Betfair Plans Web Gambling on Horses in California as State Law Lifts Ban

Betfair Group Plc, a British online- gambling company, is wagering that it can revitalize California’s slumping horseracing industry.

The London-based company, which has spent a decade bringing legal sports betting to the Web, set its sights on California after the state passed a bill in September allowing horse betting through online exchanges.

Betfair has opened an office in San Francisco, where it’s likely to more than quadruple its workforce next year to about 100, said Stephen Burn, the company’s global director of racing. California’s law, the first in the nation to legalize so-called exchange wagering, takes effect in May 2012.

“There’s potentially massive upside there for us,” said Burn, 48, who moved to the state from England a year ago. “We don’t share the doom and gloom that other people have been coming up with about U.S. horseracing.”

California gamblers are currently limited to pool betting, where money wagered on a horse is shared by the people who win. Exchange wagering works like a stock exchange, letting a racing fan bet on a horse to win or lose -- even after the race has started -- with the odds changing in real time. As the developer of the exchange, Betfair gets a commission on every wager.

Governor Arnold Schwarzenegger and the California legislature are counting on the law to help save the state’s struggling horse tracks. In the past decade, the amount bet on races has dropped about 10 percent, and attendance at tracks tumbled by more than a third.

Multibillion-Dollar Company

Betfair says it’s in a unique position to benefit from the law because it has an online exchange designed for horseracing and can work with regulators to ensure bets follow the rules. While lots of other sites provide online betting, many focus more on poker or other card games and aren’t legal in the U.S.

Founded in 1999, Betfair’s exchange lets Internet users worldwide bet on sporting events, including horseracing. Most of its 3 million customers are outside the U.S.

Betfair first sold shares to the public in October and is valued at about 1.4 billion pounds ($2.2 billion) on the London Stock Exchange. Horseracing accounts for about 35 percent of revenue, according to Burn. The company reported a 13 percent increase in fiscal 2010 sales to 340.9 million pounds.

It entered the U.S. in January 2009 with the $50 million purchase of Los Angeles-based TVG, a TV network and betting site that operates in states where gambling on horseracing is legal. About 350 of Betfair’s 2,000 employees work for TVG.

San Francisco Office

While the acquisition of TVG gave Betfair a foothold in California, the company sees a bigger opportunity in exchange wagering, which it popularized in countries such as the U.K., Italy and Australia. It has 20 employees in San Francisco and expects to hire as many as 80 more by the middle of next year, mostly working on exchange technology, Burn said.

The company may face competition in California. Companies such as Churchill Downs Inc., which hosts the Kentucky Derby, have expressed interest in the market.

Exchange wagering attracts younger, more technology-savvy bettors than traditional pools betting, Burn said. About 80 percent of TVG’s customer base is over the age of 50, while 80 percent of Betfair’s users are under 50, he said.

The new measure was unanimously supported by the California Horse Racing Board, which regulates gambling on the sport. Chairman Keith Brackpool says California has fallen behind states that have slot machines and casino games at tracks.

Because California has no racetrack-casino combinations, known as racinos, the industry is bringing in less revenue, which means less prize money, poorer horses and a reduction in total betting.

‘Best Chance’

“You have this paradox now where tiny little tracks are offering big prize money because they’re all subsidized through the slot operations,” said Brackpool, who is also chief executive officer of Cadiz Inc., a Los Angeles company that owns thousands of acres of California desert. “This is our best chance of bringing in a new audience.”

Attendance at California tracks tumbled to 6.7 million last year from 10 million in 2000, according to data from the state- run racing board. The amount wagered dropped 9.1 percent to $3.67 billion, and commissions fell 14 percent to $146.5 million from $171.1 million.

Bay Meadows in San Mateo, the track where Seabiscuit won twice in the 1930s, closed in 2008, making way for a residential and commercial district.

Churchill Downs

The new rules don’t go into effect until mid-2012 because the state wanted to let regulators establish procedures and give companies time to build their technology. The bill has a clause that allows it to expire in May 2016 if it proves unpopular.

Churchill Downs CEO Robert Evans cited the California legislation in a conference call last month. The Louisville, Kentucky-based company is looking for ways to profit from online gaming, he said.

“The industry is hoping that the growth of the online space is going to help offset the decline of traditional on- track betting,” said Anil Gupta, an analyst at Imperial Capital in Los Angeles.

Betfair CEO David Yu says his company will spend the next year working closely with regulators to ensure that new laws are clear to consumers and to establish a system that pumps enough revenue into the state and the horseracing industry.

Regulation Wanted

“We like to see well-regulated markets,” Yu said in an interview in San Francisco. “You should have regulation that protects consumers, and there should be a tax framework in place.”

Following Sacramento’s lead, the New Jersey Senate passed a bill last month to legalize exchange wagering. The law, still awaiting the governor’s signature, may take effect by the middle of 2011 -- a year earlier than in California. Betfair is hoping more states enter the fray to create a bigger market, with more tracks and customers.

“The more liquidity you get, the more attractive the markets become, and you have this snowball effect,” Burn said. “We can build the exchange for all of America and operate it from California.”

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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