MELBOURNE, Australia (Reuters) -- Bookmakers around the globe are up in arms as gambling's fastest-growing phenomenon -- the Internet -- threatens to rewrite the rules of one of the world's favorite pastimes.
Having a similar effect to what Napster had on the music world, these savvy Web sites -- which function like stock exchanges for punters -- are challenging the multi-billion-dollar bookmaker business by making an entrepreneurial move on the established market online.
The nightmare for bookmakers like William Hill and Australia's Tab Ltd started at a party in Wiltshire, England, on the day of the 1998 Wimbledon men's tennis final.
Edward Wray, a JP Morgan debt trader, and his brother's best friend, Andrew Black, a software contractor with the British government, were chatting about using the Internet to allow punters all over the world to set their own odds and gamble against each other without the need for a bookmaker.
They hit the jackpot.
Launched in Britain in 2000, Betfair was the world's first ever betting exchange. It now has 90 percent of the global betting exchange market and matches well over 50 million pounds of bets each week.
Its advent has not only forced traditional bookmakers to innovate and rethink their growth strategies or face extinction, but has also fueled an explosion in online gambling -- one of the world's biggest sources of untaxed and untraceable income.
"We did think that we would ultimately get this big but we were surprised with the speed with which it happened," the 35-year-old Wray told Reuters.
As Betfair gained market share, bookmakers became worried and then angry.
The latest war against betting exchanges is being waged in Australia, the world's third largest gaming market behind North America and Japan.
Betfair, which wants an Australian license, has stirred up a media storm as comments from Warren Wilson, a former rugby league player and managing director of Australia's second-largest gaming group Tab, were often pitted against those from Wray, an Oxford graduate who likes cricket and was an avid rower.
"What is going to happen if these guys come to town is the state government is going to be massively out of pocket, and the racing industry is going to be out of pocket," said Wilson, who is leading the campaign to ban betting exchanges.
Tax cash cow
Proving popular, betting exchanges are making inroads into traditional betting outlets.
Gambling is heavily taxed in Australia with about A$5 billion ($3.45 billion) going into government coffers annually. A recent study showed that, for every one percent shift in market share away from traditional outlets to exchanges, the Australian racing industry loses A$5.4 million a year and the government A$5.2 million.
Tab derives nearly 85 percent of its revenues from wagering while Tabcorp Holdings, the country's largest gaming concern, gleans about 20 percent from wagering.
Wray said bookmakers should face up to stiff competition. "As in any business, if you try to stand in the way of what the customer wants and likes, you have a limited shelf life," said Wray, who has since quit his job to look after Betfair's expansion offshore.
Competition from Betfair has already slashed the value of hotel and casino operator Jupiters Ltd's online sports betting firm Centrebet by up to a third.
In Britain, investment bank Goldman Sachs started the coverage of William Hill in June with an "in-line" recommendation as it said the stock might struggle to gain ground due to uncertainty over the company's online business and the potential threat from competitors such as Betfair.
In Japan and Hong Kong, betting on Betfair and all offshore gambling sites is illegal.
Wray is undaunted. "If we go into a market and are met with a huge amount of resistance then that just tells us that we are targeting the right market," said Wray.
Key to Betfair's success is not just perceptions that its product is consumer-friendly, but also because it is cheap.
On Betfair, a punter can bet on anything from Gaelic Football, the 2004 U.S. Presidential election, to whether the Dow Jones Industrial Average would close higher or lower the next day. The company's Web site also boasts translations in simplified and complex Chinese -- a rare treat from a UK outfit.
The nimble dotcom has only 280 staff and charges punters a lower fee with odds that are up to 20 percent better than traditional bookmakers. Traditional bookmakers cannot afford to charge lower fees as they have to support thousands of staff and hundreds of retail outlets.
Wray said the idea of punters betting against each other brings gambling back 200 years when bookmakers did not exist.
Betfair, which now contributes to the UK gaming industry, said it would pay taxes in Australia as soon as it is licensed.
But analysts say Australia, which is reviewing its gaming legislation, is likely to ban betting exchanges in the next year as they pose too much of a threat.
Having a similar effect to what Napster had on the music world, these savvy Web sites -- which function like stock exchanges for punters -- are challenging the multi-billion-dollar bookmaker business by making an entrepreneurial move on the established market online.
The nightmare for bookmakers like William Hill and Australia's Tab Ltd started at a party in Wiltshire, England, on the day of the 1998 Wimbledon men's tennis final.
Edward Wray, a JP Morgan debt trader, and his brother's best friend, Andrew Black, a software contractor with the British government, were chatting about using the Internet to allow punters all over the world to set their own odds and gamble against each other without the need for a bookmaker.
They hit the jackpot.
Launched in Britain in 2000, Betfair was the world's first ever betting exchange. It now has 90 percent of the global betting exchange market and matches well over 50 million pounds of bets each week.
Its advent has not only forced traditional bookmakers to innovate and rethink their growth strategies or face extinction, but has also fueled an explosion in online gambling -- one of the world's biggest sources of untaxed and untraceable income.
"We did think that we would ultimately get this big but we were surprised with the speed with which it happened," the 35-year-old Wray told Reuters.
As Betfair gained market share, bookmakers became worried and then angry.
The latest war against betting exchanges is being waged in Australia, the world's third largest gaming market behind North America and Japan.
Betfair, which wants an Australian license, has stirred up a media storm as comments from Warren Wilson, a former rugby league player and managing director of Australia's second-largest gaming group Tab, were often pitted against those from Wray, an Oxford graduate who likes cricket and was an avid rower.
"What is going to happen if these guys come to town is the state government is going to be massively out of pocket, and the racing industry is going to be out of pocket," said Wilson, who is leading the campaign to ban betting exchanges.
Tax cash cow
Proving popular, betting exchanges are making inroads into traditional betting outlets.
Gambling is heavily taxed in Australia with about A$5 billion ($3.45 billion) going into government coffers annually. A recent study showed that, for every one percent shift in market share away from traditional outlets to exchanges, the Australian racing industry loses A$5.4 million a year and the government A$5.2 million.
Tab derives nearly 85 percent of its revenues from wagering while Tabcorp Holdings, the country's largest gaming concern, gleans about 20 percent from wagering.
Wray said bookmakers should face up to stiff competition. "As in any business, if you try to stand in the way of what the customer wants and likes, you have a limited shelf life," said Wray, who has since quit his job to look after Betfair's expansion offshore.
Competition from Betfair has already slashed the value of hotel and casino operator Jupiters Ltd's online sports betting firm Centrebet by up to a third.
In Britain, investment bank Goldman Sachs started the coverage of William Hill in June with an "in-line" recommendation as it said the stock might struggle to gain ground due to uncertainty over the company's online business and the potential threat from competitors such as Betfair.
In Japan and Hong Kong, betting on Betfair and all offshore gambling sites is illegal.
Wray is undaunted. "If we go into a market and are met with a huge amount of resistance then that just tells us that we are targeting the right market," said Wray.
Key to Betfair's success is not just perceptions that its product is consumer-friendly, but also because it is cheap.
On Betfair, a punter can bet on anything from Gaelic Football, the 2004 U.S. Presidential election, to whether the Dow Jones Industrial Average would close higher or lower the next day. The company's Web site also boasts translations in simplified and complex Chinese -- a rare treat from a UK outfit.
The nimble dotcom has only 280 staff and charges punters a lower fee with odds that are up to 20 percent better than traditional bookmakers. Traditional bookmakers cannot afford to charge lower fees as they have to support thousands of staff and hundreds of retail outlets.
Wray said the idea of punters betting against each other brings gambling back 200 years when bookmakers did not exist.
Betfair, which now contributes to the UK gaming industry, said it would pay taxes in Australia as soon as it is licensed.
But analysts say Australia, which is reviewing its gaming legislation, is likely to ban betting exchanges in the next year as they pose too much of a threat.
