The New York Times – High-Tech Wagering Sees Gateway Into America: The Horse Track

July 29, 2016

By Joe Drape

Under a ratio used in Nevada, the American Gaming Association concluded American casinos could increase annual revenue by at least $8 billion if sports betting was extended beyond Nevada.

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DUBLIN — Ever since the first bookie stood on a step ladder and scrawled odds on a chalkboard, betting on horse racing was just about picking winners.

No more.

Here, where betting on a horse race (or a soccer match or anything at all) is a cherished pastime, you can wager on a horse to lose.

You can bet in the middle of a race — much the way Wall Street traders buy and sell stock based on market fluctuations — and even cash out a winning ticket before the race is over, if the price is right.

This new style of betting, called exchange wagering, was pioneered by Paddy Power Betfair, helping it become the world’s largest publicly traded online gambling company.

Exchange wagering has been available since May in New Jersey, where Betfair will sponsor the 49th running of the Haskell Stakes on Sunday at Monmouth Park in Oceanport. It is part of a broader strategy to woo young gamblers comfortable with fast-paced, tech-focused betting and get ahead in what is expected to be the widespread legalization of sports gambling in the United States.

Betfair is not the only European bookmaker to target the United States, where momentum for legalizing sports betting is at a high. The bookmaker William Hill, based in London, has become a dominant operator of sports books in Nevada, where betting on games is already legal.

But Paddy Power, through its subsidiary Betfair US, has chosen horse racing as its American beachhead and exchange wagering as its lure to draw new customers. Think eBay for gamblers, with wagers being made in real time by traders allowed to post odds and prices for peers to accept or reject.

In betting parlance, the over/under is five years on when legalized sports gambling will be available outside Nevada.

“There is no question in my mind we’re going to have this happen,” Tim Wilmott, the chief executive of Penn National Gaming, a company with 27 casinos and racetracks in 17 states, said recently at the East Coast Gaming Congress in Atlantic City.

The European incursion has met resistance from American racetrack operators, many of whom are also gambling companies. Two of the biggest, Churchill Downs Inc. and the Stronach Group, fear exchange wagering will cut into their profits. While Churchill operates the Kentucky Derby and the Stronach Group the Preakness Stakes, both have prohibited Betfair’s exchange wagering, citing, among other reasons, concerns it will encourage race fixing.

“There are integrity issues,” said Mike Rogers, the president of the racetrack division of the Stronach Group, which owns prestigious tracks in California and Florida. “Exchange waging allows a customer to bet a horse to lose, and we are still concerned about the current economics that is being returned to the industry.”

Betfair, though, is pushing ahead, with its sights on what could be lucrative terrain if sports betting is legalized beyond Nevada.

Legislators in New Jersey, Pennsylvania, New York and California have already pushed legislation to legalize sports betting in order to increase state revenue. A formal lobbying effort on Capitol Hill for the expansion of legalized wagering by casinos and gambling interests may begin as early as 2017.

American professional sports leagues, once among the fiercest opponents, are getting ready for an era in which betting is legal and conducted in the open. N.B.A. Commissioner Adam Silver has said that betting on his league’s games should be legal and regulated.

The N.H.L. recently awarded its 31st franchise to Las Vegas, Sin City itself.

Some see the rush to embrace gambling as just that, a rush without careful scrutiny.

“We are pretty concerned about the ability of states to adequately address the impacts of legalized and expanded sports betting on problem gamblers and other vulnerable groups,” said Keith S. Whyte, executive director of the National Council on Problem Gambling, which as a group remains neutral on legalized gambling. “They have done a pretty terrible job with most other forms of legalized gambling.”

Still, there are signs the public wants to bet on sports. Nearly two-thirds of the population — 63 percent, according to a recent poll by Seton Hall University — believes that betting on sports should be legal, and 68 percent of the respondents said sports betting’s legality should be decided at the state level.

Last year, Nevada sports books took in a record $4.2 billion in legal wagers, a number that is dwarfed by the billions bet illegally through offshore internet sites or operations run by organized crime. Nearly $150 billion is bet illegally by people in the United States, according to estimates by law enforcement and industry groups, a number that easily doubles when illegal wagering globally is factored in.

Under a ratio used in Nevada, the American Gaming Association concluded American casinos could increase annual revenue by at least $8 billion if sports betting was extended beyond Nevada.

A live broadcast at the Los Angeles television studio of TVG, an online betting site that handles $1 billion in horse racing bets in the United States each year. Credit Jake Michaels for The New York Times

With advanced technologies — mobile as well as online — already in place and a record of taking bets at a large scale, William Hill and Betfair have a huge head start on their American competitors.

In Betfair’s case, it is almost a turnkey operation. It already owns two television channels that broadcast more than 40,000 races a year and is available in more than 40 million homes in the United States.

It also operates an online betting site, TVG, that handles $1 billion annually on horse racing bets in the United States.

“They already got very robust services in place,” said Sebastian Sinclair, president of Christiansen Capital Advisors, a research and consulting firm that specializes in gambling and entertainment. “They also have gone through the regulatory process in England and Ireland and have passed rigorous examinations. It gives them a leg up.”

Kip Levin, president of Betfair US, acknowledged that his company is poised to reap a windfall if sports gambling is legalized in the United States. But he added that over the past eight years Betfair has devoted its efforts, as well as tens of millions of dollars, to become the dominant player in an underrated market in the United States: horse racing.

Last year, for example, $3.59 billion was bet online legally in the United States on horse racing, generating roughly $700 million in revenue, according to publicly published data from state racing commissions.

That total is four times the $158 million in revenue generated by online casinos, and more than double the $300 million in revenue generated by daily fantasy sports, according to numbers compiled by Eilers & Krejcik Gaming, a financial research firm.

“Our focus is, and has been, on growing horse racing through the television stations, our account wagering and now the exchange,” Levin said. “If sports betting becomes legal in the United States, we are ready and in the position to capitalize on it.”

Betfair’s pursuit of gamblers in the United States began here from an office in Silicon Docks, where blue chip tech companies like Google, Facebook, Airbnb, LinkedIn and Twitter have taken root.

Its interiors are familiar to start-ups the world over, rows of tabletop desks and blinking computer screens in open-air bullpen fashion.

The difference is that not only are the ubiquitous television screens tuned to a never-ending stream of horse races, soccer games and almost every conceivable sporting event that can be bet on, but working alongside the engineers and programmers are seasoned bookies. Among them is Gethin Evans, 37, who started with an odds board and money box at English betting rings at racetracks like Ascot and Cheltenham.

To Evans, “smart is the new lucky” is more than just the tag line for Betfair’s American advertising campaign. It is the sum of the lessons that he learned assessing risk, crunching data and bringing it to bear for some of Europe’s leading betting operators.

He has been paired with Bart Barden, a product manager who previously worked for divisions of Electronic Arts and Microsoft, to spread the gospel of exchange wagering in the United States.

“It’s not enough to have a cutting edge technology,” Evans said. “You got to anticipate how and why your customers want to use it and then give them all the tools they need to feel comfortable. Gambling is about finding an edge or insight and being able capitalize on it.”

In Betfair’s case, the technology is its exchange wagering platform that allows bettors to set and lock in their wagers at their own odds while also offering bettors midrace options.

So far 21 tracks in the United States have allowed their races to be part of the Betfair exchange. Among those races will be those run at the Breeders’ Cup World Championships, which include one of America’s most prestigious and lucrative days of racing. Unlike fixed odds books, which are at the mercy of the outcome of the bets, the exchange takes a fee for processing a transaction.

In Ireland, for example, Nyquist, the Kentucky Derby champion, is the 6-5 favorite to win the Haskell at fixed-odds sports books. You either take him or leave him at those odds.

In the United States, where parimutuel wagering reigns, bettors are pitted against one another. If Nyquist opens at 6-5 and you bet on him, but so does everyone else, the odds might drop to 2-5 and that is what you are stuck with. If Nyquist wins, instead of getting the $4.40 you counted on, the return is only $2.80 for a $2 bet.

On the Betfair exchange, however, a wager can be created by a bettor. For instance, the bettor can bet Nyquist will lose, and seek odds of 4-1. So, if any horse in the field upsets the Kentucky Derby champ, the bettor receives $10. The bettor can also hedge that wager by betting on Nyquist to win if, as the race is being run, it is clear that the colt will not be caught.

The exchange platform also offers an automated feature called Cash Out that lets a bettor ensure a profit or mitigate a loss with one click of a smartphone or laptop at any time before the race is over. The feature instantly analyzes the bettor’s market position against all other trades being offered by other bettors. 

So, if a New Jersey gambler takes Nyqvist to win at 7-5 in and the colt is loose on the lead after six furlongs, the Cash Out feature lets the bettor take a smaller profit before Nyqvist hits the wire, whether the colt ultimately prevails or gets caught in the final jump by a closer.

The company has countered concerns that the exchange provides a ripe environment for fixing horse races or sporting matches by entering agreements with various leagues and sports organizations around the world to share information on any unusual betting patterns.

In 2007, the company refused to pay $7 million in bets involving the Russian tennis star Nikolay Davydenko, kicking off a match-fixing investigation and wider scandal that still reverberates in the sport.

In Europe, the exchange’s impact has been dizzying as well as lucrative. Last year, Betfair had 1.7 million customers who made about 1.2 billion bets, an average of 3,287,671 bets a day. But the statistic that gets hearts pounding in American horse racing is the average age of customers on the European exchange: 38 compared with 52, the average age of TVG account holders in the United States. Those bettors, however, are wagering on a variety of sports.

“It goes to the heart of what horse racing wants here: new and younger fans,” said Joe Harper, president and chief executive of the Del Mar Thoroughbred Club.

Exchange wagering has been approved in California, but opposition from the Stronach Group, which owns Santa Anita Park, as well as some prominent owners, has stalled its implementation.

“Something new is not always met with open arms in the horse racing industry,” he said. “That is why it is so important that exchange wagering becomes a good experience in New Jersey. It can melt away opposition.”

Dean Towers, who writes the influential Pull the Pocket blog, which focuses on the economics of sports gambling, says American racetracks have a huge opportunity to plump their bottom line if they manage to avoid their tendency for self-sabotage.

“Exchanges bring in new demographics precisely because they offer a low vigorish to the most price sensitive,” he said. “Sabotaging this edge sabotages the exchange’s No. 1 selling point.”

The early returns in New Jersey are encouraging, but company officials concede that American bettors face a steep learning curve. In the first seven weeks of operation in New Jersey, exchange wagering on thoroughbreds was $1,142,228, according to the New Jersey Racing Commission.

In a typical seven-week period New Jersey handles about twice that number, $2.4 million, online and by phone.

“We seem to be successful so far in attracting people from beyond the traditional tote pools, and liquidity,” said Bart Barden, director of US Exchange, which is part of Betfair US. “Both of those bode well as we ramp up our marketing efforts.”

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