Dog bites man

I see there's a headline on page 14 of the Racing Post today which reads, "Hills in call for government to tackle Betfair over levy".

In it, Ralph Topping (for it is he) states that William Hill pays more than three times as much levy as Betfair (that'll be because you make three times as much money on racing, Ralph), and that Betfair receives 'extremely favourable tax treatment'.

I would write more, but I'm afraid I'm falling asleep (as I am sure are you).

Just before I nod off, I've got one thought, though. Why don't the Racing Post just leave page 14 untouched for the next year? It will save them having to re-format each time, and I'm not sure anyone will notice.

Can anyone tell me any other story that hasn't changed in eight years that is still reported by the newspapers?

Grand National

I landed in Sydney this morning, where I am attending the Asian Racing Conference, to the largest flurry of e-mails I have had for some time. Most of them revolved around the Grand National.

In any circumstances other than that I would have been roughly over Darwin at the time the race went off, I'd have been very sorry to miss it. The Grand National holds a huge number of special memories for me.

One of the first things I remember in my life was watching Red Rum win his third National, at my grandparents' small terraced house in Kensal Rise. It made an agreeable change to the usual Saturday afternoon fare, which involved my grandfather watching the wrestling on World of Sport.

Four years later, I persuaded the nanny, with both my parents away, to let me raid the house-keeping jar for a couple of quid, which she then obligingly put on Aldaniti for me at Datchet's tiny Turf Accountant - her first-ever visit to such an establishment. I put the stake back in the jar later, and the winnings kept me in Cola Bottles for some time to come.

In 1992, my first year as part of Cambridge University Boat Club's squad, the Grand National and the Boat Race took place on the same day (April 4th). I delayed our crew's departure from our base at the Bank of England Sports Club in Roehampton because of my insistence that I wanted to see the titles of Grandstand, complete with the music from Champions. Now, just a bar of the theme tune is enough to transport me back to that emotional day, which saw Cambridge beaten in a spookily identical fashion to that by which they triumphantly won last week. (Goldie won by three and a half lengths, and I almost took the bows off Isis in my eagerness to get their water along Crabtree Reach, more or less opposite where Betfair's offices are today.)

The memories of this year's race will sadly be limited to the various pieces of commentary that appeared in my inbox, although they give what seems a complete picture. From comments about McCoy's emotional interview, through reports about Ladbrokes' site going down (sorry - couldn't resist!), to a gleeful missive from my parents telling me that they had backed the winner; it was all there.

The bulk of the mails I got, though, involved discussion about what the result means for racing, given two things: first, that it couldn't really have been a worse result for the bookmakers; and second, whether it is right or wrong that the over-round should have got progressively worse as the race approached, to finish at 155%.

To deal with each in turn...

One of my colleagues who is most knowledgeable on the subject suggested to me that, "I'm not sure that any of the other thousands of 'first four' permutations could have been worse for them". Brace yourself for plenty of 'it cost us millions' stories in the press tomorrow, but the reality is that those millions will be back. But I won't be bracing myself for anyone (in racing) recognising the sense (for racing) in managing risk perfectly like we do at Betfair, which delivers levy returns whatever the result.

As regards the SP, it's worth having a look at what SP has been at the National over the last 10 years. Courtesy of the same colleague, here are the numbers:

2000 - 138%

2001 - 142%

2002 - 143%

2003 - 143%

2004 - 133%

2005 - 139%

2006 - 147%

2007 - 152%

2008 - 146%

2009 - 146%

2010 - 155%

To put that into perspective, the winner returned 10/1 at SP today; and 18/1 at Betfair SP.

Now, there's an argument that says that Grand National Day is the one day that the bookies should have an over-round that represents daylight robbery to any value-seeking punter. The vast majority of their customers today are not just not value-seekers, but are not betting with any knowledge whatsoever of whether a horse should be 10/1 or 33/1. Equally, many of them are not likely to come back again until the Grand National is run next year. On that basis, you could argue that it makes sense to charge as much money as possible, safe in the knowledge that they're going to buy the product just this once.

The counter, though, was put succinctly in an e-mail by one of Betfair's very early customers, who suggested that maybe an idea for Racing for Change would be to look at how the biggest betting day in the calendar could become an opportunity to welcome new people into the sport, rather than "treating them as people who have strayed into the wrong part of town and deserve to be mugged".

I think it's a powerful argument.

There's no question - and this year proves it - that there is a trend for false gambles which ignores the broader market as captured by Betfair. Horses are shortened in price late in the day, and nothing is lengthened to compensate. The pricing experience is one which I don't think any other industry would get away with.

Does it matter? I think it does. You might argue that adding 55% to fair value would have gone some way to mitigate the disastrous result; but it seems more likely that someone who picked up £180 for a tenner will return and have another go, than someone who picked up £100.

Certainly, any customer who learns that he'd have got twice the price half an hour earlier, or in the morning, or on Betfair, or even on the Tote (which was paying £15) will feel short-changed, and a 'good customer experience' will become a mediocre one at best. So, given that we know that more regular punters tend to return to the bookies what they win, I would have thought that giving new customers a fair go in the hope (or expectation based on experience) that they can then be retained for lifetime value would be a more sensible business model.

But I suspect I'm in a minority confined to Betfair.

Vive la France?

So, French legislation has gone through. I must admit that a few months back, I thought there was every chance they wouldn't get it done by the World Cup; but they've defied my predictions on that one, and got a law in place.

Whether it's a law that is going to achieve anything useful remains to be seen, but I guess that depends on what their actual objective was.

I remember having lunch in Paris some time ago with a director of the PMU. After we had discussed Betfair and the marketplace for three hours and he had thanked me for my lengthy explanations but reiterated that they would make no difference to his position, I asked the following question: would he rather have a big black market sitting offshore, making no contribution in tax and providing no information about bets, but by its very nature not immediately visible to people (which would mean that the French government and the PMU could pretend it didn't exist); or would he prefer to have Betfair licensed in France, contributing tax and information, but by its nature able to make a big thing about the fact that it was there and therefore revolutionising life for punters by making the market competitive? He agreed without hesitation that he would always opt for the former, not just in France, but worldwide.

It would be difficult for a government to make the same admission publicly as my companion made privately over lunch, but I don't think the French government's position is any different. While making all the right noises about opening up the market, it has actually created an environment where there will be very little proper competition. Many will argue that in pretending to do one thing and actually doing another, they have played a blinder: all the talk is of liberalisation of the market, when in reality they have stifled competition to the extent possible by putting in place a tax rate which is so prohibitive that no-one other than the incumbents will be making money there for some time, if at all.

This would be all very well if the objective was genuinely to institutionalise protectionism, as many suspect it was. But it seems a lost opportunity if the goal was actually what I think the objectives of all governments should be (and the stated ones are): to make sure that consumers under their wing are properly protected from the potential problems caused by any given product; and then, having regulated effectively, to take a tax revenue from the activity, providing that in doing so they don't jeopardise the primary aim.

For our part, we'll look at the detail of the legislation now that it has passed, and make a decision what we do.

Our opponents in France seem to think that the legislation as passed precludes as from getting a licence in any case. Their opinion that Betfair is 'banned' is predicated on specific wording in the law which says that the odds must be provided from 'its own' (i.e. an operator's own) assessment of the probability of an event happening, rather than from 'an' assessment. The amendment of a single word (replacing 'un' with 'son'), courtesy of the PMU-supporting Jacques Myard, was designed to keep Betfair out - an approach which I described as 'clearly discriminatory' at the time.

But discriminatory as the aim might have been, the reality, in my view, is that anyone who thinks that the changing of a single word bans exchanges, or indeed allows bookmakers, fundamentally misunderstands what we do as a business, and more generally how odds are made in today's world - when the public at large understands it perfectly.

Consider the comment by a Mr. Terry May at the bottom of a piece in The Times today (which follows this delightful final line of the article: 'Those who believe that Jack Straw could become interim leader could take 25-1 with Ladbrokes and 50-1 on Betfair'). It reads: "What's the point of getting quotes from bookies like William Hill or Ladbrokes? They don't employ odds compilers to price up political markets for a few weeks every four years - they just copy the prices on Betfair and knock a chunk off so they make a profit."

I'd go even further than that: you only need to take a short walk around bookmakers' trading rooms, or wander around the betting ring on-course, to see just how many odds compilers have Betfair screens up all the time. And why shouldn't they? It's the biggest market out there: an open book to public supply and demand.

But, just as them using the Betfair market as a guide should not suddenly mean that they are not making a price, neither should Betfair acting completely transparently about its own supply and demand, and balancing its risk perfectly, suddenly mean that the price up on the screen is not 'Betfair's price'. Of course it is. The line from The Times quoted above doesn't say, "you can get 25-1 with Ladbrokes but 50-1 from a fluid combination of Fred Bloggs, Joe Brown, and Ethel round the corner," does it?

By definition, what appears on Betfair's screen is the unmatched demand, transparently available for all to see so that every punter can know what is considered to be 'fair market price'. It's punters saying "I'd like 3 back for every 1 I put down if I am right in my view of the outcome". Betfair can match that bet itself, as it simultaneously matches one for someone who has said the exact opposite; or it can put the two bets together. Which it does is entirely academic.

If anyone wants us to demonstrate that it's our price, driven (like everyone else's) by supply and demand which we are seeing, then of course we can change our terms and conditions to make it clear that we stand as counterparty to every bet. Betdaq do that already, so it's not like it will make any difference optically.

Alternatively, of course, we could be less transparent about what supply and demand we are seeing; or we could increase the risk we are prepared to take, rather than matching the exposure on each bet perfectly. But it would be a strange government which would force that onto an operator in any industry, particularly in light of what has happened in the world in the last couple of years.

So, our view is that the legislation caters for us just as it caters for every other bookmaker, and we don't see how it somehow allows for bookmakers who take risk but bans those who manage their risk perfectly. The French government may be of a different view, but then, so was the government of Western Australia, and they didn't get much support in court.

Whether it is worth applying for a licence which requires us to pay such prohibitive rates of tax is another issue altogether. It will be impossible to make any money, and possible only to brand-build ahead of the day when the French realise that they are haemorrhaging money offshore. Weighing up the pluses and minuses of that is what we will consider in the coming weeks.

Tolstoy

I was thinking about the margin issue, on the back of past discussions and more recent comments relating to my post about bet365.

I wonder if it helps to think about it in these terms.

Every time I walk past our local pub on my way between the office and the tube, there's a blackboard outside it which has something relevant to next up-coming 'day of celebration'. For Mother's Day, for example, it was 'free pudding and a glass of champagne for every Mum this Sunday'. For St. Patrick's Day, it was 'bring in your Irish passport and have a Guinness on us'.

Now, what's that if it isn't the pub cutting its margin by means of a special offer? And why doesn't anyone bat an eyelid about it, except because it's blindingly obvious that the reason it does it is to increase the footfall on a given day? In other words, just because it gives something away more cheaply (free, even), it doesn't mean that it makes less money. On the contrary, the chances are that it makes more. If there were a levy on the pub based on its gross profits, the body receiving that levy would be better off. People who wouldn't have gone in at all will be attracted to the idea of an afternoon in the pub; people who would have gone in anyway will probably end up buying a complete round, or a bottle of bubbly for everyone.

Yet this type of activity is what the people complain about when they say that a fall in margin is automatically bad for racing.

Equally, imagine how laughable it would be if all the other pubs in the area went bleating to DCMS about how this mean little pub cutting its margin to attract more customers was unfair on them? What kind of short shrift would they get if they said that for years they'd run their pubs without having to compete with this kind of innovation; so why should they have to put up with it now?

This, meanwhile, is the type of argument regularly advanced by those large bookmakers who continue to push the idea that a drop in their margin is a reason for their slowing growth, and should result in their competitors being sanctioned in some way.

Put in those terms, is it so difficult to understand? Am I missing something?

Maybe I'm missing one thing, explained by a great quote someone sent me today, from Tolstoy.

It reads, "The most difficult subjects can be explained to most slow-witted man if he hasn't formed any idea of them already; but the simplest can't be made clear to most intelligent man if he's firmly persuaded that he knows already."

Quite.

Bet365

News that Bet365 toppled Betfair on Oddschecker over Cheltenham is likely to raise eyebrows in various places for various reasons.

Not least of the points that should be taken out from it, though, is that it ought to put to rest forever the absurd and oft-repeated notion that Betfair is the cause of falling margin in racing.

Not that falling margin is a bad thing, of course, as I have often suggested. With betting so often demonstrated by economists to be an elastic product, a fall in margin leads to a commensurate increase in turnover; and in a world where racing is paid on the basis of gross profit (the product of the two), that means the two things balance each other out (that is, 10% of 100 is the same as 5% of 200).

But the reason for falling margin, as I have said ad nauseam over the last few years, is not just Betfair, but competition. And while I am delighted to accept that Betfair is an extremely competitive operator, it isn't the only one.

The internet has made lots of operators more competitive, which would be seen as a good thing in any other industry but for some reason is a cause for a great deal of bleating in ours. I wonder whether the next time we hear a racing industry rep or a William Hill executive complaining about the pressure on their margins, we also hear them say, "it's all because of those beastly people at bet365".

I won't be holding my breath.

Painted horses

I jumped the gun on best April Fool of the year.

Credit to the guys at TVG, who I visited on Monday, for this effort.

Brilliant.

Demoted

I'm quite embarrassed that the news got out first on a different site, but if Midas Oracle has it, it will shortly be all over the web.

I've got a new boss.

http://www.midasoracle.org/2010/04/01/betfair-april-fool-2010/