Analysis: How do you solve a problem like the Betfair Exchange?

No product has shaped the UK betting market quite like the Betfair Exchange, but in recent months the so-called machine has been looking a little rusty. Paddy Power Betfair (PPB) yesterday reported a continued decline in exchange revenues for Q2, and this time there were no cancelled racing fixtures to blame.

“While football commissions are also showing good momentum on the Betfair Exchange, overall exchange revenues were down 1% in Q2 due to continued weakness in horseracing commissions,” the operator said.

“The weak horseracing performance in Q1 could largely be attributed to the high number of fixture cancellations, but the fact this weakness continued in Q2 highlights the competitive challenge facing racing commissions from low margin sportsbooks and price discounting by smaller exchange competitors.”

It’s really the first time PPB has admitted its competitors are having an impact, previously suggesting its rivals weren’t pure-play exchanges, or blaming the downturn on external factors, such as high staking customers winning less.

And judging from the subsequent results call, it’s not clear PPB has an answer for how to fix the machine. Group CEO Peter Jackson was asked whether the firm might lower commission rates to match the 2% used by Betdaq and Smarkets, but was non-committal in his response.

If you can’t beat them, join them?

Lowering commission comes with its own issues, namely the short-term impact on profits, which might not go down well with investors. Likewise, the commission rates and premium charge is set where it is to stop too much money leaking from the system to big winners. One Betfair source suggested it costs the firm £21 for each £100 won by a long-term winner thanks to marketing and operational costs. Betfair warned earlier this year about the “race to the bottom” of lowering commission rates, and seems unlikely to join that race.

More marketing is another option, but again Jackson was non-committal when asked about this. Indeed, the Exchange has been given more air time in recent months, with little apparent effect on revenues in Q2.

“It’s a very hard battle to win,” one former Betfair exec tells EGR. “The main issue is racing and if bet365 wants to use that as a loss leader, there’s not much Betfair can do. Price sensitive punters are also going to use the other exchanges with lower commission.”

Asked about biggest exchange competitor. Says bet365…

— EGR Global (@EGRIntel) August 8, 2018

What’s next

PPB didn’t give exact Exchange revenues yesterday, but back-of-the-napkin calculations suggest it was more than a third of total sports revenues and well over £100m in H1. However, it’s unclear whether returning it to growth is a focus. More and more smaller markets have been turned off in recent months, and ‘Exchange’ was conspicuous by its absence on the ‘Priorities’ slide of yesterday’s results presentation. Throw in the fact that Jackson refused to give away any hard plans for the product going forward, and the future of the machine is more than a little unclear.

“I don’t think its PPBs interest to turn it round,” said industry veteran Matthew Trenhaile. “It’s very expensive to maintain the infrastructure needed to process the huge amounts of transactions that n exchange requires, and I’m not sure the cross-sell to sportsbook works.

“Throw in the fact it’s very expensive to run customer acquisition for sportsbook as well as exchange, and I just don’t think it’s worth their while.”

He suggests the Exchange could continue to stutter unless sold off to group who sees it as a passion project, and who are “willing to make money more slowly” than PPB. Indeed Trenhaile suggests the Exchange was recently the subject of a venture capital bid, but PPB demanded a “silly price”. He also says “now would be the perfect time” for rival exchanges to consolidate, because if Betfair no longer had the advantage of liquidity, it could be very vulnerable to competition. He suggests a tie-up between Smarkets and Matchbook – which reported triple-digit growth in actives and uniques during its sponsorship of the Goodwood Festival.

It could be an interesting next six months in the exchange sector.