Thursday, 18 February 2010

Keep your trousers on...

I've just spent two days at a Board Strategy offsite, during which we did a deep dive into Betfair's three-year plan. As that would suggest, we did a great deal of looking into the future.

The contrast, then, to emerge from that forward-thinking discussion to find the Irish edition of the Racing Post, and specifically an op-ed piece at least ten years out of date by Sharon Byrne, chair of the Irish bookmakers' association, could not have been greater.

There's obviously plenty of chat going on in Ireland at the moment: the war of words between Paddy Power and HRI is being well-documented. We are, mainly, out of it; except when others bring us in. And bring us in, Sharon Byrne has done.

The irony of it is that her piece starts with the following sentence: "I can't believe that at a time when racing's governing body, Horse Racing Ireland, should be operating at full capacity, it is merely chanting old, inaccurate facts."

Ironic, because later on she adds this: "If the money that Betfair turned over from Irish customers in 2008 had gone through betting shops, it would have generated over €12million in duty and corporation tax, and provided over 300 jobs. Instead, HRI accepted a voluntary contribution of €1.2million."

If ever there was something old and inaccurate, that is it. How long can people come out with this turnover line and still be taken seriously?

I've blogged before about why turnover is an irrelevant metric, and the many reasons why our "turnover" (which is to say our 'matched bets' number and bears no relation to a traditional bookmaker's turnover at all) is not a number which tells you anything other than that there is activity taking place (which is the reason we have it up there). But perhaps it serves to try to put one part of the economics into perspective with an analogy. So, here goes.

Some shops are good at taking things back; others aren't. Imagine you buy a pair of trousers from one shop, say for £50. You get home and aren't sure if you made the right decision, but the shop has a 'no returns' policy and so you keep them. You spent £50; and the shopkeeper took in the £50. If you assume that the trousers cost nothing to make, and that the Trouser Levy doesn't allow him to offset any of the costs of running his business because it is based on the gross profit of trouser sales, then he'll be levied on the £50.

Someone else buys trousers from a shop where they're very good at taking things back if you buy something that doesn't fit. His pair also costs £50, but when he gets home, he decides he wants something different and he takes them back. He gets his £50 back, such that £50 has changed hands twice. But it should be fairly clear that no transaction has yet been made: the customer has spent nothing, and the shopkeeper has made nothing. If the customer subsequently decides to buy another pair of trousers, for another £50, he hasn't suddenly spent £150.

Indeed, no-one sensible, surely, would argue, in this instance, that anything other than only the net spend of the customer is relevant to how much Trouser Levy the shopkeeper must pay.

Imagine, now, that one of the shops has a sale. It's two pairs of trousers for the price of one, now, so the customer who shops at the shop with the sale buys two pairs of trousers, for £25 each. He still spends £50, and the shop still makes £50. How absurd would it be to argue that had the customer bought the two pairs of trousers in the shop without the sale, he would have spent £100 and not £50? He only bought two pairs of trousers in the first place because they were half price, and he only had £50 to spend. What is important is not how many pairs of trousers he bought, but how much he spent. The Trouser Levy is, after all, a levy on profit made from selling trousers.

So, this tired old argument that says 'if the money that changed hands at Betfair had changed hands somewhere else, it would have generated more tax' (which is addressed in questions 2, 3, and 5 of the booklet we produced last year) really doesn't make any sense at all, and it baffles me as much that people listen to it as it does that people keep trotting it out.

The simple fact is that if you deposit £100, once, you can "turn over" literally ANY sum of money on Betfair on a single horserace just by backing and laying it, restricted only by time and the number of people with whom you can get matched; and it's only your net position at the end that makes a jot of difference either to you or to us. But if you take the same £100 from a cashpoint, you can only generate £100 in turnover with a bookmaker on course. Arguing, if someone placed 100 bets with it on Betfair (making 100 lots of £200 in matched bets) that "if that £20,000 in turnover had happened at a different bookies" is just like me saying, "if I could translate my salary into yen, and then back into sterling, but keep the yen figure as the actual number, I'd be richer." It might be true, but it's also completely absurd.

For the record, we paid a voluntary contribution of €1.2million to HRI because that was 10% of the profit we had made from anyone betting on Irish horseracing (whether in Ireland or not), and our view was that 10% (which mirrors the statutory payment in the UK) was a sensible number to contribute. It means we made €12million profit in Irish horseracing from customers around the world. The profit is the only relevant number. It makes no odds how many people that involved, from how many countries, on how many races, or how many bets. And what turnover we did it on is no more relevant than what margin we took on it, since one would have been multiplied by the other to make the €12million; and as one went up, the other would have come down. For people who are so good with maths and fractions, it's amazing that so many traditional bookies still claim not to be able to work it out.


4 comments:

  1. Why therefore, does Betfair quote amounts matched, which as you've pointed out is pretty meaningless, and not the size of the "pot" for each market?

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  2. Rich - the amounts matched figure is very important from a trading view point. It is meaningless in terms of the profit made by Betfair and in turn the Levy.

    From a trading view point for example it is important to know how much money is flowing through the market so you know what size stakes you can use that will not be out of proportion to the market - this can be established from the turnover figure. There are many other uses for this figure of course.

    Mark - It is surprising that people still do not take the time to understand what the figures mean and represent. In my opinion it shows a disregard for the subject matter and that they clearly should not be commentating and suggesting policy when they do not understand it correctly. Also perhaps it highlights a need for further education by Betfair, though it does seem you do a lot on this already.

    Has the introduction of the Premium Charge directly meant that you pay more in Levy?

    For example the majority of my trading is on UK Horse Racing and therefore since the introduction of the Premium Charge I now pay much more in 'commission' to Betfair on UK racing. In turn the profit that Betfair makes from me on UK Racing has gone up. So I would assume the Levy Payment from this has also gone up?

    Or is what I say a to simplistic understanding of it?

    Also I left a comment on the post 'Another Sunday another float line' that you may have missed about the recent Forum Chat.

    Cheers,

    Leonthefixer.

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  3. Rich - because it's a measure for BF punters, not for others to simply quote as BF turnover for their own political purposes. If it was the overall 'pot', that number confuse folks even more as it would be going down regularly as people trade out of positions. Total matched is easily understood, except by those who deliberately want to misunderstand it for their own agendas.

    The other common misnomer is that BF take a 5% cut of that figure as well. Miles off...

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  4. Leonthefixer - no, that's not a simplistic understanding of it. We apportion what % of a PC-paying customer's profits are derived from UK racing and work out what amount of the PC paid can therefore be apportioned to the sport. We pay 10% of that number in levy, so yes - it means that our levy contribution has gone up.

    ReplyDelete