Exchanging fortunes: does Betfair have a retail future in Australia?

On March 30, 2012, when the Australian High Court delivered a decisive victory to Racing New South Wales in the landmark race fields case, Betfair Australia’s executives headed immediately to the nearest pub, convinced the business model for betting exchanges had been extinguished and it was time to hold a wake.

Nearly 11 years later, despite countless regulatory and taxation hurdles put in its way, Betfair Australia is still kicking and playing a key role in the Australian wagering ecosystem.

The original industry disruptor, which came to Australia in 2005, setting up a small operation based out of Tasmania, has had to evolve with the changing times and withstand the broadly negative sentiment of racing administrators, but the exchange still functions as a market maker, trading platform and liquidity provider.

It’s under a somewhat odd ownership arrangement that Betfair’s Australian business continues. Crown Resorts has held full ownership since 2014, with a licensing, customer and platform sharing agreement in place with the global Betfair business, owned by Flutter.

The global exchange had made a splash at the turn of the century, famously parading a bookmaker in a coffin through London as part of a marketing stunt, but 12 years later it was the exchange itself which was being administered last rites, in Australia at least.

When the High Court had upheld Racing New South Wales’ right to charge a fee, based on turnover, to corporate bookmakers and exchanges for the use of its race fields, it struck right at the heart of the betting exchange’s high-turnover, low-margin model.

The nature of the exchange platform, with back and lay options, was characterised during Betfair’s early days as detrimental to the integrity of sport and racing. The fact the platform provided for the first time, a retail option for customers to back something to lose, was perceived as an incentive to corruption.

A concerted campaign highlighted these threats and when Peter V’landys and Racing NSW scored that decisive High Court victory, it was largely cheered by those in the thoroughbred industry as a win for the sport.

It certainly proved that financially. The decision, which also impacted corporate bookmakers, immediately released a flood of over $100 million into the New South Wales thoroughbred industry and set the scene for the rivers of corporate wagering revenue which have flowed into the industry in the decade since.

V’landys, one of Betfair’s most ardent opponents, was able to use the political capital he gained from that moment to establish a mandate for his own disruption of the broader Australian thoroughbred landscape.

It wasn’t Betfair’s first trip to the High Court. Four years earlier, it had won a hugely important case against the Western Australian government, which had attempted to make betting exchanges illegal. That landmark court decision is seen at the spawn point for the corporate wagering revolution in Australia.

Betfair was at the sharp end of the disruption and innovation in the Australian wagering landscape and there was a real prospect of betting exchanges becoming a legitimate challenge to the then dominant parimutuel model. When the Victorian government granted Tabcorp its 12-year wagering licence in 2012, it included a requirement that it set up a betting exchange, looking not only to meet rising customer demand, but offer competition to Betfair.

That requirement was quietly dropped in 2019, a measure perhaps that the exchange model wasn’t the disruptor that many had envisaged.  

With significant investment into the more profitable and scalable fixed odds corporate bookmaking sector from international powerhouses such as Paddy Power, Ladbrokes and Bet365, combined with that 2012 court decision, Betfair’s influence within the Australian wagering landscape has since waned.

Under Crown’s stewardship, you could say Betfair Australia found its level in the pecking order and has eked out its existence from there.

So where does it sit now, in 2023, in a consolidated, but still quite volatile wagering market?

In terms of thoroughbred racing, it’s noteworthy that Betfair, in pure turnover terms, eclipses the declining traditional tote. While like-for-like comparisons between parimutuel pools and exchanges can be problematic, an average Saturday sees Betfair hold about 100 per cent more on Melbourne races and 50 per cent more on Sydney than what the combined three totes do.

That hold is dwarfed by corporate wagering, but the exchange also lends liquidity, or tradability, to the corporate market.

Exchange advocates are often confounded why ‘the Fair’ hasn’t become a much larger-scale retail phenomenon in Australia. In terms of price, it holds a distinct advantage, given it takes only between a 5-10 per cent commission (compared between 15-25 per cent for other models), meaning markets are much more weighted to punters’ advantage.

Advocates also point out that there is also no incentive for an exchange to shut down a winning punter, as money is effectively exchanged between two sides of a bet, with Betfair taking a clip of the ticket on the way through.

Not too long ago, the champion Winx set Betfair Australia’s trading markets alight and showed the inherent value of the exchange model. In her final four runs, the pools on the races averaged over $4 million, more than a whole Saturday holds in 2023, as traders seized on the national interest to secure and sell positions on the champion. A $1.10 favourite may not do too much for fixed or parimutuel markets, but it does amazing things in an exchange.

What an exchange does need to be truly price competitive, however, is that famed liquidity, and in a competitive wagering environment, that is becoming increasingly difficult.

Raw year-on-year figures indicate that Betfair’s winning pools on Australian racing have dropped. A comparison between the same Flemington meetings on the first Saturday of March this year and in 2022 sees a 39 per cent reduction in Betfair win pools, while on the Randwick meeting on the same day, it was 23 per cent.

The wagering market is coming off the Covid-induced highs of the past couple of years, and the current numbers are only slightly less that what Betfair was holding in 2019, however, in an exchange context, any drop in pools has a spiralling impact.

What has been anecdotally noted by professional punters is that as liquidity has reduced, Betfair’s markets on Australian racing have become worthwhile to bet into only in the final minutes before the jump. Those pros don’t mind, but for the casual punters and the traders, those who buy and sell in the same market, it has become harder to match the right prices.

That means less trading and early betting, meaning in turn, less incentive for people to bet, which of course means less liquidity. It can become a vicious circle.

There is a valid argument that that is the bed the exchanges have made, and they should be made to lie in it, but that is assuming that their business models have regulatory parity, but Betfair insists that is not the case. 

Taxation and product fees are a considerable burden on exchanges because their low-margin model means that taxes and fees applied on turnover, rather than profitability, have a huge impact on the bottom line.

The cumulative effect of these charges led Betfair to raise their prices/commissions last year. It also imposed a ‘turnover charge’ on New South Wales racing, disincentivising trading on races in that jurisdiction. It justified this on the basis that if trading continued at current levels, it would be forced to pay turnover tax on a product that generates no revenue for the business.  

The market base rate, which reflects the fees each code/sport/jurisdiction charges Betfair, is at 10 per cent for NSW racing, NSW harness racing and the National Rugby League, higher than anywhere else. That is the major reason why the Betfair hold on the average Sydney metropolitan race is 30-40 per cent lower than Melbourne.

Put simply, Betfair pay more to offer markets in Sydney than Melbourne and trading in the Sydney market has been deliberately suppressed to minimise tax liability.  

As a comparison, the base rate for racing in other states’ racing sits between 5 and 7 per cent, while for all other sports except the NRL, it is 5 per cent.

Added to this is GST costs and Point Of Consumption Tax, making it a hard road for any exchange to sustain a viable business model.

The other challenge is broader competition. What Betfair has always craved is liquidity, but in a world where trading through stock market and crypto trading platforms has exploded into prominence, it is not just competing for share of market within the wagering sector.

However, the disruption caused by the crypto trading sector, despite its much-publicised troubles, does present betting exchanges, more broadly, with an opportunity to find new customers with a trading-savvy generation.

Indeed, combined with the regulated betting revolution currently sweeping the United States, a wave of innovation, with blockchain at its centre, could regenerate interest in the betting exchange model. The American market has traditionally been more cavalier in its approach to trading and is generally more driven by price, and that is one of the exchange’s greatest selling points.

The exchange model does need to be re-imagined if it is to live up to the expectations which caused such a stir at the turn of the century.

If that doesn’t happen, then the risk is it becomes yet another wholesale solution, spurned by a retail market which doesn’t acknowledge its value in the broader wagering landscape.

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