Smart money is on Black

IN MAY 1998 Andrew Black was working away from home on a contract with the Ministry of Defence. At about eight o’clock on one of many lonely nights he came up with an idea. Unlike many other ideas, he still liked this one next morning.

After a sporadic career spread between being a City mathematician, golf caddy, professional gambler and equities trader, he was then working as a freelance computer programmer. To fill in spare time, he was devising new odds calculation programmes for football matches, which were turning him a neat profit.

That night he went one step further and came up with the concept of Betfair - an open-to-all internet gambling exchange which strips out the need for a bookmaker. Based on the principles of the US stock exchange, the system allows its customers to offer odds to other gamblers or place bets in the traditional fashion.

Rather than buying and selling shares, Betfair’s users buy and sell odds on everything from horse-racing to the FTSE’s daily closing price. Odds are even being offered on who the next Pope will be and which Canadian company chief executive is most likely to lose his job.

After four years in full operation, the business is growing rapidly across the globe, and it even earned the title of company of the year at the CBI’s business awards a few weeks before Christmas. The concept has also spawned a slew of clone sites, creating an entirely new industry that is stealing punters from traditional bookies - ruffling feathers both at home and abroad.

Although debate surrounding the draft Gambling Bill has become lost in a fog of super-casinos and gamblaholics, it was the rise of Betfair and its copycats that forced the culture secretary, Tessa Jowell, to review the existing betting legislation in the first place.

"I worked in and around the stock exchange for four years," explains Black, better known to his friends - and his 450 employees - as Bert. "I was down on the floor, I knew it really well, I knew how it worked. After my year’s gambling, I was working on the New York Stock Exchange - not on the floor but one step away from it.

"The stock exchange in the UK is market-maker driven. When you want to buy shares you go to the banks that are offering the best price. If you’re selling, you sell to the banks paying the best price.

"In America it’s different. It’s a proper open outcry system. If you want to buy something you just go for it. You could see that this was something that worked for shares. You can buy a certain number of shares at a certain price and the model in the exchange revolved around price - £1.82, £1.83, £1.84 going out from there.

"The big jump was realising the numbers in the model didn’t have to be a price. If you substituted these numbers for odds, it still worked."

Betfair has more than 300,000 registered customers. Roughly 50,000 of these place bets every week. During events such as the Cheltenham festival, the Betfair system handles 12,000 bets a minute. Last year it made bottom line profits of £11.9m.

The top tier of the company’s management is dominated by former traders and bankers - including Black’s co-founder Ed Wray, a former vice-president of JP Morgan debt capital markets. It is chaired by Bob Horton, formerly of Railtrack and BP.

But venture capitalists would not touch Betfair with a bargepole when it was trying to raise money to launch - even though it was pitching itself at the height of the dot.com boom. The firm was competing with other proposed betting exchanges that worked on a simpler concept.

Rather than creating a market for gamblers to trade in, they were operating on a system which saw punters bid for bets at certain odds, in the same way as you may buy a television from ebay. One of these firms, Flutter.com, raised capital, but Betfair proved to have the better concept and in January 2002, Betfair merged with Flutter to acquire its £19m cash pile. Now all the betting exchange sites work on the Betfair principle.

Black still owns 15% of the business. "I really want to float this business," he says. As things stand, Betfair looks a tasty investment opportunity. Despite the flood of new rivals, Seymour Pierce leisure analyst Paul Leyland says it controls about 85% of the betting exchange market - dwarfing rivals such as Betdaq.

When another big rival, Sporting Options, went into administration in November after dipping into clients’ money, Black stumped up the cash for a bail-out programme to reimburse the 5,000 punters who had been stung. Although it was a costly move, he could afford it and it helped to protect the image of an industry that is suffering from negative lobbying on the part of the traditional gaming industry.

At the beginning, Betfair was focused on attracting a small number of high-rolling punters each betting up to £80,000 a week. The site is even used by traditional bookmakers to help offset any potential losses they could be facing. Now the company is moving into the retail market and has become the third-biggest sponsor of horse-racing in the UK to back this push.

While Betfair remains internet-based, it now does about 10% of its business over the phone - partly to attract more traditional gamblers, who may not be as familiar with the internet as the City traders who make up much of its clientele. But geographical expansion remains the key.

"Geography is an absolute priority," says Black. "It’s a land grab right now. If we don’t go after geographies then someone else will. We’re working pretty hard in Australia. - that’s our biggest push. And we’re meeting some pretty staunch resistance."

Betfair already has a vast number of Australian customers which it has acquired without straining any element of the law. But Black wants an Australian betting licence, which would allow the company to advertise - and to establish a second headquarters down under that would mirror the operations of its main base in Hammersmith, west London.

The company is keen to run a 24-hour operation, so that if bets are being placed in Australia on the three o’clock at Rosehill, there is a telephone operator in the UK picking up the phone at four in the morning, and someone sitting waiting to close the market when the starter’s gun goes off.

Black says: "As far as moving into the rest of Asia goes, the timelines all line up nicely with Australia. If you’re talking about covering racing in Japan - which we don’t just now - you could do that from Australia. It makes a lot of sense."

In Australia, the existing betting monopoly, the TAB, is not happy about Black’s expansion plans - and the displeasure is filtering into the media. The company has been described as a potential front for Al-Qaeda to launder money, among other things.

"Rob Mason, the head of horse-racing in Victoria, said he would cancel the whole Spring Cup - which is the big meeting, the one which includes the Melbourne Cup - if we got in," says Black. "In a meeting with a load of other totaliser boards, he even proposed sanctions against the UK because of us."

As far as both Black and his managing director Mark Davies - another former banker - are concerned, the resistance is almost a sign of respect. Monopolies do not like being broken up, and they believe Betfair has the potential to do that in the betting market on a global scale.

They fear similar resistance in the UK with the draft Gambling Bill. The original purpose of the bill was to find a way to regulate the online betting exchanges to ensure consumers were being sufficiently protected. But there is still a risk it could be used to try to drive the exchanges out of business altogether.

As it stands, the regulatory burden will fall on the companies operating the exchanges, who will have to prove they know who their customers are and that they are in control of their market.

The bookmakers want it changed so that everyone using the exchanges would effectively have to become a licensed bookmaker.