Innovations of the Decade: #1 Peer to Peer Wagering

With the end of the Aughts rapidly approaching, the r2 collective polled industry insiders, horseplayers, and fans for their top five technological innovations in racing during the past decade. Coming in at #1 is Peer-to-Peer Wagering.

In 2000 two men who liked to play card games and make a bet or two created the Ebay of betting – an exchange where players could bet with each other. This relatively simple concept revolutionized betting – especially horse race betting – and it is the number one innovation of the decade as chosen by our panel.

Back in 1908 pari-mutuel betting (beautifully highlighted by Kevin at Colin’s Ghost ) came to Kentucky. This ushered in a whole new way to bet. The betting of the crowd dictated the odds, and those odds could change to post time. In addition, because of the anticipatory increase in betting volumes, the takeout was set at a very low 5% and racing flourished over the next several decades.  This system is ostensibly the same system we use in North America today.

In the mid 1990′s, the way we lived our everyday lives changed forever. Internet access began to sweep across the globe. No longer did we buy a stock by calling our broker and paying a $300 fee, we now did this ourselves for $6.95 a trade.  Pay phones -  long ago banned at the racetracks – were beginning to be obsolete, replaced by cell phones. Email alone changed the way we communicated. People began to demand convenience, ease of use, interactivity, control, along with lower prices for virtually everything they did or bought.

By the turn of the century, many of these features were offered in the gambling market, by a start-up called Betfair. What was once a shell company, scoffed at by bookmakers as a fad, is now the fourth largest internet start-up in the world, trailing only Wikipedia, Facebook and Craigslist in size. In 2010, the firm will handle over GBP20 billion  in turnover, and process more bets than the European stock exchanges combined do stock trades.

How did that happen? According to Nissan Gabbay at Sierra Ventures, they targeted a niche and expanded in primarily two main ways. 1) They targeted not the mainstream consumer, but the sophisticated gambler and 2) They offered a chance for bettors to win, by offering them a competitive price (most bets at the peer to peer exchange have less than a 5% takeout; ironically about what takeout was for horse racing over 100 years ago).

Nowadays it is not uncommon to see over $4M or more traded on a single horse race from the UK on the peer to peer exchange. Sophisticated gamblers, the general public and a new type of bettor – the stock trader, all play racing in their own way, on their own terms. Attracting a new market that has never given a horse race a look, has been an unexpected bonus. The evidence shows that Betfair considers horse racing their number one sport, and has put their money where their mouth is, sponsoring races, racetracks and expanding worldwide.

They have also advertised this new way to bet. In 2008, they released their first commercial, and this advertisement was not only for the UK market.

If you have never seen a Bulgarian TV commercial, well now you have.

This type of betting becoming is becoming more and more mainstream. For example, for the first time deals have been struck between the company,  several racetracks and even the Breeders Cup. Also, they have expanded into Australia and other countries. Betfair’s 2.5 million customers can bet racing, through the tote, and on the exchange.

Web 2.0 has become a buzz phrase for companies that took advantage of their customer base to grow for them, through API’s, community marketing and real time feedback. Peer to peer betting exchanges are built for this. There are literally hundreds of software packages and tools created by developers to use the betfair exchange. many of them advertise, and increase word-of-mouth. Here is one example, from a software package to bet horse races. This looks quite a bit different than anything we have ever seen before in horse race wagering, and it does (especially when looked at in the aggregate) create buzz.

Also this past year, the peer to peer betting leader has moved into the US market (although not officially), through Betfair’s purchase of TVG. This purchase has been looked at like a blessing by some and a curse by others. To some, Betfair will weed away margins for racing. To others it is chance to decrease prices, and expand horse racing to a willing audience, giving it a shot to survive.

Whatever the case, this form of wagering, with its aggressive marketing and expansion, built on web 2.0 principles is certainly an innovation that racing will remember forever, and a well-deserved winner of our panel poll. Will it lead racing from the abyss? Will it erode margins, making it more and more difficult for racing to survive? Those might be questions we’ll see answered in the upcoming decade.

One thing is for sure, this type of betting is here to stay and it should shape the landscape for many decades to come, just like pari-mutuel wagering did 101 years ago.

Panelist Comments

“Hard to not envy those across the pond who are legitimately *winning* over long periods of time becuase of this. With the rake so high and the game so hard to begin with, wagering stateside remains a hobby for all but a very, very few whales and syndicates with big bank rolls. If the powers that be ever open up to this form of wagering here then we can begin to steal some of poker’s thunder, youth and, most importantly, dumb money!” – o_crunk