Ed Wray, left, and Andrew Black created Betfair, which has spawned 21 competitors but still holds an 80 percent share of the online betting exchange market.
London -- The traditional British betting shop fancies itself a social institution, a convivial place where people can wager a few pounds on a horse race or soccer game. But that's not how Andrew Black sees it.
The Internet entrepreneur considers bookmakers financial parasites who build a fat profit into all the odds they offer.
Inspired by the way shares trade hands on the New York Stock Exchange, Black designed a way to match both sides of a bet via the Internet, bypassing the bookmaker. By acting as a broker, his company Betfair has rocked the hidebound world of sports betting.
Black's notion was to take a commission on the winner's earnings rather than to make money on odds. He developed the technology in his spare time while working as a software contractor for British intelligence.
Three years after its launch in a London attic, Betfair has 290 employees and an 80 percent share of the online betting exchange market, with 30,000 regular customers whose average wager is 35 pounds ($59), or three times the typical wager at a High Street betting shop.
Betfair's success has spawned 21 competitors, and its closest online rival, Sporting Options PLC, has a market share of just 12 percent.
“The strength of our model is the technology that drives it,” said Betfair spokesman Mark Davies.
It's precisely that technology that bothers established bookmakers, many of whom also take bets online. They accuse betting exchanges of unfair competition.
“If I were to go into a pub and take bets from people, I'd be breaking the law, but if I go on the Internet and do the same thing via a betting exchange, it's legal. We think this is a massive discrepancy,” said David Stevens, a spokesman for Coral Eurobet Ltd., Britain's third-largest bookmaker.
In online exchanges, betting is a transaction — not unlike the open outcry mechanism for trading shares on Wall Street that inspired Black, 40. He started the business with his best friend's brother, investment banker Edward Wray, 35. The pair raised $1.7 million from friends and family.
Betfair lets people offer their own odds for a sporting event. In most cases, the exchange is able to match each individual with someone taking a contrary view who accepts the odds being offered.
It charges winning customers a commission ranging from 2 percent to 5 percent of their earnings; a bookmaker's margin might be substantially bigger. Losers pay no commission.
Payouts are handled by computer servers, and Betfair says its Web site is well-protected against hackers. Using an electronic audit trail, it can track any bet placed on its site and investigate irregular betting patterns if it suspects a customer of fraud.
Within nine months of its launch, Betfair broke even. As a privately owned firm, it doesn't release profit information, and Davies said only that it's now “in good shape.”
Three months ago, the firm hired an outsider — Stephen Hill, former head of the Financial Times Group — as its chief executive. Betfair plans soon to expand overseas, with Wray leading efforts to build a business in Australia.
Paul Cooper, a former Betfair employee who works now for Sporting Options, says he thinks “the whole industry of exchange betting is continuing to spiral.”
Some analysts estimate the global market for legal betting on sports generates at least $3.4 billion in annual revenues. Although betting exchanges account for no more than 4 percent of this market, they claim to appeal to people who bet with their heads and not their hearts.
“The vast majority of punters bet on the basis of the colors worn by a jockey or the name of a horse or something that catches their eye and makes them think, ‘Today my luck has come in.' ” Davies said.
In contrast, devotees of betting exchanges look at the true chances of winning, and place much bigger bets, he said.
Russell Clifton, a regular Betfair customer, bets as much as 1,000 pounds ($1,690) on a single horse race. As a professional stock trader, he said he's comfortable with Betfair's technology and appreciates being able to offer his own odds directly to other individuals.
“That's the brilliance and the simplicity of the system,” he said. “It's a revolution.”
While old-fashioned bookmakers protest the online betting exchanges, Britain's Department of Culture, Media and Sport acknowledges that there are “loopholes” in the rules governing them. But the agency doesn't expect Parliament to pass a new gambling bill before the summer of 2005.
One concern is that betting exchanges, unlike traditional bookmakers, let customers wager on horses to lose races and not just win them. Bookmakers worry that this could tempt jockeys, trainers, stable hands or even horse owners into throwing a race if the odds are right.
“There is a threat to the integrity of racing, but we're working with the exchanges to combat any threat,” said Owen Byrne of the Jockey Club, which sets the rules for British horse racing. In June, Betfair and Sporting Options agreed to provide the Jockey Club with customers' identities if requested.
Another issue is taxes. Although betting exchanges pay the same taxes as bookmakers, Stevens of Coral Eurobet says some exchange customers are functioning as bookmakers and should also be taxed.
That would clearly discourage betting with the exchanges — and make it hard for them to survive.
Betfair's Davies denies that betting exchanges have an unfair advantage. Traditional betting shops shouldn't fear losing customers to the exchanges because, he said with a touch of irony, “there are so many people who don't care about value.”
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