consensus within the industry."

In its preliminary results for the 12 months ended 30 April 2012 Betfair said;

"TVG had a good year and continued to grow its share of the US market. Handle was up 7% and overall revenue up 5% (both in local currency terms) driven by increases in both actives and ARPU. On a standalone basis, TVG generated a positive EBITDA performance as a result of the revenue growth as well as operational efficiencies, but this was offset by investment in the Exchange and business development. Overall, Betfair US adjusted EBITDA improved by £0.8m to a loss of £0.4m."

When it released its interim results for the six months ended 31 October 2012, Betfair said that the cash flows generated by TVG were now expected to be below the level needed to support the goodwill carrying value, resulting in an impairment of £13.5 million;

"Betfair acquired TVG in 2009 as part of an entry strategy into the US gambling market. The goodwill arising on this acquisition was $53 million. After a strategic review of the business, we have impaired the carrying value of this goodwill by $21.7 million, or £13.5 million."

Also regarding the U.S. betting market, Betfair said that uncertainty around the prospects for exchange based wagering in California had also resulted in the impairment of the carrying value of its US exchange technology. This impairment totalled £10.4 million.

Betfair's march into Europe has been curtailed somewhat, by both cultural and regulatory barriers and high taxation,in those countries where it has been allowed it to operate.

On 17 December 2009, The Attorney General of the European Court, Yves Bot, give a not unexpected ruling in the case of Betfair and Ladbrokes gainst the Dutch state monopoly De Lotto.

Bot essentially reconfirmed (again) that providing a State's gambling policy is designed to protect consumers through the prevention of fraud, and providing that the measures taken to achieve this are proportional, then the state is entitled to pursue a monopoly solution.

Moreover, he concluded that the monopoly provider may introduce new games and enage in the advertising of them, providing that measures were put in place that took account of the potential for gambling addiction. Bot also said that a member state was not obligated to recognise licences which betting operators had acquired in other European countries, regardless of the merit of such licences.

Bot also said that whilst in principle there should be a competitive tender procedure when gaming licences were being extended, the national court has the right to overrule this stipulation, with an eye on such matter as public order, the protection of consumers or the prevention of fraud.

On 14 May 2010 Betfair posted the following message on its forum;

"On 6 April the French parliament passed a law relating to online gaming which came into effect on the 13th May, 2010. This law prevents us from allowing customers to access www.betfair.com and associated sites from France. We are considering our options for the future but in the meantime, as a result of this change in legislation, we can no longer accept bets from France or any of its territories. Please note that this restriction also applies to customers that may have accounts registered in a different location but attempt to use their Betfair account whilst they are visiting France."

In his blog, former Betfair man Mark Davies pointed out an example of the opposition to Betfair from traditional bookmakers, when they were asked to make submissions to European government's ahead of the planned liberalisation of European betting markets. Davies provides the following submission to the Greek government from Sportingbet:

"Betting exchanges may be the source of a series of illegal activity. It is known that several recipients of illegal betting hedge some of their bets at the exchange. It is also obvious that given that an exchange gives its customers the opportunity to offer bets, this creates a clear and distinct flaw in the legislation. This will give the opportunity to people who are not licensed as betting providers to do so through the exchange. Lastly, the exchanges provide the opportunity (and with minimal cost) for money laundering because two people can pass unlimited amounts between them with one person winning and the other person losing. We believe it is inappropriate to regulate betting exchanges, and propose a ban on hedging of bets. Moreover, betting exchanges have not been included in any other recent laws in other European countries."

In January 2012, Betfair received a licence to operate all of its products in Denmark; with the company paying a tax rate of 20% of GGR.

Also in January 2012 the Italian Government notified a Ministerial Decree to the European Commission that would establish the regulation of betting exchanges. Betfair has said that it is hopeful that this regulation will come into effect in the second half of FY13, allowing it to operate its Exchange on its betfair.it. website in due course.

In May 2012 Betfair said that it had been awarded a licence to operate its betting exchange in the German state of Schleswig Holstein, for the purposes of sports betting. Under the terms of the deal Betfair will pay 20% of Gross Gaming Revenue derived from its German customers to the state of Schleswig Holstein. Betfair said that based on current revenue run-rates it is envisaged that this payment would reduce its core gross margin by approximately one percentage point.

In June 2012 Betfair was awarded an online gambling licences in Spain, enabling it to offer sportsbook and casino products. Betfair said that it would pay a Gross Gaming Revenue tax of 25% on its Spanish operations. Following the receipt of the initial licences, Betfair was forced to make its betting exchange produt unavailable to its Spanish customers, until such time that it were to be granted a betting exchange licence.

Betfair also said that in a deal with the Spanish tax authorities, in respect of operations between January 2009 and May 2011, it had made a one-off payment of £6.4m.

As recently as July 2012 the Cypriot Parliament introduced gaming legislation outlawing online casinos, online poker and betting echanges;"designed to facilitate the receipt or acceptance of bets between players". In FY12, Core Betfair said that it had generated approximately 4% of revenue from Cyprus and this revenue had made a contribution of approximately £9 million before allocation of central costs.

In September 2012 Betfair announced that it had made a formal complaint to the European Commission, on the grounds that the attempted ban by Cyprus of betting exchanges was a discriminatory and disproportionate breach of EU law.

Commenting on the complaint, Martin Cruddace, Chief Legal and Regulatory Officer at Betfair said:

“Having played a constructive role in the preparatory phase of a draft Cypriot law, we were disappointed with the inclusion of elements within it which could unfairly discriminate Betfair and in any event are clearly incompatible with EU law. We have therefore asked the Commission to review the matter and engage with the Cypriot authorities, with the aim of addressing the concerns raised in our complaint. Betfair is a transparent and responsible operator, with a track record of working cooperatively alongside governments in any jurisdiction in which it operates. Current Cypriot law goes against European free market principles and we look forward to working with the Commission and the Cypriot government so we can continue to provide our Cypriot customers with Betfair’s best-in-class Exchange product and odds value.”

In its most recent annual report(to April 2012) Betfair alluded to the high costs associated with trying to breakdown the walled gardens of the European betting market;

"Corporate costs increased in the period to £46.9m (FY11: £42.0m),primarily due to investment in legal and public affairs resources as part of our regulatory efforts in European countries, higher bonuses and additional costs relating to the move of the UK licence offshore and of being a listed company."

At the end of June 2012, Betfair’s then interim chief executive, Stephen Morana, told the Financial Times;

"Italy and Spain are two of our key markets and after some finalisation of regulation with both of them then we will push on aggressively......The caveat is regulation ... there will be new one-off [taxation] hits [as we expand] but if you pay more tax in the short term it allows you to grow your business in the long term."

On 11 September 2012 Betfair released its Q1 FY13 Interim Management Statement. Noting that it had made its exchange unavailable to customers in Spain, until exchange licences are issued, and that it had been forced out of the market in Cyprus, Betfair said that it expects that the on-going impact from these regulatory changes on revenue would be c.£1.5 million per month on a run-rate basis.

Regarding the German market, Betfair said that the introduction of a 5% Federal turnover tax in July, threatened to make its current betting exchange model unviable. Betfair noted that in FY12, approximately 4% of its revenue came from Germany, delivering a contribution of approximately £6 million before costs.

In September 2012 Betfair announced that it had made a formal complaint to the European Commission, on the grounds that the attempted ban by Cyprus of betting exchanges was a discriminatory and disproportionate breach of EU law. Martin Cruddace, Chief Legal and Regulatory Officer at Betfair said regarding the action;

"Having played a constructive role in the preparatory phase of a draft Cypriot law, we were disappointed with the inclusion of elements within it which could unfairly discriminate Betfair and in any event are clearly incompatible with EU law. We have therefore asked the Commission to review the matter and engage with the Cypriot authorities, with the aim of addressing the concerns raised in our complaint. Betfair is a transparent and responsible operator, with a track record of working cooperatively alongside governments in any jurisdiction in which it operates. Current Cypriot law goes against European free market principles and we look forward to working with the Commission and the Cypriot government so we can continue to provide our Cypriot customers with Betfair’s best-in-class Exchange product and odds value."

In a fascinating interview in Computer Weekly (October 4 2012), Betfair's chief technology officer Tony McAlister highlighted some of the technological challenges facing the company as it sought a slice of the European betting market;

"I have to make changes in the systems where customers’ information and money is kept to allow for unique things like the national ID cards in Spain, which I don’t have to account for in Italy, for example. There have been numerous situations where the IT team has needed to support regulatory changes, such as Italian regulators wanting to see bets taking place in real time so they can approve them, which meant establishing communications between Betfair and the authorities in Italy. Authorities in Denmark want information on bets to be placed in a safe location in case the government needs to access it, and authorities in Spain are going down the same route."

Noting that having to deal with these changes could easily have consumed all of Betfair’s resources and budget McAlister went on to describe how the company had to build what it calls a “jurisdictional architecture”, a project that broke the Betfair's IT architecture down into various country-related components...enabling independent deployments and changes, depending on what has to be presented to the customer." In a nutshell; a very costly exercise.

On 7 November 2012 Betfair announced that it was going to exit from the German betting market;

"As previously indicated, in July 2012 Germany introduced a law that applies a 5% tax on stakes on sports betting in the country. A tax at this rate, if applicable, would make Betfair's current exchange model unviable. Following detailed opinions provided by its legal and tax advisors, Betfair believes that, in regard to bets placed on its exchange, it is not an organiser of sports betting under the tax law and is not, therefore, liable for the tax.

Betfair has been working with the relevant tax authorities to seek clarification on interpretation of the law and its applicability to exchanges. The company is disappointed, however, that to date the tax authorities have not been able to agree to an interpretation of the law that would allow Betfair to continue to offer the exchange product. Consequently, Betfair has decided to withdraw its exchange product from the German market.

Following this decision, on-going contribution from Germany is expected to be de minimis and Betfair is reviewing its operations in this market. In FY12, approximately 4% of Core Betfair revenue came from Germany and this revenue delivered a contribution of approximately £6 million before the allocation of central costs.

The company believes that it has fulfilled all of its obligations under German law, including the filing of necessary tax returns. Discussions are continuing with tax authorities regarding the potential tax liability, if any, arising from bets placed on its exchange since the law came into effect."

On 26 November 2012 Betfair announced that it was also going to leave the Greek betting market, citing a lack of clarity on the regulatory front.

Betfair said that the associated fiscal conditions attached to new betting permits, included payments of taxes on historical revenues, and that this made the Greek betting market economically unattractive to it.

Betfair said that it had expected to generate £13 million of revenue and £7 million of contribution from the Greek betting market in the current financial year.

When it released its interim results for the six months ended 31 October 2012, Betfair said that it was now going to address "regulatory uncertainty" by ceasing marketing and other investment in countries which lacked regulatory visibility. In total, it said, these countries had contributed 24% of Group revenue in the first six months of the year, with Cyprus, Germany and Greece accounting for 8%.

LMAX was established by Betfair in late 2007 in an attempt to leverage some of the technology and intellectual property underlying Betfairs Betting Exchange into the online retail financial trading sector.

In July 2010 LMAX received authorisation from the FSA to commence trading and it currently plans a launch of its exchange platform in the final calendar quarter of 2010. LMAX is currently 73.5 per cent. owned by Betfair, 12.5 per cent. by Goldman Sachs and 14 per cent. by LMAX management.

In its most recent annual report Betfair said regarding LMAX;

"Customer traction has improved throughout the year, leading to strong volume growth in FY12. In the year LMAX matched $85bn of foreignexchange volume (FY11: $9bn), delivering an annualised run-rate of c.$300bn in April 2012. The number of trades on the platform has increased from 4,000 a month to 300,000 a month over the period. LMAX now ranks in the top 30 retail FX providers globally and has firmly established proof of concept for its exchange technology in this market."

As regards the profitability of LMAX and investment costs, Betfair said;

"Revenue from the (LMAX) platform increased from £0.1m to £1.0m, with over 70% of this delivered in the final quarter. LMAX generated an EBITDA loss of £6.0m (FY11: £5.8m) reflecting continued investment in the business and expansion of its sales capability."

The 2012 annual report also included the following reference to LMAX;

"Free cash flow from Other Investments was an outflow of £11.9m (FY11: £16.3m), reflecting continued investment in the development of the US exchange and LMAX."

When it released its interim results for the six months ended 31 October 2012, Betfair announced that it had decided to give up its majority holding in LMAX venture, which it had established in late 2007 in an attempt to leverage some of the technology and intellectual property underlying its betting exchange into the online retail financial trading sector.

On 22 September 2010 Betfair announced its intention to apply for admission to the premium listing segment of the Official List of the UKLA and to trading on the main market of the London Stock Exchange and to proceed with an initial public offering of Shares. Betfair does not intend to issue any new Shares as part of the Offer. The offer price was set at between £11.00 and £14.00 per Share, which was equivalent to an equity value for the company of between approximately £1.16 billion and £1.48 billion.

Shares in the company started conditional trading in London on Friday 22 October, opening at a price of £13.00, which valued the company at £1.390bn. Following the exercise of an overallotment option, by Morgan Stanley Securities Limited, acting as stabilising manager, 49,256,353 ordinary shares in the Company will be held in public hands, representing a free float of approximately 46.1 per cent of the issued share capital of the Company.

Within half an hour of trading, shares in the company were changing hands at £15.50, and during the course of the day they recorded an intra-day high of £16.09, before closing at £15.50. It was anticipated that shares in the company would remain strong in early trading, following squeezed institutional demand, and this was indeed the case, with the likes of Newsmith Capital Partners, founded by Paul Roy, the Chairman of the British Horseracing Authority and a member of the Horseracing Betting Levy Board, snapping up shares in the company.

At the close of business on October 27, the day that the retail punter was able to get his hands on shares in Betfair, they closed down almost 3% at £15.01. It will not be in Betfair's long term interest to see the ordinary punter getting shafted as a result of this share issue, as such a happening could negatively impact customer loyalty. Alas, for Betfair's legion of small shareholders this worst case scenario looked set to unfold when on Friday 29 October shares in the company fell back to £1,435.00 a fall of 55p, or 3.69% on the day.

At the close of business on Friday 05 November 2010 shares in Betfair closed at £13.81, their lowest level since flotation. Betfair shares then went into freefall hitting a post-flotation low of £11.40 on 03 December; leaving many small retail investors nursing a near 20% loss. On 1 December 2010 the Daily Telegraph reported;

"Having been brought to market in October at £13 a share, Betfair closed below its float price for the first time as Morgan Stanley initiated with an ?equal-weight? rating and a £14.80 price target, while Goldman Sachs began coverage with a ?neutral? rating. Another adviser, Barclays Capital was equally lukewarm with a £13.60 price target. The three banks were amongst the brokers and law firms who trousered £15.7m in fees at Betfair?s much-trumpeted listing."

On 2 December 2010 Liberium began coverage on Betfair and wrote; "Betfair is overvalued ? SELL, £10.50 target price. Betfair?s growth is strong (24% CAGR in EBITDA from FY10-13), but this partly reflects a fall in profit in FY10 (CAGR is 12% using FY09 as a base). Part of the growth comes from more commoditised areas, and higher risk non-regulated markets. The yield is almost non-existent (<1%), and the excellent growth rate is clearly not a secret, reflected in a CY11 PE of 33x and EV/EBITDA of 15x (pre non-core loss makers)."

Many noted with interest (and humour) the news that Betfair finance director Stephen Morana had bought £100,000 worth of shares in the betting exchange operator following the significant fall in the company's share price on the back of its poor interim figures. Morana bought 9,641 ordinary shares at a price of 1037.14p. The total holding of Stephen Gavin Morana when aggregated with the holding of a connected person (his spouse, Louisa Morana) was 13,550 ordinary shares - 0.0126%. A slightly better punt by Martin Cruddace, Betfair Chief Legal and Regulatory Officer, who acquired 2600 shares at 1017p. The total holding of Martin John Cruddace when aggregated with the holding of a connected person (his spouse, Caroline Angela Cruddace) was 7,831 ordinary shares - 0.0072%. With Betfair shares trading at 968p on December 29th 2011, both men had banked a tidy Post-Xmas loss, and were accordingly taught a salient lesson by the only market that really counts.....

In its annual report for the 12 months ended 30 April 2012 Betfair said that returns to shareholders totalled £59.8m in the year, with £50.2m through the share buyback and dividends of £9.6m.

On the morning of 16 August 2013 Betfair shares were still over 50% below their flotation price, trading at £6.70.

Betfair's interim results for the six months ended 31 October 2012 included the news that Betfair, following a review of its balance sheet at 31 October 2012, had impaired goodwill totalling £34.6 million. In Core Betfair, the impairment included goodwill arising on the acquisitions of Timeform in 2002 , the PokerChamps platform in 2005 and Betfair TV, which owns technology that allows betting via internet connected TV sets, in 2008.

Betfair said that it had sold its minority stake in social gaming company Kabam for $30 million. Kabam was founded in 2007 as Watercooler and funded by Betfair and Canaan Partner, who took part in a $5.5 million Series B funding round. Betfair's US president, Gerard Cunningham said at the time;

"Our investment is further proof that Betfair believes the fantasy sportsmarket is a tremendous opportunity in the US and around the world," said Cunningham. "Watercooler's strong team and its proven ability to execute an innovative approach to social networking and sports, is extremely compelling as we continue to build Betfair's global portfolio of sports and social media offerings."

For the six months ended 31 October 2012, Betfair reported a loss after tax from continuing operations of £59.7 million (H1 FY12: profit after tax of £24.8 million).

For the 12 months ended 30 April 2012 Betfair reported underlying Group revenue up 5.5% at £389.7m (FY11: £368.6m), compared with revenue growth of 8.4% at Ladbrokes and 14% at William Hill. This represented the fourth consecutive year of declining revenue growth for the company. Profit increased by 32% to £33.9m, but was still below that achieved in 2009.

Betfair Group ended the year with a cash balance of £135.4m (30 April 2011: £155.0m); a decline of 13%. Customer funds held off balance sheet in separate ring fenced accounts were £288.3m (30 April 2011: £305.6m); a decline of 6%.

Betfair said that revenue from the management of customer funds held on deposit reduced by 10% to £3.0m "primarily reflecting a reduction in the average rate of interest earned on these deposits from 1.1% to 1.0%." The fact that funds on deposit had declined by 6% may also have contributed somewhat.

During the year, Betfair said total active customer numbers had fallen by 10% to 852,000 due to the acquisition of 96,000 fewer customers during the first three quarters of the year. Betfair atrributed the decline to a strong comparative period (the World Cup), but also to a "more targeted acquisition and retention strategy as well as the later phasing of marketing spend".

Betfair acknowledged a hole in the betting exchange model accepting that there were still some betting markets in which the Betting Exchange "may not have sufficient liquidity to offer an optimal betting experience, notably in ante post and ancillary markets". Former CEO YU had previously also said; "We want to be a one-stop shop for betting and at the moment, if you are going to bet on the next ace in tennis, it's better to go to a fixed-odds bookmaker."

In response to this lack of liquidity across some of its betting markets, and in an attempt to stop its customers migrating to the traditional bookmakers, Betfair,in May 2012, introduced risk based fixed-odds betting on singles markets in certain sports.(In effect, the company that had once proudly proclaimed the death of the traditional bookmaker,itself became a fully fledged bookmaker.) Betfair said that its fixed odds offering would "complement the Exchange and would not be trying to compete with it on price once liquidity has formed."

In so far as a central tenet of the betting exchange model was about reducing risk, Betfair's further incursion into fixed odds betting, has raised more than a few eyebrows. This has been compounded by the news contained in company's recent annual report that risk sports (multiples),which contribute 7% of sports revenue,had seen a 12% decline in revenue to £18.1m (FY11: £20.6m) "as a result of adverse sporting results in Q1, which particularly affected margins in our telephone betting business". Betfair also said that the overall margin for the year in this area had decreased from 8.7% in FY11 to 6.8% in FY12.

In the Games segment, revenue declined by 5% following a 17% reduction in active customers,whilst the Poker segment saw a decline in active customers of 9%.

Administrative expenses increased by 9% to 221.8m and represented 63.5%of revenue(FY11: 61.4%). Commercial and marketing spend was £87.5m (FY11: 79.3m) and represented 25% of revenue. Operations costs were 6% higher and corporate costs increased in the period to £46.9m (FY11: £42.0m).

Source = Betfair annual reports and accounts and Betfair Annual Review.

The euphoria that greeted the arrival of betting exchanges has long faded. The traditional bookmaker lives on, and Betfair, the company that once promised to kill him off, has moved to shore up holes in its betting exchange model by embracing fixed odds betting.

Betfair has meanwhile failed in its attempt to globalise the betting exchange model, and it has also failed in its attempt to leverage betting exchange technology into other markets (selling off its majority stake in financial market company LMAX, having incurred an estimated £30m in costs).

Memories of a disastrous IPO continue to haunt the company. On their first day of trading shares in Betfair touched an intra-day high of £16.09, before closing back at £15.50. Today they are priced at £6.70 a mere 57% below their all time closing high.

It has become clear that there are significant holes in the betting exchange model. Despite dominating the betting exchange market for ten years, Betfair was unable to deliver a sufficient pool of liquidity aross all of the betting markets that it offered. Secondly, Betfair's forced exit from a number of European betting markets, highlights the fact that the low margin nature of the betting exchange business makes it highly vulnerable to "taxation hits" and regulatory shock in general.

Lack of first mover advantage will weigh heavily upon Betfair in countries such as Spain and Italy, not to mention the high cultural barriers that it will have to overcome when it does eventually get to launch its betting exchange in these markets, and the poor economic conditions that currently prevail in both countries.

As regards entry into the US market, Betfair acknowledged that the license fee structure for betting exchanges in California "should reflect uncertainties in the model". Now the company has taken impairment charges against both its TVG arm and its California venture.

In its 2012 Annual Report Betfair said that "investment in legal and public affairs resources as part of our regulatory efforts in European countries" had contributed to a rise in corporate costs to £46.9m (FY11: £42.0m). Betfair continues to take legal action against those countries that seek to exclude it from their betting market; most recently Greece and Cyprus.

The launch of a fixed odds betting service, not only exposes Betfair to greater risk, but also, and, perhaps most importantly, serves to dilute its core proposition of being the company that offers the punter a platform upon which to bet without the bookie.

The possible entry of Ladbrokes into the betting exchange space could not have come at a worst time for Betfair, which is currently seeking to refocus itself under new management.

The betting exchange model has failed and those that were foolish enough to buy into the Betfair IPO story are nursing big losses and bruised egos.

The history of the betting exchange industry, is essentially the story of Betfair, and how it went from being an arrogant disruptive upstart into becoming a limping laggard. A company that threatened to topple the established order, but that ended up being forced to take significant impairment charges across its entire portfolio, and to unravel itself from a regulatory quaqmire, that was very much of its own making. A company with global ambitions, that was forced to return to basics. A company that has been forced to embrace the very thing that it set out to destroy; traditional fixed odds betting.