British online betting exchange upsets world of sports betting

LONDON (AP) - The traditional British betting shop sees itself as a social institution, a convivial place where people can wager a few pounds on a horse race or soccer game.  

But to entrepreneur Andrew Black, bookmakers are financial parasites that build a fat profit into all the odds they offer. 

Inspired by the way shares trade hands on the New York Stock Exchange, Black designed a way to bypass the bookmaker and match both sides of a bet via the Internet. 

By acting as a broker, his firm Betfair has rocked the hidebound world of sports betting. 

Black's idea was to take a commission on the winner's earnings, not to make money on odds.  

He developed the technology in his spare time while working as a software contractor for British intelligence. 

Three years since its launch in a London attic, Betfair has expanded its workforce from eight people to 290 and grabbed an 80 percent share of the market for online betting exchanges. 

Betfair now has 30,000 regular customers, each placing an average bet of 35 pounds (US$58), or three times the typical wager at a High Street betting shop.  

The company's success has spawned 21 competitors, and its closest rival has a market share of just 12 percent. 

"The strength of our model is the technology that drives it,'' said Betfair spokesman Mark Davies. 

"We're a technology company that focuses on betting as the transaction.'' 

The brainstorming behind Betfair drew on Black's passion for gambling and his experience designing software for financial markets.  

Impressed by the open outcry system for trading shares on Wall Street, he said the notion of applying the same sort of mechanism to sports betting struck him one evening in 1997. 

"There was a real 'Eureka!' moment. I was sitting in an armchair and hopped up and thought, 'This is a good idea' _ and it was an even better idea in the morning,'' Black said. 

Wary of ditching his day job as a software contractor, Black nurtured his concept for almost two years before risking his savings to try to make it a commercial success. 

His best friend's brother, investment banker Edward Wray, joined him as a partner, and the pair raised 1 million pounds (US$1.7 million) in capital from friends and family. 

Betfair broke even within nine months of its launch. As a privately owned firm, it doesn't release profit information, and Davies said only that it's now "in good shape.'' 

The firm charges customers a commission ranging from 2 percent to 5 percent of their winnings, whereas a bookmaker's margin might be substantially bigger. 

Three months ago it hired an outsider - Stephen Hill, former head of the Financial Times Group - as its chief executive. 

Betfair plans to expand overseas, with Wray leading efforts to build a business in Australia. 

"Quite clearly they have first entry advantage, and they have bigger global aspirations than us at the moment,'' said Paul Cooper, a former Betfair employee who works now for its nearest competitor, Sporting Options PLC. 

"But we think that the whole industry of exchange betting is continuing to spiral.'' 

Although betting exchanges account for no more than 4 percent of the global betting market, they claim to appeal to people who bet with their heads and not their hearts. 

"The vast majority of punters bet on the basis of the colors worn by a jockey or the name of a horse or something that catches their eye and makes them think, 'Today my luck has come in.''' Davies said. 

In contrast, devotees of betting exchanges look at the true chances of winning, and they place much bigger bets, he said. 

Bookmakers, many of whom also take bets online, accuse betting exchanges of unfair competition. 

"If I were to go into a pub and take bets from people, I'd be breaking the law, but if I go on the Internet and do the same thing via a betting exchange, it's legal. We think this is a massive discrepancy,'' said David Stevens, a spokesman for Coral Eurobet Ltd., Britain's third-largest bookmaker. 

"We're not trying to get betting exchanges banned. Betting exchanges are here to stay. We just want to see them treated as we are, so there's a level playing field.'' 

Betting exchanges now pay the same taxes as bookmakers, but Stevens argues that some exchange customers are functioning as bookmakers and should also be taxed.  

That would clearly discourage betting with the exchanges - and make it hard for them to survive. 

Betfair's Davies scoffed at the criticism that the betting exchanges have an unfair advantage. 

He said betting shops shouldn't fear losing customers to the exchanges and added, with a touch of irony: "There are so many people who don't care about value.'' 

A more immediate concern of critics of the betting exchanges is that the exchanges, unlike traditional bookmakers, let customers wager on horses to lose races and not just win them. 

Bookmakers worry that this could tempt jockeys, trainers, stable hands or even horse owners into throwing a race if the odds are right. 

"There is a threat to the integrity of racing, but we're working with the exchanges to combat any threat,'' said Owen Byrne of the Jockey Club, which sets the rules for British horse racing. 

Betfair and Sporting Options agreed in June to provide the Jockey Club with customers' identities if requested. - AP 

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