Winds of ex-change

Betfair launched a horseracing exchange into New Jersey in May after five years of legal and financial wranglings. Brad Allen examines whether it will be worth the wait

UK horseracing’s Epsom Oaks in 2000 was an unexceptional one on the track. It was won by Love Divine, a three year-old filly, but far more consequentially, 33 wagers were struck on the race via a brand new medium.

The race marked the first ever betting market offered on the new Betfair exchange in the UK, and the racing industry, along with traditional bookmakers, were half terrified and half airily dismissive of the new fad.

The exchange’s founders faced an uphill battle to convince racing stakeholders that their invention wasn’t going to destroy the industry through race fixing and diminished licensing fees.

Fast-forward 16 years and a new set of Betfair executives are facing the same set of problems, but now in the North American market. The new breed is backed by a London FTSE 100 behemoth, with a market cap of more than $10bn and arguably the most advanced marketing department in the world thanks to its recent merger with Irish bookie Paddy Power.

But that’s not to say success is going to be easy in the US. Disrupting any established industry comes with more than its fair share of backlash (just ask Uber), and even more so when the industry is as steeped in tradition as US horseracing.

As Bart Barden, the director of Betfair’s new US exchange puts it: “There’s innovation shellshock in this industry. There has been little innovation since Advanced Deposit Wagering in 1999 and before that you have to go back to the introduction of the full-card simulcasting and the Pick 6. ”

And the lack of innovation is represented in the industry’s popularity. The ‘Sport of Kings’ is on the decline around the world, and the US is no exception. According to a 2015 industry forecast, the amount wagered on horseracing in North America declined 28% between 2003 and 2013. In 1995 there were 7,984 racing days and an average of 8.17 starters per race. By 2013, those numbers had dropped to 5,556 racing days and an average of 7.85 starters per race.

It is into this shrinking market that Betfair launched its technologically pristine horseracing exchange in May, with geofencing restrictions limiting access only to residents of New Jersey.

Product first

The product itself is largely similar to what a UK customer might see if he was looking at US horseracing markets. Indeed the New Jersey exchange shares liquidity with the rest of the world, a feature which Barden describes as “the most important factor in the initial decision to launch the platform”.

“Given what we know about entering markets in Europe, sharing liquidity is absolutely paramount and will continue to be so for any other state or any type of expansion, simply because it’s the best thing for the customer,” says Barden.

“Our New Jersey customers are seeing their bets matched and great liquidity, largely driven by the international community and they have a better product because of it.”

Interestingly, the commission for New Jersey users is more than double the standard rate in the UK, at around 12% on winning bets for the majority of customers (this is configurable for VIPs). Barden dismisses any suggestion that this could cause any resentment among US punters, because they are currently forced to bet into a tote market with a takeout of around 20% on every race.

“For an average bettor hitting around 50%, our commission creates an effective rate around 6% which we believe is very competitive compared to the current market,” Barden says.

A casual observer then, might expect a dying industry to embrace a product that can attract value hunting customers to the sport, but so far at least this has not been the case.

While some support the exchange – Monmouth Park for example helped Betfair launch the product – many tracks have adopted a ‘wait and see approach’, fearful that the exchange’s lower takeout will see their own revenues diminished in turn.

Betfair has to work out a licence fee arrangement with every track in the US that it wants to feature on its exchange, and working out how to split a smaller pot of money in a way that keeps everyone happy is one of the main reasons it took five years between legalising exchange wagering in New Jersey in 2011, and launching the platform back in May.

“It’s been challenging,” admits Gethin Evans, head of marketing for the US exchange. “Because this is a lower margin product than the current pari-mutuel proposition in the US. But over time we believe that there will be a longer-term benefit for the sport.”

Playing the long game

The hope for Betfair is that the exchange will boost betting and thus revenue for the tracks in a couple of ways. Firstly through increased engagement from existing punters who will be able to lock in the price they bet at for the first time, rather than getting the closing odds offered through the tote system.

Betfair is also hoping to boost the value of these experienced punters as they can lay horses efficiently for the first time, bet in-play, cash out and bet on more races without such a heavy take-out fee. The exchange is also expected to attract a new breed of younger, more tech-savvy bettors into the industry for the first time.

“The long term return to the sport will be more than comparable with the current tote agreements,” predicts Barden. “So it’s up to us to get in front of the tracks and educate them about the potential. We know how it’s helped the racing industry in the UK and Australia, but the US market is still adapting.

“The venues and jurisdictions that are more educated about the exchange – like Woodbine in Canada which was previously accepting exchange wagers on their races from UK customers – they’re adopting. The challenge is the tracks that haven’t been exposed to this before; they’re the ones we need to convince,” says Barden.

“At the moment it’s a waiting game. We need the information from the first two months of this with our existing tracks, so we can say ‘these metrics are improving, these new customers are coming and if you were involved with the product two months ago, you would have made x percent more.’”

It is also hoped that the exchange can bring back much of the money that Americans are currently wagering on horses offshore. The size of the black market is unknown, but the vast bookmaking operations in the Caribbean are certainty not paying a cut of their profits to the industry.

Fourteen tracks signed up with the exchange on launch, and that number is already up to 21 and counting, with Betfair expecting the number to continue to rise.

Testing, testing

Serendipitously, the situation in New Jersey could not be a more perfect testing ground for proving the benefits of a racing exchange, since Betfair’s US brand TVG also operates New Jersey’s online horseracing tote site 4NJBets.

The exchange and 4NJBets are the only online horseracing betting platforms in the state and Betfair has access to all of the data from both of them. It knows which users are signed up to both, how much they are betting on each site, what type of bets they are placing and every other piece of data it would wish to know.

“If you want to measure the impact of the exchange you couldn’t choose a better scenario,” agrees Evans.

And the early data is indeed promising. Approximately two thirds of the revenue on the New Jersey exchange has come from customers who were not on 4NJBets. Put another way, two thirds of the money on the exchange is brand new, coming from people who were not already betting on horses online in the state.

“That’s an easy sell,” says Barden. “That’s the number one point we’re selling. If we continue to see that trend that makes it a lot easier to sell it to the tracks.”

Elsewhere, there are more positive signs, with “no obvious cannibalisation of tote betting”, and even signs that customers are signing up for the exchange and then crossing over onto 4NJBets.

As Evans suggests: “It’s similar to what we see in the UK, where people who normally stick to the exchange like to have a go on the Scoop 6 when it reaches a big jackpot. Since the NJ exchange only offers Win, Place and Show bets, we are seeing customers who then want to switch over and bet the exotics or bet into the big pools on the tote.”

The engagement figures are also really positive according to Betfair. “It’s a small sample size, but people are trading in and out of positions, using mobile, cashing out and the average number of bets in a market is high,” Evans notes.

He also suggests that Betfair has been surprised by how well some of the more advanced features – things like cash out and in-play which aren’t available anywhere in the US – are being adopted.

“In-play volume in particular has been exceptional,” Evans adds. “Especially considering we only offer it on selected tracks. The number of customers that have placed those bets suggests there is a genuine interest in in-play wagering.”

New blood

Betfair won’t yet share official figures for the exchange, but there is a sense that the engagement rates might be better than the overall participation rates. In other words, the die-hard racing bettors who have likely already heard about the exchange, are using the product and loving it, but the floating voters have yet to make up their mind.

Fortunately, Betfair is not lacking in marketing budget, and the firm is bringing its big guns to bear on the young male demographic.

The firm’s first TV ad dropped in late June, and another one has already in the can. The firm is also sponsoring key races at Monmouth Park and has an expansive digital campaign planned. The focus is of course on education – teaching players about how the exchange works and how it can benefit them.

As a result, the creative team have come up with a kind of animated infomercial with “the Betfair guy” – a snappily dressed twenty-something – telling viewers he uses the exchange to lock his odds and rely on his own judgement rather than luck. “Smart is the new lucky,” the slogan proclaims.

The Betfair guy is designed to reflect the type of person that Betfair wants to use the exchange, a competent digital native who wants to help himself win on horseracing.

“We’re trying to do something different and I think we needed to,” says Evans. “We’re not trying to make horseracing cool, but we are trying to make it more accessible and applicable to a younger audience. This is probably the first time a horseracing product has been advertised without a video of a horse galloping across the finish line.”

Value proposition

The message about locking in a price is also a carefully considered choice, after consumer research revealed it was that mechanism which most appealed to US users who were accustomed to the fluctuating odds of the pari-mutuel pool.

“In the early days we though that cash out and in-running could be the headline features to sell this because that’s literally not available in the US anywhere,” say Barden. “But from talking to customers, they were so excited about being able to lock their odds in. At one trial someone had managed to green up his entire book before the race, and he couldn’t believe that he had locked in a profit no matter what. We call that ‘the exchange moment’,” Barden adds.

Perhaps the dream customer that Betfair is targeting with this kind of message and advertising is the Wall Street professionals who populate New Jersey’s northern border with New York. “We believe Wall Street guys could represent a new revenue stream for the sport and our stakeholders agree with us there,” says Evans.

“Hopefully they’re going to have a better lifetime value than a recreational guy, so we are targeting that audience specifically with our marketing.  If you trade stocks and shares you can apply those principles to horseracing markets and we think it intuitively appeals.”

Soft landing

But while chasing these high-value customers, Betfair is also aware that it mustn’t alienate the broader section of New Jerseyans, which is why it has put together a whole series of tutorial videos, explaining the basics of the exchange and processes like how to lay a bet and how decimal odds work.

“We’re really trying to soften the product,” explains Evans. “There’s an education piece here. We’re trying to explain this to a guy in his twenties who maybe bets on horseracing once or twice a year but also may have used DFS – that’s a much younger demographic and if we can get them playing with us, that’s a win for us and horseracing.”

In fact, Barden believes the advertising blitz which got the DFS industry in so much legal hot water last year, may have come at the perfect time for Betfair.

“DFS has done us a favour,” he proclaims. “They have hammered a legal gambling message to this same young, predominantly male audience we are targeting. They even pushed it on mobile which is what we’re trying to do. They’ve made it more socially acceptable to place money on the outcome of sporting events.

“And then they stumbled because they were operating in a gray market. Well guess what. We spent four to five years getting that legality piece in place and now it’s paying off. Now we can expand our messaging and bring these recreational guys in.

“DFS people used to laugh at us and say ‘you’re crazy, why don’t you just get in there and start operating in the gray market because you could’. And now the industry has millions of people that are potentially unmonetizable and we’re hoping to scoop them up,” Barden says.

One shot

While the advantages for Betfair seems to be stacking up, the company is well aware that the New Jersey exchange needs to work flawlessly for the model to be accepted and replicated in other regions.

States like California and Iowa – where the racing commission recently presented a report on exchange wagering to the Iowa General Assembly – will be watching the New Jersey experiment closely.

“New Jersey is our sole focus right now” says Barden. “We need to show we are great for the industry and we don’t want to take our eye off the ball because we do have a huge job here.

“California is a massive market of course but we don’t really have a next target. The industry is so fractured with so many stakeholders that trying to hedge our bets on which state is next is a waste of time for us.

“We will not turn away anyone that comes to us and says ‘we love what you’re doing, can you do it in our state’. We will gladly entertain that discussion but we are going to be reactive on that rather than targeting states and trying to force something through. It took us five years to get this one state,” Barden proclaims.

While the initial breakthrough may have been a long time coming, it would take a brave man to bet against Betfair getting another domino to fall with its marketing expertise, FTSE 100 reputation and budget, close links with US racing bodies and novel product. Thus far at least, the early going has been good for Betfair and a savvy form reader might predict the online gambling giant could pull clear in its race to captivate the US.