STRATEGIC MANAGEMENT BETFAIR

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1 STRATEGIC MANAGEMENT BETFAIR Jorge Tarzijan

2 Background Information The Betfair case shows that two firms competing in dissimilar ways may become partners in value creation, by jointly growing the economic pie in their sector. The traditional bookmaker is a one-sided operation it only offers punters odds on events. But the betting exchange is two sided it provides an electronic platform that allows its customers to not only back teams to win, but also to lay odds for others to bet on.

3 Questions 1. What aspects (choices) of Betfair s business model inter-link to create a powerful interactive system? In particular, why did these choices make it successful in its initial competitive battle with Flutter.com? 2. How do the bookmakers and Betfair interact? Does the competitor compete for the same customers? At what other points do they interact? 3. What would you recommend for Betfair going forward? Which expansion option do you prefer, and why?

4 1. What aspects (choices) of Betfair s business model inter-link to create a powerful interactive system? In particular, why did these choices make it successful in its initial competitive battle with Flutter.com?

5 Betfair: Business model One-sided and two-sided business models have different logics of value creation and value capture Bookmakers create value by managing risk, and they capture it through the odds that are offered to punters. Betting exchanges bear no risk they create value by matching the two sides of the market, and they capture it by taking a cut of the punters net wins.

6 Betfair: Business model The business model of Betfair essentially consists of three basic elements: 1. A value loop that emphasizes Betfair s position as a network business that creates two sides of the market Those who wish to back horses (the ordinary punters) and those who wish to lay (the bookmakers or traders). Betfair chose a system that looked more like a stock exchange and that clearly show the prices. 2. The feeder decisions to attract the layers in the market (the high-volume traders) These can be considered in stark contrast to the choices made by Flutter.com. 3. A (possible) regulatory advantage that leads to a lower tax burden and prices on Betfair.

7 Betfair: Business model Layers don t pay tax on winnings Low prices Low-cost Business Model that cuts out middle men In-play gambling possible High Volume of bets (Greater Betfair Profits) Digital Odds Smaller Price increments Decreasing Commission Rates with Volume Attract everyday punters (back-side of market) Attract highvolume traders (lay side of market) Site looks like stock exchange Increased Competition within Markets Liquidity exists in each market More money to gamble with Commission / Exposure calculated on events not individual bets Restrict markets to certain events Regulatory advantages Source: Ramon Casadesus-Masanell Network Loop Feeder Choices

8 2. How do the bookmakers and Betfair interact? Does the competitor compete for the same customers? At what other points do they interact?

9 Interaction of Business Models Betfair model strikes at the heart of a bookmaker s operations, and the animosity of the relationship is very visible in Betfair s publicity (proclaiming the death of the bookie). Major point of interaction is for customers Customers are attracted by the lower prices (i.e., better odds) available on Betfair Has Betfair reduced the prices/increased the competitiveness offered by bookmakers? Price competition has had an impact (see the gross win percentage of Ladbrokes and William Hill in Exhibits 5 and 6. It has declined markedly in the last 5 years). Has this negatively impacted the bookmaker s business? The increase in the gross win amounts indicates that the price competition has not hurt the large bookmakers, and that increased trade has more than compensated for this.

10 3. What would you recommend for Betfair going forward? Which expansion option do you prefer, and why?

11 Choices facing Betfair The case presents Betfair as it faces a crucial decision point, trying to choose between three options: 1. Increased penetration in the U.K. sports betting market 2. International expansion of its betting exchange model, or 3. Product expansion into more casino-based online gambling

12 U.K. Sports Betting Growth It may represent the most natural progression for Betfair. As punters become more familiar with Internet, Betfair will become increasingly relevant to punters. Multiples betting is a product that needs to be offered, but Betfair would need to take risk itself acting as a bookmaker for at least part of the transaction. What other moves Betfair could make to improve its market penetration? Would Betfair kiosks at race courses or within high street shops be too much? Betfair is considering that, but it may hold back because of the likely reaction from bookmakers

13 International Expansion Betfair s networked business model has international scale impacts. Betting is more international than the trading of goods, which people generally want to engage in only with someone in their own country (due to shipping costs). For example, English and European soccer teams have large followings around the world. Although Betfair is very well placed to expand internationally other countries are not as liberal as the U.K. in gambling. The regulating authorities in Europe may favor a deregulation that would help to expand more easily While international expansion is a natural choice, Betfair cannot be relied on it to provide growth in the short term.

14 Choice: Product Diversification It is a natural extension. Create a market for them and do a trial with existing customers. By widening the number of markets and ways to gamble, a client may gamble in more games, reducing liquidity rather than boosting overall activity. Threat? Online gaming has much lower barriers to entry. Is Betfair s brand name enough of a competitive advantage? or will they end up competing over price to attract customers. Expanding, Betfair mitigates likelihood that its customers will move money to other websites This should boost customer loyalty and increases the average revenue per user.