Disrupting the status quo: Is Betfair's exchange dominance really under threat?

“The betting exchanges, Betfair, Betdaq and co. represent the greatest revolution in gambling in generations,” gushed the BBC in August 2003. It was a pretty typical view at the time, with the Australian Tab proclaiming a month later “betting exchanges will mean the end for bookmakers.”

But Malcom Gladwell’s famous tipping point never really happened for the exchanges. According to UK Gambling Commission data, exchanges produced gross gambling yield of approximately £170m in the year to March 2017; a good chunk to be sure, but around a tenth of the revenues generated by the online sportsbooks that exchanges were supposed to banish to the history books. So where did the sector go wrong?

Speaking to industry experts and traders, four factors rise to the surface. First is the sharks and minnows problem inherent in any peer-to-peer endeavour which can see high-powered syndicates betting directly against a bloke in the pub on his phone. A very small percentage of users suck millions of pounds out of the system with no real restrictions. It’s the same ecology problem that has hamstrung the poker industry and DFS, both of which are still struggling to adapt their business models.

The second issue is that an exchange user simply isn’t as valuable as a sportsbook user, so companies aren’t as incentivised to push punters towards the exchange. It’s no coincidence Betfair launched a fixed odds sportsbook, and pushes users to that product when they arrive on site rather than to the exchange.

The third problem is the education piece. By their nature, exchanges have a relatively high barrier to entry, with the back/lay options and varying liquidity levels looking far more complex than their sportsbook counterparts.

Finally, for more than a decade, the exchange market has been a virtual monopoly, with very few challengers of note to Betfair’s dominance. And if competition begets innovation, so the inverse must be true, meaning exchanges have stayed largely the same with sportsbooks pulling ahead on front-end presentation and accessibility.

Changing times

But that ride atop the market for Betfair appears to be under threat. In November, the firm reported Q3 exchange revenues were down 5%, and although some of that was due to “exceptional VIP action” in the prior reporting period, even a comparison to Q3 2015 showed only 2% annual growth.

Then-CEO Breon Corcoran was asked by analysts about increasing competition in the exchange space, specifically a Racing Post article on Matchbook, which quoted the operator saying it would increase its marketing spend by 300% in 2018. Corcoran assured investors that rivals were “not pure play exchanges in that some of them do proprietary trading” and were therefore not direct competition. But even the question itself showed that the Betfair’s three main challengers – Matchbook, Smarkets and Betdaq – were chipping away at the once insurmountable lead, belying the old wisdom that the market could only support one exchange.

But as the UK betting market matures, so do its punters. As noted in these pages before, the rise of account restrictions has led to a corresponding growth in the number of unwanted bettors who are increasingly turning to exchanges to get their bets down. And as price-sensitive punters, they are willing to look beyond Betfair to cheaper exchanges.

As Cenkos analyst Simon French puts it: “Betfair have had a free run at it for the last 12 years, and from what we know, market share is now under pressure. That comes from Matchbook and Smarkets especially, but clearly with the M&A in the sector there’s potential for new powers. All M&A does is consolidate volume, and the natural thing to do with volume is look towards an exchange model.”

Betdaq

That last point refers specifically to Ladbrokes Coral’s (LCL) exchange Betdaq, which was often perceived as an odd purchase for Ladbrokes, which bought it in 2013 and seemed unsure what to do with it. However in 2018, that seems to have changed. Following a strategic review of the group after the Ladbrokes/Coral merger, LCL exchange director, Shane McLaughlin, convinced the executive team there was an opportunity for Betdaq to take market share.

“We’ve put a lot of work into the platform and the product over the last two years,” McLaughlin says “We added things like live streaming, exchange starting price functionality, Proform race guides, and we felt our product was better than the footfall we were seeing.”

LCL executives took the bait and agreed to give Betdaq the push it needed, letting McLaughlin cut commission rates to 2% and giving him a marketing budget to shout about it, including title sponsorships of a Kempton race day and Oddschecker takeovers.
McLaughlin says the early results have been “exceptional”, with acquisitions, and turnover up 30-50% in the first three weeks after going to 2% commission, although he expects that to settle down after the initial surge.

The exec also has grand plans to extend the Betdaq liquidity pool – that includes the little known Ladbrokes exchange – to Coral in the coming months. In action, adding an exchange to Coral carries “very little marginal” cost and could help generate that all important liquidity, while also introducing more recreational customers to the exchange concept. “We have the data from the Ladbrokes exchange to show we’ve dispelled the cannibalisation argument and to show what it would do for us,” McLaughlin says.

He even envisages extending that network to GVC’s sportsbook brands, bwin and Sportingbet should the £4bn takeover complete as expected. “Again, it’s a very low cost to add those exchanges, so profits would flow directly to the bottom line, which is what makes that model so interesting with the other brands we may have access to,” McLaughlin says.

Poker parallels?

Of course, this is an internal plan not yet endorsed by GVC management, who may not want to shift their valuable sportsbook customers onto an exchange. As one executive put it to EGR: “Why pull players out into a lower margin product where your competitors are better than you? I don’t see how it can’t cannibalise.”

The exec compared the move to operators adding poker in the mid 2000s only to see money drain from the system. Cenkos’ French on the other hand is more positive, and says he can see the potential for an expanded Betdaq and derivatives to offer some “proper competition” for Betfair.

Smarkets

Of course, that competition is coming from more places than one, with Smarkets arguably providing the model for Betdaq with its 2% commission rates and investment in racing sponsorships.

Smarkets is one firm which is aiming to challenge Betfair’s dominance

In September 2017, the London-headquartered Smarkets offered a rare insight into the opaque word of exchange finances, with its 2016 results that saw revenue climb 144% to £25.4m, on trading volumes of £2.7bn. Interestingly, only £8m of that revenue was earned from commission, while £17m was earned from ‘betting activity’, suggesting that Smarkets is doing very well from betting against its own punters.

Paul Leyland from Regulus Partners noted Smarkets had used its “proprietary liquidity, strong technology capabilities and improving UX to become a material exchange business in the UK and Irish markets”.

He added: “This is an impressive feat, especially as delivered so quickly (founded 2008; 2014 revenue was £2m). However, given that true exchange commission was ‘only’ £8m, it is still too early to call Smarkets a true disruptor to Betfair’s exchange dominance.”
But that was 2016, and the exchange has continued to grow since then, with its recent deal to sponsor 240 Jockey Club races indicative of its ambition, particularly for racing, which is its largest sport by turnover. Even more recently, the firm joined the Oddschecker grid and overhauled its site and apps to appeal to “non-bettors”.

Notable changes include a font switch to make text more legible and improve number readability, while an emphasis has also been placed on percentage chances and probabilities of teams winning.

Pascal Lemesre, Smarkets press officer, said: “We are displaying percentages more prominently on the homepage and listings pages, even if you have selected decimals as your preferred odds choice. “That is the direction we want to go in and it is very easy to see what the probabilities are for a horse to win a race or for AC Milan to beat Arsenal.

“We have gone for a tiles and cards format which is different to the old website that was fairly basic in that it displayed just the top markets in horseracing and football. It was minimalistic and easy to navigate but we wanted to make the homepage in particular a bit more engaging,” he adds.

Lemesre says the focus for Smarkets in 2018 is pure customer acquisition, with the hope that unique feature like its Live Charts, which visualises prices as percentages, will provide a point of differentiation.

“We definitely think there’s a chance to be a bit different,” says Lemesre. “We want to create that financial product rather than a betting product, so we don’t have slots, casino, poker or any of that. We’re solely focused on exchange and that should help us because we’re not worried about cross-selling to slots for example.”
Lemesre says Smarkets also sees a big opportunity to take market share, with competition “bubbling up quite nicely”. “There’s definitely a chance for us to challenge Betfair,” he says. “A lot of people are disgruntled with Betfair and there’s a lot of scope there for people like us to disrupt because we have good technology and liquidity.”

Matchbook

Rounding out the chasing pack is Matchbook, which has historically been very strong in US sports and football where founder Matthew Benham provides some useful liquidity. But of late it has also been throwing its hat into the horseracing ring with improved liquidity and the launch of an in-running product. The firm has inked several sponsorship deals including events at Goodwood and Sandown, and is currently offering 0% commission on horseracing bets through the Cheltenham Festival to push its improved racing product.

Matchbook has recently inked several horseracing sponsorships

“We see racing as our route to growth in the UK and Ireland,” says Bradley Morrish, Matchbook’s head of business development. What’s unique about the firm is its commission structure which encourages betting rather than trading, with commission charged per bet rather than on net winnings from a market. However in another move to tempt traders from Betfair, the firm is considering a dual commission system where customers could pick one structure or the other to suit their style of play. “We’ve always wanted to be the exchange that puts the customer first, and this could be another extension to that if we do go down that route,” says Morrish.

Good for the game?

Smarkets alone claims to account for 10% of the UK exchange market on an active customer basis, while Matchbook and Betdaq could claim around 5-6% each, EGR understands, with Matchbook likely leading the three on a volume basis.

at The competition then is at an all-time high, begging two questions. One; how will Betfair respond, and two; will the increased competition benefit the overall exchange sector as investors, operators and customers hope?

The first thing to note is that Betfair tells EGR it has seen “nothing notable” in its exchange volumes following the recent influx of offers, and indeed expects to see a growth in turnover in its FY17 numbers in early March. But that doesn’t mean the market leader is sitting on its hands doing nothing. Paddy Power Betfair has been reorganised with the recent arrival of CEO Peter Jackson and the business split more clearly into Paddy Power and Betfair divisions, with the exchange by extension given more priority within Betfair.

“It’s a fair criticism [that Betfair has deprioritised the exchange in recent years] and I can see how people would say that,” says Rich Hayward, the head of exchange pricing at Betfair. “But with the restructure, growing the exchange is now a central focus”.
What’s especially interesting is how the firm plans on doing that, pledging not to get drawn into a “race to the bottom” that’s “not sustainable for the industry”.

“The exchange sector can’t survive at 2%,” says Hayward. “To support an ecosystem with enough recreational flow, you need to compete with the marketing of the big sportsbooks, so you have to have the margin from your winning customers to generate that revenue to reinvest in the exchange.

“We’ve been able to do that in recent years but if it becomes a race to the bottom, it would probably benefit us because we’d be able to survive that but it’s not sustainable business for anybody. Poker is the key one to watch and not make the same mistakes.”

Indeed Betfair’s own research with offers like 2% commission on the Premier League and ‘2% Tuesday’ on racing has shown that many customers are less price sensitive than expected. “It [price sensitivity] has not been as fundamental as you would believe it to be considering it’s been so prevalent as a message in the industry at the minute,” Hayward says. It means Betfair has no immediate plans to change its 5% base commission rate, although it says it is constantly being evaluated. Instead the focus is going to be on attracting more recreational punters to ‘the machine’, through more than just TV advertising.

The new way to lay

One angle will be attempting to blur the lines between the exchange and sportsbook. For instance, Betfair has been experimenting with a button on the bottom of exchange markets on mobile, which takes customers straight to the sportsbook version of the page to make it easier to place multiples.

“There’s lot more of that to come in terms of tying the products together,” Hayward says. “There’s very few customers who are solely using the exchange, so one of the key things for us is trying to make a product that’s seamless between the two. That means we surface whatever product is best for that customer at that time. Offering a personal experience is one of the key things in 2018 for us.”

In a similar play for recreational customers, Betfair is also close to launching an entirely new app called Bet Against which will aim to get customers laying bets without really realising it. The interface will be similar to a sportsbook, and instead of laying Spurs at 1.5, for example, the punter would be able to ‘bet against’ Spurs at 2/1, with the bet then executed through the exchange liquidity.

“One of the USPs of an exchange is lay betting but there’s only a finite amount of people you can get on that education curve,” Hayward explains. “We want to simplify that experience. That’s exciting for us, because that’s how we grow exchanges. In face of competition from sportsbooks we need hooks for customers so they start looking at us in a different way.”

And this is where it starts to become obvious how more competition really is good for the sector and consumers alike. Punters are getting new products like Bet Against or Smarkets’ Live Charts, as well as commission rates that mean exchanges are frequently best price in the industry. All four companies are spending on advertising and education too, meaning more and more customers are learning the value of these platforms.

The exchange sector grew 12.6% last year compared to 14% for sportsbooks but it wouldn’t be surprising to see that hierarchy reversed next year. After all Paddy Power Betfair and Ladbrokes Coral have recently re-prioritised their exchanges, and Cenkos’ Simon French suggests other fixed odds giants could be keen to snap up Smarkets or Matchbook.

“I couldn’t see those two getting together, but I could see either or both of them getting bought by fixed odds partners in the short to medium term because they’re offering a valuable alternative,” he says. All in all, while it appears exchanges won’t be putting bookmakers out of business as predicted back in the early 2000s, they could still prove a vital part of the modern sports betting ecosystem