You've got to laugh

I've just spent two days at a Betfair senior management offsite, which included - among lengthy strategy chat and discussions about how we can keep improving employee engagement - a brief discussion on how long it might take for mobile to pass the internet as a channel.

There was some irony, therefore, to learn (as I caught up on the last day's news) that Racing New South Wales, while deciding to allow punters to place bets via the internet while at the racecourse, has decided to introduce the following complex rules in the process: prospective online punters must first apply for authorisation from Racing NSW to carry a laptop computer on-course, which will be subject to an annual monitoring fee; and that laptop must then be dedicated for that purpose, and cannot be used for anything else, anywhere else.

Come again?

ABB AGM

I did something today which you'd have got very long odds against a few years ago - or even a few weeks ago. Indeed, readers of this blog will be wondering how William Hill didn't veto it. I spoke at the Association of British Bookmakers' AGM, at the invitation of Chief Executive Patrick Nixon, who asked me to go and give them my perspective on the Rick Parry integrity panel and the resultant deal with the PFF.

The ABB chairman, Warwick Bartlett, said he couldn't quite believe he was introducing me; I half-expected at least one person present to have a seizure as I walked to the podium; the Racing Post's Jim Cremin said in the questions afterwards that he was still pinching himself even after hearing my speech; and as I sat down, my blackberry pinged me a message from someone in the audience which read, "Ha ha well done.........still, industry chumbbawobba aside it was a bit like inviting Bernard Matthews to speak at a Turkey convention!"

I remember the first contact I ever had with the ABB. I was sitting in our office in Parson's Green (our third office, that was - after Putney's attic and the town house on Russell Square which we on launch day and for about six months afterwards, by which time we had outgrown it), and we were discussing how we might get more people involved on our fledgling site.

I was, at the time, doing business development for the company (I hesitate to say 'running it' not because I was useless (honest, guv) but because there weren't enough of us to be able to say we were running anything...). But our discussions led us to moot the idea, in our naivety, that perhaps we should get involved with the ABB.

Having done the minimal amount of research, I picked up the phone, first, to the aforementioned Warwick Bartlett; but he wasn't in. So, the next phone number I found was that of Chief Executive Tom Kelly. His slightly gruff Scottish tones came down the other end of the line.

"Er, hello... Tom Kelly? My name's Mark Davies... I'm calling from a company called Betfair."

"Yes. And what do you want?"

"Well I was wondering if we might get together to discuss an idea we have about your members getting involved with what we're doing."

"No, we might not."

"Oh... Oh...." (slightly covered in confusion at this point... 29 years old, and feeling about 16) "Er... any particular reason why?"

"Well, yes... Because I think you're an illegal business and I think what you're doing is wrong and must be stopped. You're driving a cart and horses through legislation and I don't agree with it. Do you need me to think of any other reasons?"

In fact, we did subsequently sit down for a meeting - Edward Wray, Tom Kelly, the ABB's Barry Faulkner, and I - because in the end, they agreed at least to hear what we had to say.

It didn't go anywhere, which is hardly surprising in the circumstances... And Tom has continued for almost a decade to use the exact terminology he gave me in almost the first sentence I ever heard him utter. But much as I disagree with his view, I have to admit that I rather admire him for the fact that he has been 100% consistent not just in that but in what he thinks is the solution - a consistency which, I think makes him unique as far as our opponents are concerned (because all the others have shifted their argument at various times, based on what they think is most likely to resonate with decision-makers).

But it puts in perspective just how big a thing it was for the ABB to accept me as a speaker today (with Tom in the audience).

I hope the speech was well-received by at least some of those listening, and that it leads to us finding other areas of common ground.

Nasdaq

It's ten years since the Nasdaq peaked, as I mentioned in my post the other day. The Today programme on Radio 4 did a piece on it this morning, talking to an internet success story and a representative connected with internet hype.

For the former, Betfair fitted the bill; for the latter, Boo.com.

Edward Wray, Betfair's co-founder and now non-executive chairman, and a chap whose name I didn't catch, replicated the success and failure stories verbally (i.e. Ed was well worth listening to; IMO the other chap was not).

If you missed it, it's 22 minutes in on iPlayer.

In all its glory...

I still can't upload William Hill's Betting on Britain document (which I commented on the other day) onto the blog itself, but as I've had requests from a number of people to try to do so, I have found a way to put it online at least.

You can access it through this link.

http://www.mediafire.com/?tmyzgdimyw2

The betting exchange section is section 3.

Section 3

I'm afraid I can't (as requested yesterday) link to or reproduce Section 3 of William Hill's 'Betting on Britain' document.

But I can lay out here a brief version of our response (for those who are interested and haven't already read the longer version which I've mentioned before) to their specific claims, which I can list one by one.

I apologise for those who think it is phenomenally tedious and wanted a new story about Betfair's early days... I will have to come back to those another time. At least laying out a point-by-point rebuttal of the William Hill document serves to underline how genuinely amazing it is that that document was allowed to be published with its 10-year-old arguments. Not just that, but published apparently in the belief that it will have any credibility at all with anyone who bothers to take the time to try to understand the counter view. Extraordinary.

1. Claim: Betfair ‘layers’ are acting as ‘unlicensed and unregulated’ bookmakers

Betfair position: It is impossible for any customer of Betfair, using Betfair alone, to act in a commercial manner which would require them to be licensed as a bookmaker. It is impossible for a Betfair customer to tout for business or to deal directly with any other punter or the public in general. The Betfair customer is not responsible for paying out to the winning customer and is not able to hold the stake of those they are betting against. If a customer is unhappy, the responsibility for dealing with that is Betfair’s and Betfair’s alone: there is no recourse to the customer matching his or her bet. No customer can access another customer’s data and it is impossible for any customer to know who their bets are being matched against.

Betfair, in contrast, undertakes all of these activities and responsibilities, which is the reason that we hold a bookmaking licence. Betfair is simply a fixed-odds bookmaker that manages its risk perfectly by using cutting-edge technology to immediately offset the risk it takes – otherwise known as ‘matching’ bets.

Much of the debate is centred on the ability of Betfair customers to ‘lay’ a result, i.e. bet against an outcome. This is nothing new and has always been possible if you can work out the maths. For example, if Chelsea is playing Manchester United, by the simple action of backing Chelsea with a traditional bookmaker, you are automatically ‘laying’ Manchester United and the draw; while in any two outcome event (such as any tennis match, snooker match, boxing bout, or cup tie in any sport), backing one outcome is simply laying the other. Betfair simply allows our customers the transparency and ability to choose. It does not make them bookmakers any more than it would the punter that decides to ‘lay’ one outcome by backing the outcomes which give the same result.

It suits William Hill’s position to label the punter as a ‘backer’ and the bookmaker, ‘the layer’, as if that makes him the same as a layer on Betfair. Although the same word is used, a layer on Betfair is simply a customer who bets on an outcome not to happen. A bookmaker might lay a bet in the same sense (and back the negative outcome); but it is only because convention (rather than statute) has meant that only the bookmaker has been able to do that until recent years, that all the other things that actually make him a bookmaker have become associated, colloquially, with the word 'layer'. In other words, all bookmakers are layers, but not all layers are bookmakers; just as - like they used to tell me at school - the fact that all policemen wear blue, doesn't automatically mean that everyone who wears blue is a policeman.

To underline that case: a punter betting with William Hill that England will not win the World Cup is not suddenly classified the bookmaker to William Hill’s punter, just because he’s betting on something not to occur. But it is abundantly clear that what he is doing is the same as a layer on Betfair who lays England for the World Cup (something I shall be doing, as it happens).

2. Claim: There is a ‘significant tax, integrity and regulatory risk’ associated with exchanges

Betfair position: Betfair customers acting on Betfair alone do not require licensing as bookmakers for tax purposes, because as is illustrated above, they are punters betting for or against outcomes. Equally, as customers undertake no activity for which a licence is required, they do not pose any regulatory threat.

In terms of integrity, Betfair pioneered a new relationship between betting and sport with its Memoranda of Understanding information-sharing agreements. These agreements allow Betfair to share with sporting regulators instances of irregular or suspicious betting patterns in real time, and also to provide them with an audit trail of identifiable customer transactions that the sporting regulator can use to pursue disciplinary action. Betfair signed the first ever MoU with the Jockey Club in 2003.

Far from posing a threat to integrity, Betfair has done more than any other betting operators to provide part of the solution. Although I have noticed some in racing starting to raise the integrity question again suddenly so that they might have an excuse to ask Betfair for more money, I think it would be laughed out of court for anyone seriously to suggest in 2010 that Betfair is a threat to integrity. There are too many clear examples of betting corruption which existed before Betfair came along, and too many knowledgeable and independent people are on record putting the opposite case for the charge to have any real credibility.

3. Claim: Tax yield from exchanges does not represent the ‘volume of betting transactions flowing through the exchange’

Betfair position: Yawn here if you're a regular reader of this blog, but just for the record, since it has been raised again...

The amount of money or volume of bets ‘turned over’ on any Betfair market bears little and sometimes no relation to either the amount the customers have risked or the commission Betfair charges. The fact is that a customer with £100 in their Betfair account can "turn over" literally any sum of money on a single horserace just by backing and laying any number of times, but it's only the net position at the time when the market is settled that makes any difference to the customer, or to Betfair. The same £100, by comparison, can only generate £100 in turnover with a bookmaker on-course or in a shop. As such, to suggest that someone placing 100 bets with the same £100 on Betfair is equivalent to the same 100 bets being equal to £10,000 worth of transactions going through a traditional bookmaker is not only highly misleading, but bordering on the absurd.

Of all the arguments, this one must surely be the simplest. If anyone can give me a reason I am missing as to why some people find it so hard to understand it, I'd be delighted to know!

4. Claim: The gross profits tax yield from traditional fixed-odds bookmakers is higher than it is on Betfair

Betfair position: This argument (the oldest of the many old chestnuts which Section 3 seeks to breathe new life into) is made by a laughable table which I am sorry not to be able to reproduce.

It basically says that £1000 lost to William Hill generates £150 in tax and £100 in levy, whereas £1000 lost on Betfair is won by someone else, which means we get an average of 3%, or £30 of it, so £3 is paid in levy and £4.50 in tax. It's misleading to say the least, and like all the arguments in William Hill's document, is addressed at length in our document relating to the levy.

To put the argument down here in slightly different terms, though, the table is missing a column which outlines what happens if the punter wins the single bet in William Hill's single bet world. Quite clearly in this scenario no tax at all is paid, as the bookmaker has not made a profit. Indeed, the customer profit, and bookmaker loss, can then be offset against future bookmaker profit; so a bookmaker can pay no tax on the second, winning (for him) bet, either.

As such, the £250 William Hill suggests it pays on each £1000 transaction is predicated on what William Hill erroneously terms ‘the ‘layer’ (see above!) always winning, rather than it paying on the differential between what it pays in winnings and what it takes in, in losses. Betfair pays its £7.50 out every time regardless of who wins or loses, because it charges the winning party a percentage of its winnings. In other words, it, too, pays out less to the winners than it takes in from the losers.

The figures are also predicated on the bookmaker making a profit on a race, which is a function of his risk-management and of results being favourable. If the bookmaker is unprofitable over the entire book (i.e. it pays out more than it wins) again, no tax is paid as the tax is not collected on a per transaction basis. Betfair has no such issue, because it has taken the business decision not to take risk because it has the technological capacity to do so while still delivering instant pricing to its customers. To compare a single, successful, bookmaker bet with a single exchange bet is therefore entirely misleading.

Sorry, guys. Nice try, though. Except we've heard it lots of times and we saw through it the first time. Still, you had my seven-year-old daughter believing it for a few minutes.

5. Claim: ‘the current exchange model receives an unfair tax treatment that makes it impossible to compete’

Betfair Position: Betfair entered the market in 2000, meaning our exchange has been competing with traditional bookmakers such as William Hill for ten years. Previous to the recession in 2009, William Hill displayed consistent growth in its revenue on both on- and offline sports betting products, despite having to compete with us.

For eight years, then, it has been entirely possible for William Hill to compete with us. We haven’t changed; so we fail to see why we are suddenly responsible for any slowing in growth in their business.

We have noticed, though, that the slow-down does coincide with them deciding to have a fresh pop at us. Oh well.

'Some strange eruption'? Or should that be 'the wheel is come full circle'?

The betting exchange section of William Hill's new policy paper, ‘Betting on Britain’, (reported in Friday's Racing Post, and now doing the rounds of an MP's office near you) is Shakespearean in its range: comedy, history, tragedy, and not a little irony. It's all there.

The history part is obvious, and tied in with it is the document's tragedy. It is not the first time William Hill (or another big bookmaker) has launched an attack on our business based on the absurd claim that Betfair customers are ‘acting as bookmakers’ and either we, or they, should be singled out for differential tax treatment accordingly; and it probably won't be the last. From my perspective, it's refreshing that there is nothing in their attacks which is new, and nothing that is not easy to knock down with the smallest level of scrutiny. But as readers of this blog will know, I think it means William Hill are living in the past, and it's about time we got onto a sensible topic. Like previous efforts, the document is an attempt to stifle competition in a modern market. And like the previous attempts, it'll be rejected by anyone with a brain.

The irony? Well, it's a paper which argues for a change in tax treatment on the grounds that tax is somehow being avoided. William Hill pay no tax on their online business since moving it offshore last year. Need more be said?

As for the comedy: there's almost too much of it to mention, such as the table - labelled 'a simplified version' (see irony, above) - in which they genuinely try to argue that they pay tax based on one customer losing £1000 to them (without any suggestion that at the same time, another customer will win £850 and it's the difference between one and the other that constitutes the profit, not the £1000 on its own (although even that is a simplified version); for tedious amounts of more of which, click here or here, or, in even more detail, here).

But the best line in a whole gamut of them has to be the one that says that taxing exchanges at a higher rate of gross profits tax on their commission is an "appropriate alternative" if identifying individual exchange users for tax purposes proves "too difficult".

This basically translates as "we think, without any evidence, that there are bookmakers who are evading tax that are using exchanges, but it is far too hard to say exactly which of Betfair’s punters are doing so [presumably this will be because it's not true, a bit like trying to prove the existence of ghosts], so the best course is to subject exchanges to a discriminatory tax regime just in case."

Why they don't just write, "the sole objective of this paper is to try to argue that you should tax or regulate (or both) those horribly competitive betting exchanges to such an extent that they are unable any more to offer their product and offer stiff competition to William Hill and other traditional bookmakers (which we still aren't really used to and don't like much), even though we can't actually articulate any justification for doing so, or provide any evidence that it is necessary."

Surely it would have been rather more transparent and honest if they had? Or is that a third piece of irony lost on no-one but themselves?

Ten years on...

It was exactly ten years ago yesterday that I quit my last job, at JPMorgan. People often ask me how I first got involved in Betfair, and I can remember the first time I heard anything about it as if it were yesterday, so it seems like a suitable moment to tell the story!

I was sitting at my desk on the trading floor at JPMorgan - a corner desk in the middle of a room about the size of a football pitch - where I had spent most of the last four-and-a-half years surrounded by screens. Down the aisle between two rows of desks stormed one of the Managing Directors in Fixed Income - the man who ran the Syndicate Desk, Paul Hearn.

Paul was someone I had come to watch very carefully, in that way that you study an object of curiosity: he was the sort of person on whose every word you hung, but purely on the basis that it might well be his last. These days he is more relaxed, judging from our chance meeting at a dinner a fortnight back; but at the time, I expected him to have a coronary every time he opened his mouth. And as I sat there minding my own business, I suddenly became aware of him stomping towards his own desk - diagonally across the corner divide from mine - even more buff and bluster than normal.

"ED WRAY'S LEAVING THE COMPANY!" he bellowed to no-one in particular, his arms waving around demonicly. "He's going to set up some sort of BETTING company! Reckons he's got a different way to do it - but haven't these people always got a different way to DO IT!" My ears were caught between wanting cover, and pricking up.

I knew who he was talking about. Edward Wray worked in Capital Markets, bringing new bond issues for various sovereign states. Our interaction was mainly limited to him coming to ask me where comparable bonds traded in the secondary market, to give him an idea where he might price new issues. But we shared a great love for sport, and it was through this shared passion that he had come to rumble me six months earlier (before he headed off on the sabbatical which was spent testing Betfair's business viability) as I sought an exit from the City by moonlighting with the media in the hope of being offered a permanent role.

I'd got myself freelance work writing cricket reports for the Daily Telegraph and reading the sports news for BBC Radio Five Live. Ed had heard me doing late-night and overnight shifts on the radio, and, as one of the very few on the trading floor who read a a white paper rather than a pink one, had, the previous summer, sidled up to my desk with his Telegraph open.

"So, Mark," he said with a wry smile. "There's a report in today's paper on yesterday's county game between Surrey and Somerset, written by Mark Davies, the day after you were off sick. Is this coincidence, given that last week, the day after you took a day's leave, there was another report by Mark Davies, on the match between Nottinghamshire and Middlesex?" I'd had to admit it was a fair cop.

It became increasingly clear over the months that passed that it would be unsustainable for me to pursue my media ambitions while working in the City - a fact brought home to me, as I walked up towards Fleet Street from our office on Victoria Embankment after the markets closed for New year 2000, to have my senior salesman put his arm round my shoulder and wish me a change of luck with the new Millenium. "I've never known someone have as rough as trot as you've had in '99, Mark," he told me. "Three members of your family, and two friends die; and so much illness? Things can only get better for you, mate."

So it was music to my ears, soon after Paul Hearn had announced to anyone within half a mile that Ed was off to set up a business, when Ed suggested to me that his new venture might be my answer. It was, after all, a fledgling business; who knew if it would go anywhere; and, he told me, if I made any significant progress in pursuit of my dream of presenting for BBC Sport, we could always come to some arrangement where I could take unpaid leave if I was offered too many days to be able to have as holiday. He wanted someone who understood business, he said, which he presumed I did as I was trading corporate bonds; and - in case his business took off - he needed someone who knew the media. That, he was right in saying, was where I was spending increasing amounts of my time; and it was, in any case, the industry I had grown up with. Would I, he asked, be interested in having a conversation?

I didn't need any persuasion: I agreed to go and see the product, and talk about the idea. And so, a short time later, I went one evening to a small attic room in Putney, without any desks, and with one computer perched on one of the many boxes which constituted the only furniture, to meet Ed and his business partner, Andrew Black. How Andrew (or Bert, as he is known) had come out with the idea and given half of it to Ed has been well documented. Also there that evening was Sean Paterson, who at the time was offering his services on a consultancy basis as Ed and Bert, but who later became the company's first CFO.

Bert gave me a quick demo of the product, as it existed then. As I remember it, it was nothing more than an Excel spreadsheet at the time, although my knowledge of software packages is not deep. Whatever, it certainly didn't have any bells and whistles.

But it didn't need any. I remember exactly what my reaction was: it was, I thought, so simple, and so well-executed; I couldn't believe I hadn't thought of it myself. And the thought flashed through my mind that if one in a hundred people reacted to it as I had just reacted to it, the concept was going to fly.

Exactly what the timescale was between that moment and me resigning from Morgan, I am not certain. It feels in my head like I quit the following morning, but there must have been things to work out. Whatever, I handed in my notice on 2nd March 2000, at the time much to the envy of many of my colleagues, who told me that they wished they had the balls to do the same. That sentiment changed within a matter of weeks, though: the NASDAQ peaked on 10th March, and shortly after, lastminute.com's share price collapsed, heralding the bursting of the dot.com bubble.

It was a hairy time. Not that I got any sympathy from any of my City colleagues, who thought it was the most hilarious thing that I had quit to join a start-up, leaving a very lucrative job, with such impeccable timing. I had a rush of e-mails from "friends" (!) with mocked-up P45s, and repeated comments that they would buy the Big Issue off me providing I sold it on Blackfriars' Bridge, just outside the office. To make matters worse, I must be the only trader in history to have been asked to work his notice: normally, they march you out of the door there and then. Either they thought I wouldn't do any damage, or I couldn't do any more than I regularly did already. Or maybe it was genuinely the case that they had no-one else spare to make a price.

Looking back, the success of Betfair makes it easy to forget just how un-obvious it was to an awful lot of sensible people that it would work; and just how big a risk it was at the time. At our launch party at the Sports Cafe, to which I invited all my former brokers and many a big City punter, we were repeatedly told it would never beat spread betting, which they all knew and loved. Meanwhile, six companies launched in a six-week period with the same idea: disintermediate the risk between your customers rather than taking it on yourself, and you can deliver far better pricing. Five of the six (one of which was Coral's offering, Play2Match - conveniently forgotten by the bookies today!) no longer exist; and Bert's model, with its order-driven trading and best execution, came through. Every attempt to enter the market today skins itself remarkably similarly to Betfair, as 'the only way to do it' - as if it's obvious. It wasn't so obvious at the time!