Thursday, August 26, 2010

6 Reasons Why It Ain't Easy For Racing to Run an Exchange

There is quite a bit of chatter about the Betfair bill in front of the California state legislature. There seems to be a good chance this will not pass, and one of the ideas floated about by many is the simple (logical, really) argument that racing can and should run its own exchange and 'keep all the money'.

This is nothing new in business. Bricks and mortar auctioneers saw Ebay in '98 and someone said "why don't we be Ebay". Newspapers saw Craigslist and said "why don't we be them". It is common in Internet business and has been for many years.

Currently, it is really not that difficult to get an exchange going. With a small investment (sometimes under $100k, if you give away a slice of the commissions), the resources and the back end can be had, and it can be up and running in no time, really.

So why not then? Why not finally get off our duffs and create one? Here are a few reasons why it is a tough row to hoe, in my opinion.

1. Too Many Fingers in the Pie

Takeout was 5% in North America in 1908. Now it is over 22% blended. If there is something we know racing likes, it's high takeout. Conversely, low takeout is the attraction to Betfair (and other gambling games online) and it is their hook.

From Betfair's annual review when asked about their low takeout:

"We know that the least valuable customers to Betfair are the ones who lose all their money quickly. They go away and never come back. So, we are happy to take less off our customers per bet."

Racing seems to not believe this, and never has, so one would suspect an exchanges biggest edge (price), would be muted by a racing led exchange. Even if they did start at a low takeout, once revenues were not what they wanted, the take would go higher. Horsemen would want most of the money, the investors would want their cut. They will complain when it is not enough and the fingers in the pie would raise the price and shrink the pie, just like we have seen the past ten years in racing.

2. Technological Advancement Will Be Second-Rate

E*Trade, Ebay, Betfair, Facebook and many other successful web companies know one thing: If you do not invest heavily in your technology, you will get killed. Today's savvy web-consumer demands a few things - they want stuff, it better be good, and they want it yesterday. Betfair alone has 400 IT people on their payroll and 1500 servers in five or six countries. They are constantly on the move.

Racing would have to become an Ebay - they would have to sink piles of money in the exchange, and reinvest a lot of the profits back in. The first time the purses are hurt, or times are tough, whomever runs the exchange will say "we need to invest our money to make this great" and someone, somewhere will say "we need the money to run horses because if we go, there is no exchange" The latter will win, and the IT department would lose.

Hugh Mitchell, CEO of Western Fair and a former Woodbine executive recently said that change and innovation in racing is hard because "it's like turning around a 747 on a tennis court". Companies that can not turn that jet on a dime, have their lunch eaten.

Here is a screen shot of software for exchange players on Betfair, showing a simple 5 horse dash. Will this be done here with little IT investment and edge?

3. Marketing Will Be Old-School

This to me is the most interesting, since I am a marketer. I can not believe some folks I speak with in racing who believe that marketing is a) Easy and b) Not that costly. It is very difficult and it is very expensive.

Betfair just embarked on the largest ad campaign in world history for a gambling company. TV, print, online, everything. Via Marketing Week their agency rep said "“Throughout the development process, we were encouraged by Betfair to keep pushing the boundaries. ’Middleman’ a compelling and competitive creative proposition which once again shows that Betfair is a real force to be reckoned with.”

I have heard racing be described as many things, but as a business that "pushes the boundaries" is not one of them.

Betfair is constantly looking for new markets, and do it in myriad ways, as witnessed in their TV commercial. Don't worry, it is not broken, it is in Bulgarian.

Can anyone see racing try this kind of reach and spend for an industry run exchange to grow it outside existing markets? Since they have not done that yet this century - and no one has been stopping them from trying - I can't.

4. It Will Cannibalize Wagering

Betfair does not cannibalize wagering when they enter a market. In each jurisdiction, the tote pools stayed the same, or went up. How? Because they bring in a brand new demographic, target new markets, and their players play more.

Will racing be able to do this with their exchange? As above, I doubt it. Where will they run ads for their exchange? I bet we'd seem them target Horseplayer Magazine, American Turf Monthly, at tracks themselves, and of course the old industry stand by: On simulcast screens. They will be advertising to their existing customers, just like they always seem to do. We will not be creating new customers, we'd simply be shuffling them.

5. No Volume, No Exchange, No Business

If racing had an exchange rolling right now, it makes me wonder. By advertising to existing customers, charging a high price, and having no real value proposition, who exactly is going to get hooked?

Betfair has three million customers, with hundreds of millions (if not billions) in their accounts. It's ready made and it offers volume immediately to any racetrack who chooses to partner with them. Racing would be starting from scratch, and with some of the points above I believe volume and savvy bettors would not be seen, even if we are an exchange monopoly. A dead exchange is worse than a track with a $100 win pool.

6. It Won't Go Viral

Internet gambling or service businesses grow because they are viral. Facebook grows because people sign up, chat and tell friends. Ebay grows because someone sold an old coin for $100 and they told 100 people about it. Online stock trading grew because people told people about it. Online poker grew because friends can invite friends to come play with them, and with others from all over the world.

If a racing exchange charges a high price, really is not that great, and very few people are playing, who is going to tell people to come play on it? We will hear what we always hear, even if we attract some newbies: "it is too complicated, I don't understand, and I lose money" so that person does not want to join, or tell friends.



"Racing should run an exchange and keep all the profits for themselves" is heard time and time again, and is usually met with a nod. Quite honestly it makes sense. There is a musician out there right now saying they should create an "ITunes" and keep all the money for their songs. There are many others who see something work on the net and say "I should do that"

It's not easy. Even with a monopoly, the issues that plague racing - too many cooks in the kitchen calling the shots, lack of reinvestment, lack of vision, charging too high a price for their product in a new world, and lack of customers - will rear their ugly head. We need to get rid of those horrible traits if we ever hope to compete. Until that happens, send the business to a reseller who actually knows how to do today's business. We'd be better off.

For me I guess it all comes down to one simple point. Racing has presided over the Internet age since about 1998. Since 1998, if racing simply held on to their customers and had them bet only to the rate of inflation, handle would be $20B this year. Instead it will be about $10B. A regime who lost half their business in the internet age (where they have held a legal monopoly no less), suddenly knowing how to run a new internet business successfully, is an argument I have trouble taking seriously.

1 comment:

Scott Ferguson said...

The simple reason why they shouldn't run their own exchange - there have been something like 40, yes 40, rivals to Betfair over the past decade. None of them have made a profit, and few remain. Those that survive are backed by stubborn men with ridiculously deep pockets, but they are still heavily in the red.

A locally-run exchange sounds like a great idea, but it will be like trying to run a city council with every citizen given an equal say - nothing will ever get done because everyone thinks they know what they are doing, but actually they don't have a clue.

Betfair will bring technological expertise, marketing expertise, user experience expertise etc etc, and most importantly of all, liquidity. There has to be a starting point. If you turn it on with no money in the pools, people won'thave a clue what is going on and won't have a bar of it. Switch it on and there are 10,000 customers from around the world getting involved because these markets are about to take off, and bang - you hit the ground running and never look back.

Without tapping into liquidity (and expertise) from outside the USA, it will be a bigger lemon than the Spruce Goose.