Scott Longley – Is the Betfair Exchange losing its edge?

This April, Paddy Power Betfair reported a lacklustre Q1 2018 trading update, in which the betting group detailed a decline in its Exchange revenues.

As the FTSE operator tackles further enlargement pressures, can the Betfair Exchange maintain product and market dominance against ambitious incumbents seeking to slice apart ‘the exchange cake’…

_________________

It seems a long time ago since Betfair first floated on the London Stock Exchange and the prospectus spoke about the betting exchange being a “unique, disruptive platform” that had a “transformational impact” on the sports-betting market.

Back in 2010, Betfair talked about the way that the exchange had “fundamentally changed” the world of sports betting. Come in the first-quarter trading statement from the enlarged Paddy Power Betfair, though, and you have to wait until the fourth paragraph of page two before any reference to the exchange is made.

To compound the impression of a product which has lost its luster, the statement goes on to say that revenue for the exchange was down 7 percent for the first three months of the year due largely to lower horseracing commissions.

Other than a brief explanation of the whys and wherefores of fixture cancellations and exchange revenue performance, that’s pretty much it. No further mention is made; not in relation to reviving the situation nor to any plans to potentially expand into the US with a product which could well thrive in any positive post-SCOTUS scenario.

This eclipsing of the betting exchange’s importance within the parent organisation comes at a time of increased exchange competition, according to the analysts at Morgan Stanley.

In a note issued ahead of the first-quarter results in late April, the MS team suggested the exchange was “the greatest point of diversification” for the Paddy Power Betfair online operation but also “an area where we see increased competitive risk.”

Noting moves made by Matchbook, Betdaq and Smarkets to cut commission levels while upping their collective marketing spend, the analysts warned: “While the superior liquidity on Betfair forms a defensive moat, we do see scope for this gap to close or for Paddy Power Betfair to be pressured to cut commission levels to retain syndicate-based winners on the platform.”

Eye off the ball

“I think more people are questioning their Betfair use now,” says Shane McLaughlin, managing director at Betdaq, the now GVC Holdings owned betting exchange based in Dublin.

To counter the liquidity question, McLaughlin says the launch of a 2 percent commission offer (well below Betfair’s standard 5 percent) means that perceptions have “changed somewhat.”

At Matchbook chief executive Mark Brosnan thinks that a “level of disillusionment” dating back to Betfair’s introduction of a premium charge in 2011 has contributed to punters looking elsewhere when it comes to their exchange preferences.

“I think, on the whole, there is a sense that Betfair has lost focus on the exchange side of their business,” he says. “From the time the sportsbook was launched right through the Paddy Power merger and subsequent platform integration, the exchange has become a smaller and smaller part of the overall business.”

Betfair for years hung its hat on a ‘winners welcome’ sign but for many that premise met its demise a long time back. “As soon as they had a client database they turned bookie,” says Ben Keith, founder and chief executive at Star Sports which also runs the Star Spreads business.

He suggests that by straying far from that original message, it will have given the likes of Betdaq “hope”. But he still issues words of caution about the liquidity advantage. “Liquidity breeds liquidity,” he says.

“It would be a mistake not to acknowledge the job that Betfair has done over the last 15 odd years, in educating customers as to the value of betting with an exchange,” says Brosnan.

“It is obviously one of the main drivers behind the overall growth of the betting-exchange market but its complacency has left the door open for others to build on that position and not just take market share, but help grow the overall betting exchange market itself.”

“We just think there should be room for more than one dominant player,” says McLaughlin, who points out that where Betdaq has seen growth in recent months has been with the higher-spending exchange customers.

The prize, though, would be making headway with the more mass-market customers. “Then we would really be driving success,” he says.

To misquote The Wire, many have come at Betfair and as Brosnan points out, many have missed the target, the ill-fated WBX.com for one. But timing is everything and given that the focus of Paddy Power Betfair is currently elsewhere, there are reasons for the contenders to believe this time might be different.

“There are two ways for us to think about market growth,” concludes McLaughlin. “First, it will be by developing more product, apps, presenting exchange betting as more generic. But we also want to see more growth from new regulated territories opening up.”