Entrepreneurship and Innovation in the UK Betting Industry:: The Rise of Person-to-Person Betting

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The emergence of Web-based ventures in 2000 offering person-to-Person (P2P) betting represented a genuine revolution in the oligopolistic United Kingdom betting industry. The radical innovation of P2P betting was that it enabled punters (the term for betting customers) to lay (accept) bets, a role that had previously been the preserve of bookmakers. This created a free market in betting, offering dynamic markets to punters and also enabling trading style activities as seen in financial markets. P2P betting flourished and by 2004 it was estimated that it accounted for up to 25–30% of UK horseracing betting turnover. The oligopolistic bookmakers, however, were less than enthusiastic about this innovation, challenging the P2P concept. In response, the P2P firms claimed P2P betting brought innovation and transparency to betting markets. This article considers P2P betting in context, and looks at its impact on the United Kingdom betting industry.

Introduction

In the 1990s dot com entrepreneurs backed by enormous amounts of venture capital funding tried to enter a wide range of markets. Many believed that the Internet, by lowering entry barriers and enabling greater efficiency, would lead to the dramatic industry shakeouts described as ‘seismic shifts’ by Day (1997), whereby incumbents in stable industries are unable to cope with the onset of new competition. In reality, however, the Internet did not redraw industry structures; in the main it was an enabling technology, which made existing firms more efficient, a situation confirmed by the dot com meltdown of 2000 (Porter, 2001).

One industry targeted as inefficient was the UK betting industry, historically dominated by a few big firms with healthy margins traditionally in the range of 15–20% (Bowen, 2002). In 2000 new ventures were launched which enabled people to bet directly against each other through websites, thus cutting out the bookmakers, in a concept known as person-to-person (P2P) betting.

Whilst many new ideas did not survive the bursting of the dot com bubble in 2000, P2P betting was to be a highly successful innovation. By 2004 the UK horseracing establishment estimated that it accounted for up to 25–30% of horseracing betting activity in the UK (UK Parliament, 2004).

This paper considers the development of the P2P betting market in the UK: Section 2 will outline the key features of the UK betting industry. Section 3 will go on to consider what P2P betting is and the emergence of the early players in the market, Flutter and Betfair. Section 4 will explain the different models of P2P betting and the emergence of an industry standard model – the exchange – as pioneered by the dominant firm Betfair. Section 5 will then consider the challenges faced by P2P betting including those running a real time Internet operation, and the legal and ethical challenges which question the whole basis of this innovation. Finally, section 6 will discuss some possible future trends in the sector.

Section snippets

What is Betting?

The betting industry forms part of the wider gambling industry, which includes casinos, bingo and lotteries. The general distinction that may be drawn between gambling and betting is the possible element of judgement in betting – for example, that a certain horse will win – which contrasts with the pure chance of gambling activities.

Market Size and Structure

All governments which allow betting make choices which balance the economic benefits of this activity with the ethical and legal concerns it raises. Whilst some

What is P2P Betting?

After the industry had adjusted to the impact of e-commerce and the end of the GBD a more radical application of Internet technology was starting to develop, namely P2P betting. Its main innovation was that it allowed users to set their own fixed odds against an outcome – known as ‘laying’ – and invite others to place bets, something which had previously been the preserve of bookmakers. The user would state on the website the odds and what amount of bets they were prepared to take – for

The Importance of Liquidity to P2P Betting

With the vastly superior finances of Flutter – a second round of venture capital funding worth $33 million was arranged in June 2000 involving elite firms such as Benchmark Capital, UBS Capital and J.P. Morgan Chase (Fast Company, 2000) – it appeared that the odds were stacked in their favour.

However, success in this new market crucially depended on achieving liquidity, in this context the ability to back and lay outcomes to the desired value quickly

Number of Users

In January 2004 Mark Davies of Betfair when being questioned by a UK Parliament Committee on Gambling legislation revealed that his company had “around 200,000 registered clients of whom about 30,000 are active on the site in any given week” (United Kingdom Parliament, 2004). Although growing in popularity the exchange concept was a niche product, as shown by a 2004 survey which found that less than 1% of the UK population had spent money on a betting exchange in the last 12 months compared to

Speculation

This speculation is not about whether a horse will win, but upon movements in the prices on offer. For example, someone might back a horse at 4-1 with a stake of £1,500 before the race. During the race the horse is leading and its odds shorten to 3-1, so that the punter can lay at £1,875 at 3-1 ‘in-play’, thus producing a guaranteed win situation, as shown in Table 1. As with the derivatives market these speculators bring considerable liquidity to the Betfair market. They are encouraged to back

Market Size

The commission income generated by Betfair, accepted as the overwhelmingly dominant player, is in the public domain and detailed in Table 2.

When compared to the gross win (stakes minus money paid out in winnings) of £722 million in 2004 by William Hill, it would appear that the betting exchange concept has had little impact. However, the commission of exchange betting vastly understates its impact as it is a low margin model. As betting losses in an event can be offset against winnings the

Technical Challenges

Running a betting exchange poses a demanding set of problems. At peak times Betfair matched 1 million trades per day, 4 times that of the London Stock Exchange (Phillips, 2003). Betfair’s website was not always able to cope with such demands leading to the site crashing on occasion causing major problems given that in-play and new forms of betting activity were such a major part of their business.

Security

In 2004 it was reported that many betting sites were facing extortion threats from criminal gangs

Developments in the UK

The difficulty of challenging Betfair in the UK market was shown by inability of Sporting Options or Betdaq to make inroads into their dominance. This was confirmed by the exit of Sporting Options in November 2004.

The P2P concept did start however, to initiate change in UK bookmaking, at least at the fringes as some of the new Internet and telephone bookmakers, such as Bet365.com, started to give their customers limited opportunities to lay outcomes.

There were also rumours that the “Big Three”

Conclusion

In conclusion this paper has looked at the growth of P2P betting in the UK and the meteoric rise of Betfair and their exchange model. What is particularly striking is the manner in which the experiences of the founding entrepreneur enabled the development of a superior betting exchange model which defeated a rival with an overwhelming financial advantage.

The paper has also drawn out some specific lessons for P2P betting. There is a need for scale to achieve liquidity – the “network

DES LAFFEY, Kent Business School, University of Kent, Canterbury, UK, CT2 7PE, Email [email protected]

Des Laffey is Lecturer in E-Commerce at Kent Business School. His research interests include new ventures enabled through e-commerce, online advertising, website quality and the betting industry.

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    DES LAFFEY, Kent Business School, University of Kent, Canterbury, UK, CT2 7PE, Email [email protected]

    Des Laffey is Lecturer in E-Commerce at Kent Business School. His research interests include new ventures enabled through e-commerce, online advertising, website quality and the betting industry.

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