Day At The Track

Betfair eyeing up the US market

07:14 PM 05 Aug 2008 NZST
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Among the many things upon which the success of any business is based is the ability to attract new customers. Increasing the number of individuals who patronize a business will most often proportionately increase revenue.

When that business involves pari-mutuel wagering, new customers are obtained through the widest possible distribution of the simulcast signal.

According to statistics recently released by The Jockey Club Information Systems, the handle on North American Thoroughbred racing has dropped 11 percent since mid-June.

There is no reason to think that betting on harness racing had dissimilar figures during the same period.

The reasons for such a precipitous drop in wagering on horse racing are the subject of conjecture.

Irrespective of the rationale, it is clear that racing needs to locate a new customer base for its signal, and fast.

In this regard, the timing of the National Horsemen's Benevolent and Protective Association's summer convention in Pennsylvania held on July 18-20th could not have been better.

During the conclave, it was disclosed that BetFair, an Internet-based wagering exchange with headquarters in Great Britain, has been in negotiations with officials and others in the United States in an attempt to pay horsemen in the states for use of the races they produce.

Added purse money means more revenue for racing, and the potential for enhancement of the racing product.

Good news?

Not so fast! There are some things that need to be known.

First, BetFair isn't seeking to add any customers to the U.S. betting pools.

Rather, BetFair is simply trying to find a way to legitimize what it has been doing for years; that is, allowing non-US residents to wager on United States' racing without placing the money in the applicable racetrack pools.

Moreover, BetFair does not engage in the business of pari-mutuel wagering. The main business of BetFair is exchange wagering involving proposition bets.

The company permits gamblers to set odds and bet against each other regarding the finish position of a horse in a given race.

In effect, gamblers utilizing the exchange service can bet a horse to lose. So what's wrong with that? Well, just about everything.

Winning takes skill, ability and determination.

Losing, on the other hand, requires nothing more than determination, albeit a misplaced determination.

When gamblers are afforded the opportunity to make money by betting on losers, the incentive to "manufacture" losers is prevalent.

Even if losing is not intended, exchange wagering on such propositions invariably leads to the appearance of impropriety.

No better example of that is the 2006 English race fixing and money laundering scandal involving significant figures of the British turf.

Though the accused were fully exonerated the next year, the ramifications of such accusations are apparent.

When something smells fishy, everybody runs from the odor, even if the fish are nowhere to be found.

The fact that BetFair itself made the initial allegations, though smacking of irony, was of little consequence.

The damage was done.

Even before the 2006 problems in Great Britain, the integrity antennae were up in certain major U.S. markets.

In 2004, the New York Racing Association withheld export of its product to Attheraces, a British wagering service that purportedly made NYRA races available to BetFair customers.

The next year, in March of 2005, BetFair executed a memorandum of understanding with the Thoroughbred Racing and Protective Bureau (TRPB).

In this document, similar to ones it signed with The Jockey Club and greyhound industry, BetFair agreed to provide the TRPB with information regarding possible integrity violations related to betting activity on North American races.

In a vacuum, this appeared quite altruistic.

In reality, BetFair was keenly aware of moves in September and December 2004 by TRPB's parent, the Thoroughbred Racing Associations of North America (TRA), to form a domestic industry-owned betting exchange which would supposedly compete with BetFair for foreign customers, and possibly open up monitored exchange betting to North American residents.

Though BetFair's principal publicly lauded the TRA's intentions a few months before, the mere timing of the Betfair-TRPB memorandum renders the exchange company's motivation for signing the agreement suspect at best.

Another aspect of this issue involves the question of pricing. As BetFair doesn't participate in pari-mutuel pools, it is unclear just what BetFair is proposing.

If it's merely a media content agreement, whereby BetFair simply pays for the depiction of races, it's clear that the domestic racing industry will be leaving countless dollars on the negotiating table.

Consider the telling statement of Edward Wray, BetFair's co-founder, contained in a 2004 company press release,

"Betfair has made it very clear that it wishes to pay appropriate product fees as it expands overseas." Given the backdrop of non-pari-mutuel wagering, "appropriate product fees" sounds like a proposal to pay the domestic industry a flat fee, rather than one proportionate to BetFair's ever growing business.

BetFair's reinvigorated push to expand should not be a surprise.

In the wake of the passage of the Federal Unlawful Internet Gambling Enforcement Act of 2006, foreign on-line betting outlets offering poker and sports betting lost their ability to deal with U.S. customers.

As domestic credit card companies were abruptly prohibited from assisting the groups, these outlets lost virtually all of their U.S. customers overnight.

One of the exceptions to the Act's prohibitions on internet gaming is betting on horse racing.

Thus, BetFair's recent moves can safely be described as a "Texas Two-Step:"

First, pay the U.S. horsemen for their racing content; second, persuade the industry to permit U.S. residents to engage in exchange betting on their supposedly "legitimized," fully paid for, U.S. content.

It's hard to believe that BetFair's offer to pay for racing content it has "borrowed" for so long is born out of a feeling of pure benevolence.

Nor should anyone believe that the only racing cared about "Across the Pond" involves blinkers and saddles.

On July 21, the British equine industry publication "Horse & Hound" reported on its website that BetFair was so impressed with the success of the very first harness race contested at the Kempton Park Thoroughbred track in England on July 16 that it requested the staging of four Sundays' worth of sulky contests in 2009.

Bettors reportedly wagered more than 80,000 pounds, the equivilant of almost 160,000 U.S. dollars, on this single harness race trial put on by the British Harness Racing Club.

BetFair official Tony Calvin was quoted as saying, "Our expectations were minimal - but as it turned out more than 1,000 people placed bets on the harness race. We were completely taken unawares. There is definitely potential if it is supported by one of the horse racing channels. It could provide a new interest for the racing fraternity and certainly gets our backing."

Newfound interest in harness racing should be cause for glee; alas, it may be but a silver lining shining so brightly as to obscure a darkening cloud.

The manifest integrity issues aside, consider that every U.S. dollar wagered on a U.S. harness race through a non-pari-mutuel betting exchange is a dollar diverted from a racetrack's pools.

Millions wagered on your local trots and paces by foreign nationals, and soon maybe U.S. citizens, will never show up on a track's income sheet; or in the state's tax coffers; or in the horsemens' purse account for that matter.

The substitute will be a "product fee," something trumpeted as "appropriate" by the signal recipient, but sure to be a poorly negotiated barter by the U.S. racing industry in light of the mammouth revenue the recipent will undoubtedly garner from wagering on its newly-purchased product.

Given our industry's undeniable faux pas in the historical pricing of the simulcast signal between host and guest, facilitating rampant poaching of bettors by rebate shops as well as other economic nightmares, is there truly any level of comfort that we won't repeat the failed simulcast model scenario with foreign betting exchanges?

Therein lies the crux of the problem.

BetFair is not illegal in England.

It's a legitimate business trying to increase its revenue.

It offers action to punters on horse racing; the same general business that is engaged in by every racetrack and simulcast center in America.

If it properly pays for the receipt of telecasting of American racing product, it should be able to utilize that product in ways that are completely legal in the jurisdiction where it operates.

If the American racing industry sells its product too cheap, or to an entity that uses the product in a way that would call the integrity of the product's content into question, the root cause of the incumbent problems will be the fault of our industry alone.

Moreover, if the domestic industry relents and permits U.S. residents to engage in exchange betting, whether through a TRA consortium or BetFair, then American executives, regulators and horsemen will be relegated to collectively yelling at the face of a mirror if (when) things go horribly wrong.

The solution?

Sell signals based only upon infusion of domestic pools at a price that benefits all domestic stakeholders.

In other words, don't sell the signal out, and don't sell it cheap.

Instead of viewing exchange betting through proposition wagers as an inescapable trend from which there is no turning back, let's protect our product by doing everything possible to ensure that only those willing to partner in our pari-mutuel pools be granted access to our content.

We admittedly can't stop a group of guys from putting some money on the top of a bar during the telecast of the Kentucky Derby.

It's quite another thing for our industry to readily facility the massive redirection of immeasurable sums of wagers into the unregulated black hole of a betting exchange.

If we protect the product in this way and have less folks betting on it, we've lost not one customer, because exchange customers are no more our customers than those guys on the barstools.

It's our product. In short, for all the foregoing reasons, let's commit to sell our product, not give it away for a pittance and threaten its honor.

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Chris E. Wittstruck, an attorney and Standardbred owner, is the founder and coordinator of the Racehorse Ownership Institute at Hofstra University, New York and a charter member of the Albany Law School Racing and Gaming Law Network.

By Chris E. Wittstruck, Esq.

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