Cheltenham

As bookmakers reflect on a successful Cheltenham, I have been left wondering about the logic of racing's accounting year being so weighted towards a short-term view of the world.

Consider these two bookmaker quotes.

First, from Ladbrokes:

[The Gold Cup] was a result beyond our wildest dreams. The cheers for Imperial Commander came from the bookies and we roared him up the Cheltenham hill. The gamble on Kauto Star was colossal. Had he won we’d have handed back all the cash we made earlier in the week. Getting the big two beaten was nothing short of superb."

And this from William Hill: "This will go down in history as the worst set of results Cheltenham punters have experienced."

One can imagine that a similar sentiment was felt by the hierarchy in racing. In simple terms, the estimated £60million that the bookmaking industry won will result in a £12million levy differential compared with had the industry lost a comparable amount.

Of course, it works both ways. In 2003, when 10 out of 20 favourites ran in, the opposite was true: the bookmakers took a bath, and the levy fell by a commensurate amount - the loss to the betting industry being doubled up in levy terms, because it would have been offset against previous, levy-generating, gains. With two weeks left til the end of the accounting period, the figures never recovered.

This year, the fact that 10% of the £60million will come to racing will doubtless be seen as a good thing. But I'm a bit sceptical, myself, about racing rejoicing that its biggest set of customers should have suffered four days of pain. If the same thing happened consistently over a five-year period, sensible punters would start to spurn Cheltenham as 'impossible', 'a lottery', a 'punters' graveyard' - and would bet on something that gave them more of a chance. The long-term impact on the sport could be disastrous in that scenario.

The fact is that the fastest way to turn a customer away from the game - any game - is to leave him feeling that he never had a fair go. Casinos know this very well, and are all about recycling funds and making sure the customers get a good run - the very reason that slot machines pay out more than they are required to do by statute. It's about the lifetime value of the customer, and not about how quickly you can bleed someone dry.

I remember watching a race not so long ago where the short-priced favourite was beaten, and two of racing's most senior figures, who were standing next to me, high-fived each other at the benefit that would bring the levy. But where the traditional bookmaking industry can delight in its adversarial relationship with its customers (because it knows that those customers will keep betting with them, and will simply find themselves a new product to turn their luck), Racing has no such luxury: if punters decide they lose money too quickly when they bet on the horses, they'll punt on something where they think there is more representative form on which to base an opinion. Like football, perhaps.

So, while I wouldn't begrudge Racing a wry smile that this is a good year and not a lean one, I do wonder whether it would not make more sense for the sport to move the end of its accounting year so that the biggest week of punting doesn't come right at the end of it. A bad week for punters at Cheltenham might be good for the sport as a one-off; but in terms of lifetime value, it doesn't serve for Racing to rejoice in its customers' misfortune, and doing so over a period could have serious implications which are not immediately apparent when this year's levy figures are announced.

Radio 4

This programme by the BBC's Chris Ledgard is well worth a listen if you have a spare half hour. I found it interesting to hear that even thirty years ago, people were saying that the betting shop was doomed. Plus ca change. Same issues, new set of whipping boys. :-)

Good luck for Cheltenham, everyone!

“Fifty years ago, a young fellow entering the bookmakers would place his virgin bet on a horse. These days, an 18-year-old's first flutter is more likely to be on the football or even the winner of The X Factor. And while you can view hours of the beautiful game without ever hearing mention of the word "odds", it's impossible to watch a horse race without constant references to betting. Racing enthusiast and broadcaster Chris Ledgard asks if the people behind the sport of kings have lost the plot and what they can do to turn young people into punters. On a freezing night at Kempton Park racecourse he meets the man charged with changing the sport's image - but the struggling horse owners think there's not a Burlington Bertie's chance of this happening.”

Dear Andrew Lyman

Dear Andrew

I thought it only polite to reply more fully to your open letter to me in Sunday's Racing Post. You asked me so many questions and made so many points which warranted a full and proper response that it unfortunately takes far too many words for the paper to be able to give me the space to do your letter justice.

May I first though just make one clarification, about the basis on which your letter was written?

When I say I'd like racing to move on from this ten-year debate (and when Betfair places adverts calling for that), that isn't actually the same as saying that we want William Hill to move on.

I can see the confusion given your recent close relationship with the BHA, but our advert was addressed to British Racing, and it is specifically British Racing that we'd like to move on because we believe it is chasing shadows and losing valuable time when it has other things which it needs to worry about.

But as far as I'm concerned, William Hill, as a competitor, can run around chasing as many shadows and wasting as much of its time as it wants. I'd even say, be my guest on that one. As I've commented before, William Hill's pursuit of this particular topic has done us a world of favours. Please don't be under any false impressions about that.

Second... I think it's only fair not to dwell at length of the ironies of your letter, but, equally, it would be perverse to leave them aside completely:

• the call for transparency, from a company which I can never dis-associate in my own mind from that iconic image of your chairman John Brown waving away the media from his front door, claiming that data protection and client privilege meant that it would be wrong to reveal any of the betting patterns behind Man Mood;

• your asking me questions about volume, when that same chairman, in 2001, was the very person who drove through (and hailed) the arrival of the Gross Profits Tax system which rendered volume completely irrelevant;

• your call for the Gambling Commission to be able to get more information from us, when until recently you worked at the Gambling Commission and will therefore know how much more information you were able to get out of us than you were from your now employer.

But as I say, let's not dwell on any of that: it speaks for itself.

Let me instead address each of your questions and comments directly.

I'm glad you like "our line about being a bookmaker and not a betting exchange".

You'll obviously agree with me on the facts that prior to the Gambling Act 2005, we were licensed as a bookmaker just like William Hill, and that since that category was removed (with the introduction of the Act) we are both licensed as betting operators. Where we differ is that I accept that things move on: your employer seems to be stuck with the idea that a bookmaker has to take risk, just because in the past, it was essential to being able to run a business; and your employer doesn't like the fact that we can manage our risk perfectly, now that technology exists which allows us to do so.

To be honest, I find this curious. It wasn't an awfully long time ago that William Hill was hailing its 'Electronic Point of Sale' software, which allows more effective risk management, as the reason why it had opened up clear blue water over Ladbrokes, which had eschewed the technology. Did William Hill become less of a bookmaker the day it started to use that?

Personally, I don't believe so. Words do shift in meaning, and industries evolve. William Hill today might still be a bookmaker, but it is a world away from the William Hill of fifty years ago, I am sure you will agree. That bookmakers previously took much more risk than they do now (when, to use William Hill's own words, they take "trading decisions") is just a function of that changing world.

A bookmaker today, whether it's us or you, facilitates the placing of bets for customers by looking at supply and demand and deciding when it wants to take risk (which we do on our multiples, and you do on most bets if you feel confident enough) and when it doesn't (which we don't on our singles, because we have the technology which allows us to service customer demand despite the fact that we are offsetting the bet; and you don't if you don't feel like it). Our trading decision is therefore different from yours by degree and by its level of consistency; but not by its basic mechanism or analysis.

Off-setting 99% of our singles risk instead of 100% of it wouldn't make us a bigger bookmaker; and on the days when you might, by chance, find your book is perfectly balanced, you don't suddenly turn into a betting exchange, even though, as we do, you would have offset your supply with your demand.

Moving to your second point: our revenues do continue to grow, you are right. And you also may be right that we are taking some of your horseracing business. This tells me that customers like our product, and long may that continue. We do our best to listen to them to make sure that we have the best all-round product in terms of value. If the day comes when we get that wrong or someone does it better, they will go and bet with someone who offers them a better package. I hope we don't bleat about it if it happens, because it will be our own fault.

I suspect you are also right, to your third point, that only a small part of the fall in GPT and levy receipts falling is due to off-shoring. I suspect a lot more of it is due to new products like FOBTs and virtual racing. What do 'the facts' you mention show about that?

British racing's loss of market share is a very real issue for it: it has gone from being 80% of our business to about 22% of it in less than ten years. This is precisely why I think racing needs to move onto a topic of relevance, and why I continue to call for that to happen. It has very real issues to address, and in my view, having customers move from a high-margin competitor to a low-margin one is not one of them. That should be no more relevant to it (or to the Treasury) than it should be to an airline regulator (or the Treasury) that airline passengers book with Easyjet rather than with British Airways. Yes, that's an issue for British Airways, just as our lower margin is an issue for William Hill. But any organisation or government department dependent in part on the profits of an industry as a whole (bookmaking, airline, or anything else) shouldn't give a fig whether the customer is being offered better value by one operator than by another. If it does, then it's looking at the wrong metrics.

Next: I'm surprised you ask how expensive our advert was in the Racing Post. Your company is one of their biggest advertisers, so I would have expected that you would know how much it costs. For the record, it cost us £7,000. Am I right in suspecting that if we did more advertising with them, we would get much better rates?

Moving on, you say that we'll always be polarised until we open our books to independent scrutiny, but you appear to have forgotten that we have already, on multiple occasions, on two sides of the world. In principle, we have no concern about doing so again if any of Treasury, HMRC, or the Gambling Commission (your chosen arbitrators) should feel the need to waste time re-visiting something they have between them spent many man-years on, so please don't misunderstand my call for racing to move on: it is not made out of fear that looking at this issue again. It is just that we keep doing it.

Shall we make a deal? If we open the books again, and again the conclusion is that we have no case to answer (as I believe it will be), you don't reply by saying we really should open the books? Equally, if it requires you to be transparent about where you make your money, you will be open to complete scrutiny as well? We're not afraid of, and we have had, an independent enquiry. But it is merely Einstein's definition of madness to believe that repeatedly doing the same thing will eventually bring a different result. Absolutely nothing has changed since the HMT review. We may have more customers, but by definition, the sort of people you fallaciously talk about as being relevant to your argument are sophisticated early-adopters of the product, which had been around for almost six years when HMT concluded its review.

You've also called for transparency of our accounts. They are published, in full, on our corporate website - something which we have no need to do as a private company, but which we have done in any case for many years. By all means go and look at them. They are audited by KPMG, if you're interested.

To your next point, I don't have a breakdown of back and lay win, but I fail to understand its relevance. It's abundantly clear that backing and laying are two sides of the same coin, and if your argument when it comes to 'who is the bookmaker' is that actually it makes a difference whether you are betting on something to happen or not to happen, I look forward to you making the case that fifty percent of the people betting on tennis, or snooker, or boxing, or Cup ties, are somehow doing something they need a licence for. I covered this in my response to Section 3 of your recently-published document entitled 'Betting on Britain'.

As regards how we categorise our customers: we don't, other than giving them a sliding scale of commission (the full details of which are published on our website), and recognising some key accounts. I suspect that is much the same as you do (in recognising your 'high rollers'); it's certainly the same as other businesses, for whom the idea of preferential rates and loyalty schemes is not unusual and certainly doesn't imply that there should be a change is the category of the customer as regards either his regulation or his tax. Personally, I'm a Gold Card holder with British Airways (lucky me!). I do sometimes fly for as short a stop as the crews do, and, remarkably, down the exact same routes. That doesn't make me an airline pilot, though, and I'm not licensed to take control of the plane. Thankfully, I also pay no tax that is not levied on the customers of other airlines in turn, and I certainly pay no taxes that are relevant to the company I choose to fly with.

As regards recreational or business users.... Yes, we have some customers who, away from us, run bookmaking businesses and use us to hedge. Any who do, and are failing to declare the profit (or indeed off-set the loss) that they make through the window onto the world that is Betfair, would be breaking the law.

The point that we keep making but you don't seem to get, though, is that we fail to see how you can run a business purely on Betfair. By restricting what you do to Betfair alone, you pay your money and you take your chance, like any other punter.

The reason for this is simple: as you know, our books do not include any margin at all (not even our own commercial margin: we add it later, and call it commission), but are the perfect reflection of the supply and demand we are seeing. Since none of our customers has a means of attracting business, the only way to get your prices taken, is to be best price. Given the perfect book, that would mean taking the book over-broke most of the time. I know your numbers haven't been great at William Hill recently, but you're surely not betting to negative margins, are you? It would be a quick way to go bust, as sports.com once proved.

You close by saying that "We would like to move on, but sadly we think that under that smooth and frankly quite likeable exterior, there hides a whole host of unanswered questions; which of course I may be too stupid to understand the answers to."

I don't believe there are any unanswered questions: on the contrary, I believe that all the relevant questions have been addressed repeatedly, both in independent enquiries and in documented form, and are collected here. In fact, I think it is precisely because those questions have been so comprehensively answered that commercial competitors continue to muddy the waters with irrelevances, pretending to be making different points when in fact they are raising the old, answered, issues, packaged slightly differently.

Which should answer your basic point: I doubt very much indeed that you, or indeed any of those vociferously arguing this bogus case, are "too stupid" to have got it.

Yours,

Mark

Market managers?

Word reaches my ears that the latest great idea doing the rounds from those insistent on treating Betfair differently from other bookmakers is to argue that Betfair is actually a 'market manager', and should be distinguished from other fixed odds bookmakers as a result.

The basis of this argument is presumably that Betfair does not take any risk on its singles bets.

Over the years, people have got very hung up on what the level of risk you take does to your status. This is curious for a number of reasons, not least of which is that if risk-taking were a pre-requisite, then we could change our matching algorithm to offset 99.9% of the risk and change status. Or 99.99%, perhaps. What's the threshold of risk that works for you? Am I a 'bigger bookie' if take more risk than someone else? And would it be sensible for any government to base any system of regulation (in any field) on requiring operators to run riskier businesses in order to secure more favourable treatment?

Risk-taking is not a pre-requisite of bookmaking, and neither is it the domain of bookmakers. Punters take risk, by definition; and it's the bookmaker who is in a position to reduce his risk by balancing supply and demand (that is, his book). We happen to balance ours perfectly (on our singles bets, at least; on our multiples, we take risk). We do that by only accepting a bet if we can offset it, matching supply and demand around the world. We do it perfectly, and quickly, because we built technology to help us. That doesn't mean we're doing anything different from a bookie who calculates his risk in his head, any more than a supermarket is doing something different from a small shopkeeper by having an electronic check-out instead of using a pencil and paper.

I accept that this has been questioned again and again: some have commercial interests in making sure it is; others presumably can't understand the mechanics of our business and therefore mistakenly think that regulation should be predicated on the way the business is marketed. But the argument that we can be distinguished from any other fixed odds bookmaker just by virtue of our risk appetite and our means of risk management has actually gone to court in the past to be properly debated an analysed - in the Constitutional Court of Australia.

The result was that seven judges agreed that we are, if you look at the mechanics of our business, just like any other bookmaker; and none came to the opposite conclusion.

A 7-nil whitewash is fairly comprehensive...