Tuesday, 26 January 2010

Europe on a slow road to nowhere

I spoke yesterday at the International Casino Conference in London.

The audience comprised regulators from monopoly countries and operators of monopoly businesses in Europe, so I didn't turn up expecting to have many friends. But I was struck, at the end, by how many people came up and told me that they agreed with the position I outlined, and how they find the position adopted by leaders on their side of the business frustrating.

The main thrust of my brief talk was one which will not be news to other online betting operators: that while European governments either sit on their hands or legislate in a way which outlaws internet gambling, consumers vote with their feet and go and bet wherever they choose. The impact of aggressive legislation is not to stop people betting, but to make them bet with operators other than the 20 or 30-odd brand names that we have all heard of. Given that the French government's own analysis estimated that there are around 5,000 gambling sites on the web, it's not as if they are spoilt for choice.

My comment that it would be helpful if European regulation took into account the reality of consumer behaviour was answered by Paul Herzfeld, the CEO of Casinos Austria International, with the statement: "Consumers might want to drive at more than 130kph, but that is the law."A sentence earlier, Mr. Herzfeld had also said that the difficult part of the debate between the state operators and the "private" industry (many of whose members are actually listed on the stock exchange) was that his company was regulated and the others were not.

It seems to me that in those successive sentences, Mr. Herzfeld summed up why this debate is not moving forward. On the assumption that the comments were based on a lack of knowledge rather than a conscious effort to misinform, I'd like to set the record straight on both issues.

To take the second, first: Casinos Austria may be licensed in Austria; but Betfair is licensed in the UK, as well as Australia, Italy and Malta. In other words, not only are we licensed, but we are licensed by more places, and therefore more heavily regulated (by virtue of different countries having different requirements) than his company is.

As regards the first, the analogy completely misses the point. No-one is suggesting that consumers should be allowed to travel at more than 130kph if 130kph is deemed to be the speed at which they are safe. But once we've established that the speed limit is set, would any government insist that a consumer had to drive a Volkswagen but couldn't drive a Volvo? Or could travel by car, but not by train? If not, on what basis must a consumer be allowed to bet with a State-owned operator but not a non-State-owned operator regulated to the same standard?

The implication of Mr. Herzfeld's statement was that Betfair somehow tries to avoid regulation, and wants to break the law. Nothing could be further from the truth: we set our business up making clear statements that we would stick to the law even if we thought it was stupid (we never, for example, took bets out of the United States, but instead blocked access to us from there); ;and we have made quite clear that we will submit ourselves to regulation and tax in states around the world, providing that regulation is equitable and consistent across all operators and does not seek to single us out.

The point is not, therefore, that the online gambling industry is seeking to avoid being regulated. It is that operators are being told that they cannot have a licence. The reasons we are given for that do not bear scrutiny. We are told, for example, that we 'cannot deal with problem gambling issues', when it is manifestly clear that we do so at least as well, and normally better, than existing monopolists. Let's not forget, for example, that the PMU in France introduced a means of ensuring its customers are over 18 only in June last year!

While operators like us are denied licences (and the French, for example, have said that they want to ban 'our way of betting', as if the fact that we manage our risk perfectly through technology is somehow problematic: you would think that it was a bonus, given what is going on in the world), consumers are voting with their feet. If they can't find the product they want at a fair price within their own jurisdiction, they go and find it on the web. They don't think of it as breaking the law: they think of it as exercising their consumer right to a fair product at a fair price. It's not as if they are buying something that isn't sold in their home country; it's that they are buying it in a package that attracts them, at a price which they think is fair value.

The impact of this in the longer term is going to be significant. Governments that think they are protecting their tax revenues by protecting their monopolies and keeping out competitive product are simply losing consumers to sites much further afield. We know from our own commercial experience that once you have lost a customer by seeing him sign up to a different site, it is very difficult to get that customer to move. In short, this game is a land-grab, and, by legislating (on purpose) to keep out best product and best price in order to protect slower-moving national operators, European governments are not even pitching for the business.


  1. I find it intriguing to hear you playing the monopoly card, when you hold a near monopoly in the exchange market yourselves. Whilst this may currently not be a monopoly in the online betting markets, it is a monopoly in the "best price" market as you describe it.

    This is for 2 reasons, firstly due to your business model of managing risk perfectly as the traditional bookmaking model cannot compete on price, and secondly due to the eBay effect that Betfair achieved long ago which to date has pretty much shut the door on any similar competing business model.

    Any monopoly is bad for the consumer, but from their point of view it comes down to their monopoly or yours. They just like theirs better as it means higher tax revenues, and jobs remaining within the national borders. And you, well you like yours and like any business the real deal here is making even more money.

  2. I'd strongly disagree that we are a monopoly. We comprise about 6 or 7% of the gambling market. to say we have a 'monopoly' on our particular way of doing it - questionable in itself - is lie saying that Coca Cola have a monopoly in the soft drinks market just because they happen to be by a distance the most popular cola.

    To the extent that we are comfortably the most poplar betting exchange, we are there because we created the specific model long before anyone else did, and having liquidity is an advantage. But the other people who run exchange models are way past the level of liquidity at which we felt we had a sustainable business, and Betfair has no God-given (or government-protected) right to its position.

    So in my opinion, your analogy doesn't work. Consumers can choose to use us, or not. The fact that they do is based on their perception that we offer the best all-round package. That doesn't mean we have to be the cheapest, or the fastest, or the most liquid, or have the best customer service, or have the best range of markets. It means we have to have the best combination of everything that the consumer considers important. If we fail in that, then the consumer will leave us.

    I don't see how that is the same as trying to criminalise people who decide that they think someone else has a better product.

  3. Incidentally, the whole point of the post is that having a monopoly operator in a country does NOT mean that countries have higher tax revenues, but that in the longer term, they end up with NO tax revenues. Consumers being offered one product at an unfair price go and find a product that suits them better at a fair price, elsewhere. So the whole point of the posting is to say that in my view, if the objective is to try to maintain tax revenues and protect consumers, the worst way to go about it in an internet world is to try to ban everyone else. The sensible way is to make sure that within your jurisdiction is a range of products to satisfy all types of consumer, such that you end up retaining the tax revenue of all consumer spend. In my view that is a better and far more sustainable solution than having ever-increasing amounts of that consumer spend disappearing elsewhere, to outside your jurisdiction.

  4. Simply a counter argument as to why the French, American, Dutch & other governments remain protectionist toward gambling.

    Throughout the world respective governments are protective of their "Sin Taxes" et al. Even with Europe’s borders apparently open for free trade, living in the UK, whilst I am free to travel to France or another country in Europe to purchase my cigarettes at half the price, I am not allowed to order them remotely & have them delivered.

    I actually agree there should be legal, tax & trade harmonisation across Europe on all sin products, as this would put an end to the offshore issue too. Like it or not governments are the elected representatives of the people, and they do what they believe are in the best interests of their country. {Allegedly.} Ultimatly if they get that mix wrong, they are no longer in government.

    The Internet explosion brings some interesting challenges to governments. Some will remain protectionist, others will opt for free trade. As with the capitalist / communist split in Europe in the latter half of the last century only time will tell who was right.

    To your latter point about NO tax revenues, governments will adapt to this by either opening up to free trade, or taking the Chinese / American route of censorship / criminalisation.

    As for the good old monopoly argument, you may only comprise 6-7% of the gambling market in whatever scope that is defined, however I expect you account for 90%+ of the sports betting exchange market in the same scope. 90% of any market, especially the most competitive way of doing business in a particular sector in my eyes is a monopoly.

    To apply your argument would be the same as saying eBay didn’t have a monopoly as it competed with every single retailer, car boot seller, garage sale & local newspaper in the world. { I say didn’t here as in recent times Amazon have upset the applecart somewhat. }

  5. As a footnote, reading my own closing paragraph, perhaps the term I should use is "near monopoly".

    Whilst there is no state legislation protecting your position, the liquidity effect does so with near equal effect. However as Amazon have proved in recent years, whilst incredibly difficult, it is possible to break this dominance.

  6. Surely that (Amazon example0 completely undermines your argument? the fact that someone is in a pre-eminent position is not the same as saying they have a monopoly. Ford used to have a monopoly on motorcars, but where are they now? You stay ahead of the game only by innovating, to the benefit of the consumer. The protection of players is to the detriment of the consumer, and in my view is something else entirely.

    To your point about us having 90% of the exchange market: I guess it depends what your ambition is. We don't see ourselves as an 'exchange market' company. We are a betting company, competing for the betting pound. We don't want to say we're the cleverest person in the world just because we're the cleverest person in the class of a small secondary school, because we don't think that makes sense. We're interested in where we stand in the global market place, not in a small sub-section of it. Even in our little corner, we have (and ask for) no protection: we take our commercial chances, and as you show yourself, there's no guarantee that we keep our place in the sun if we make bad business decisions.

    As regards sin taxes, I'm not arguing a right or wrong. I'm saying that the reality of the world is that even if you adopt the Chinese/American model, you get nowhere. If you think, for example, that America is blocking gambling, look at pokerscout.com. A block achieves precisely the opposite of what it is intended to achieve: it doesn't cut the quantum of gambling, but it removes all protections and it lowers the standard of the operators. The evidence is there in the numbers.

    Unlike cigarettes, there is no physical commodity that needs delivering; so if governments want to retain control, they need to have realistic policies. I understand that that is out of the comfort zone of many years experience, but my whole point is that they re not rising not the challenge. They have 20th century solutions for a 21st century problem.

  7. Uncanny you using Ford as an example, as I just happen to be working on their data at this very moment in time. :-0

    Fair enough on the dictionary definition of monopoly, I should have really paid more attention in English lessons on the days I bothered to turn up at school. :-)

    BTW The timestamps on your blog are showing a few hours behind.

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  9. It is true that Betfair do not have a monopoly. They are more akin to an oligopoly, in that there are only a few key players in the exchange market, Betfair being by far the biggest key player.

    It is also important to be careful with comparisons with 'traditional' bookmakers as you are not comparing like with like. Obviously Betfair hold zero risk and with traditional bookmakers it is not possible to lay a horse like you can on an exchange. Where as an exchange can offer most of what a bookmaker offers such as virtual racing and effectively FOBT's.

    The comparison with Coca Cola is also incorrect in my opinion as although Coca Cola is the dominant player in the Cola drinks market there are no barriers to exit for the customer. They can very easily switch from one brand of Cola to another.

    This is not possible with the current make up of the betting exchange market.

    Yes it is true that Betfair and say Betdaq for all intents and purposes offer the same product. However, there are huge barriers to exit for the users of Betfair as they are unable to get matched over at Betdaq. Of course Betfair have no control over this and although they are the dominant player in the exchange market they have very little control if any over liquidity.

    I would argue that Betfair's most important advantage in the exchange market place is liquidity. Without it Betfair will soon suffer as users move elsewhere.

    Will that happen? Not with the market in its current form. Will it ever happen, most likely. Just as it has begun to happen to Ebay.

    As with Betfair, the barriers to entry into the online auction site are sizeable but not so restrictive to stop anyone else doing it. What Ebay had over the others was that like Betfair they were first to market and best at marketing which Betfair got spot on in the early years.

    With everyone using Ebay it was very diificult for people who also wanted to buy and sell to go elsewhere. Ebay could give very poor customer service but people would stay as it was the only place they could conduct their business. Ebay could increase their charges exploiting this and people would still remain as again it was where you could get your business done. They were not a monopoly but could use their market position to achieve as much money as they could. Is there anything wrong with them doing this? They are like Betfair running a business and not a charity?

    Like Ebay users, the Betfair users are individuals and work for themselves on the whole and therefore any move to Amazon etc was very hard to achieve as people would not be willing to take a chance that everyone else would follow if they moved to Amazon. This has been shown to be exactly the same with Betfair and Betdaq. People (traders) want to make a move because of increased costs and falling levels of customer service but are unable to.

    On a different note, Mark - if you have chance I would love to hear about your thoughts on the American market place and what this is likely to mean for the exchange market if/when it opens up.

  10. Sorry Leon - I've only just seen that you replied to this.

    I agree with you on liquidity, but I don't think that that in itself is an argument to say we are a monopoly. As you rightly say, eBay had that; but their ascendancy is nothing like it was. We hold the view that we will only stay in front if we continue to deliver the best all-round value, which is a combination of everything (customer service, price, product etc.)

    Where I disagree is that the fact that we are not taking risk is relevant. That is a business choice, made possible by our investment in technology. Indeed, we do take risk on some product; and some exchanges, I believe, take risk all the time in order to create the impression of liquidity.

    I take your point about barriers to exit. But again, that is the result of us getting it right. People's belief that liquidity available elsewhere is not sufficient to sustain the vast majority of our customers fall into the trap of believing the myths about who our customers are. The fact is that the vast majority of them are ordinary punters who look like anyone else - a fact proved by the fact that the proportion paying premium charge on Betfair does not even come to 1% of our active customers - let alone our registered ones.

    Re. the US... I will have to find some time to write about that at some point.