Wednesday, 2 June 2010

Premium Charge and the levy

I had an interesting lunch yesterday with a group of racecourse Chief Executives, talking about the racing industry, the levy, and specifically Betfair's impact (as they saw it) on both.

They were all extremely focussed on the Premium Charge, and argued vociferously as follows: if Betfair has identified people who consistently make money, and then charges them a premium, why should racing not be able to charge those people money as well, on the basis that they are profiting from racing.

My first reaction was mild amusement that racing should believe that our Premium Charge customers should necessarily be racing customers. There's a naive belief which persists that betting means racing, when racing is an increasingly small proportion of the betting industry's business.

But that aside, the logic of their argument just doesn't stand up.

Racing derives money from betting operators, and as it derives a percentage of their profits, it should be comfortable that operators and racing are incentivised in the same way. If we maximise our profits, then their take is maximised in turn.

Now, their argument is that if we charge a consistent winner 20%, then they only get 10% of that 20%. But that argument is seriously flawed.

Like all operators, Betfair is out there trying to maximise profit, and balancing that desire with ensuring that its customers get value. Unless it achieves that balancing act, then its profit by definition cannot be maximised, because it has no customers to make a profit from.

Part of Betfair's USP is that it welcomes people who win. This is an important selling point, as was seen by the outcry that its introduction of a Premium Charge created. As was said at the time, only 0.6% of its customers pay the premium charge, but around 50% of its customers were seriously up in arms about it. The dream of winning is very important, as was made clear by the many, many customers who claimed (falsely, in my view) that the Premium Charge took away that dream.

Allowing customers to win is therefore important to the success of the business, but it cannot be done in a way which costs the business money. Successful punters (who, incidentally, are not necessarily the same group of people year in, year out) have to win from someone, which means that Betfair needs to provide a never-ending stream of customers who contribute to the liquidity of the pool.

So, Betfair's business model is that it makes sure that it markets to a fast-growing customer base, and keeps the money circulating in the system. The longer the money stays in the system, the more often Betfair clips the ticket. Betfair's aim is therefore to keep the money in the system for as long as possible.

One of those present said to me (repeatedly) that what we ought to do is just stop people winning. Now there's a good business model: why doesn't racing tell all its punters that they're not allowed to win, and if they do, then they'll be banned. I can see that working well for the future of the industry.

But that aside, let's return to the argument. Betfair's business model is to maximise money not by closing down people who make money from it, but by spending money to ensure that it keeps clipping the ticket all the time. In other words, it has a business model, like any other business model, based on costs of doing business, and revenues gained from what those costs provide. The fact that it is using revenues to pay the costs is not a matter of concern to racing because racing gets paid on the GROSS revenues, not on the net revenues. So the fact that Betfair chooses a business model where, having paid some of its gross revenues in tax, it then spends some more of those gross revenues to cover costs which then in turn generate revenues, is not relevant. By that stage, it becomes a matter for Betfair's Executive, and Betfair's shareholders. Racing should be delighted that Betfair is out there maximising its revenues.

So, for racing then to dip into a part of Betfair's business model and say 'oh - we'll have a bit of that too' is absurd. Racing has decided that its funding model is to take a percentage of the profits of operators. Not customers, but operators. So it is simply not racing's position then to play with individual parts of Betfair's business model and say that it likes this bit but doesn't like that bit. Either it takes the model and a percentage of the revenues that are generated, or it doesn't.

Now, racing is of course perfectly at liberty to change its own funding model in turn. It could absolutely say, "we no longer want to get a percentage of the profits of operators. We want to get a percentage of the profits of all those who benefit from racing over a given amount of money in a financial year'. But if it is going to do that, it has to do it consistently across the board.

For example, take a successful punter who also wins the Scoop 6. Maybe he wins it more than once, as a very savvy, Premium-Charge-paying punter.

If he were to win the Scoop 6 betting through Betfair, and is paying the Premium Charge, should his Scoop 6 winnings be included in the money he makes from racing, and therefore then be included in the event that racing secures money from non-operators who make money on racing? If so, should they also be included if he wins the Scoop 6 betting through the Tote, rather than on Betfair's Tote product?

The fact is that, like Paddy Veitch (who was written about at length in the FT this weekend), racing isn't interested in that kind of even approach. If they were, I'd have some sympathy with them. They could, in my view, absolutely change the target of who they want to get money from, providing they do so on a consistent basis.

But for the life of me, I cannot see how anyone thinks it is equitable to dive into one operator's business model, picking and choosing those aspects of it that suit, when it has made a decision to charge operators on their profits.


  1. Hi Mark,

    A great, informative post, but it makes me wonder why or didn't read those comments when the premium charge was introduced 2 years ago.

    Whilst I still don't like it, at least you explain some good points very well e.g. allowing customers to win etc. which would have put the fire out in many quarters had it been explained properly at the time.

    All the best,


    P.S. Apologies if you did, but I read a lot about it at he time and didn't see the detail that you mention here printed anywhere.

  2. "Racing should be delighted that Betfair is out there maximising its revenues...."

    In theory, yes, but maybe the reality is something like this: those who run Racing have fallen for the hand-wringing by the bookmaking chains about how Betfair is directly and indirectly giving consumers too good a deal and is making their horseracing business impossible. Now if only someone could shaft Betfair's business model (by levying layers, traders, bot users, PC payers, [insert any other type of BF customers]), things would return to how they used to be, with the bookmaking chains enthusiastically promoting British horseracing, with resulting juicy profits (and Levy receipts).

    Actually, no, forget that, those running Racing aren't that gullible.

  3. Regarding the following:
    "So, Betfair's business model is that it makes sure that it markets to a fast-growing customer base, and keeps the money circulating in the system. The longer the money stays in the system, the more often Betfair clips the ticket. Betfair's aim is therefore to keep the money in the system for as long as possible."

    This suggets that an incentive to keep money in the system would be beneficial.

    I've often said that there is a big difference between a PC paying customer with a £3k balance making and withdrawing £1k a week, and a PC paying customer with a £100k balance, making £1k a week and increasing their balance withdrawing nothing, in order to make more.

    Draining of liquidity doesn't take place when money is won, it takes place when it is withdrawn. Unfortunately for me, Betfair does not make that distinction.

    Being able to defer PC until withdrawal makes sense from that viewpoint. I have withdrawn quite a large amount of money from my betfair account specifically for the purpose of avoiding PC by arbing with bookies and increasing commission generated. Being able to defer PC would keep more money in the system and take care of the 'unfair' aspect of not receiving a rebate after a big loss.

    A lucky customer who turns £1k into £100k in a year, pays PC and then blows the lot, will not get anything back.