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Case Analysis Betfair Transforming the Worlds Wagering

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					Case Analysis: Betfair: Transforming the World’s Wagering

Networked Organizations Final Exam
Dr. Leyland Pitt

November 25, 2004

SURAJ BASNET
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275557

Table of Contents
Table of Contents ............................................................................. 2 Case Summary ................................................................................... 3 Objectives of the Class ............................................................................ 3 Teaching Plan: Main Issues and how they should be addressed ................................... 3 Blackboard Plans ................................................................................. 3 How do Bookmaker and Totalisator Systems work: ................................................ 4 Drawbacks of Bookmakers and Totalisator Systems ............................................... 4 Online Gambing Industry and their drawbacks: .................................................... 4 Why Betfair? Advantages of Betfair.com system: .................................................. 4 How does BetFair Make Money? .................................................................. 5 How can Betfair.com Make More Money? ......................................................... 5 PEST Analysis .................................................................................... 5 Political ........................................................................................ 5 Economic ...................................................................................... 5 Social .......................................................................................... 5 Technological .................................................................................. 5 SWOT Analysis (see Appendix B) ................................................................. 6 Marketplace to Marketspace/Value Creation Analysis (Appendix C) ................................ 6 Object Oriented Strategy (Appendix D) ............................................................ 6 Summary and Take Away of Academic Frameworks ............................................... 7 Questions raised by Management: ................................................................ 7 Should the Company be listed on a major Stock Exchange: ..................................... 7 Competition and Reaction ...................................................................... 7 How to Grow Betfair.com ....................................................................... 8 Strategic Partnerships .......................................................................... 8 Growing the Betfair Business Model ............................................................ 8 Appendix A: Size of Online Gaming Industry ....................................................... 9 Appendix B: SWOT Analysis ...................................................................... 9 Appendix C: Marketplace and Marketspace ..................................................... 10 Appendix D: Object Oriented Strategy ........................................................... 10 2

Case Summary In the vibrant, promising, yet equally dubious world of the Internet, entrepreneurs are finding new business paradigms to build fame and fortune. When only a few online companies are prospering after the dot.com hype of the last century, Betfair.com’s model has been financially and conceptually profitable and so far, looks sustainable. It matches virtually every sort of bets between two individuals. In the gambling industry, both traditional and online, which has a controversial record for being unfair and controversial, Betfair.com’s business model of making money from small commissions, irrespective of which party wins, gives it a level of credibility most online gaming casinos lack. This is the story about Betfair.com and how it has achieved its competitive advantages, and will be used in light of the academic theory in the Object Oriented Strategy and Networked Organizations class. This is an excellent story about how a company can benefit from an amalgamation of internet technology, object oriented strategy and a sound business model. The New 5 Forces are an excellent model to perform a preliminary analysis of the company; however this has been spared because of the number of times it was used in-class presentations. Additionally, no description of the company is provided for similar reasons. Objectives of the Class    Applications of academic theory on Networked Organizations Case Study: Discuss how Betfair.com is able to be profitable and its competitive strategy/positioning Advantages achieved by a Networked Organization

Teaching Plan: Main Issues and how they should be addressed      Betfair: How the Betting and Online Betting Systems Work PEST Analysis Application of Business and Network Organization Frameworks Summary and Key Take Aways Answers to Management Queries

Blackboard Plans  Examples of Betfair.com’s Maketplace and Marketspace concept, Object Oriented Strategy and SWOT can be used to highlight academic applications of these frameworks. Please see Appendix B, C and D.

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How do Bookmaker and Totalisator Systems work:  Took the money from the loser and paid the winner. They make a commission during the transaction process Drawbacks of Bookmakers and Totalisator Systems    The Totalisator systems always took a percentage of the win and affected the player's bottom line Bookmakers systems did not reflect the true odds; and if the odds changed, the wagerers did not benefit from these changes These systems were susceptible to practices that put players at a disadvantage against those of the systems Online Gambing Industry and their drawbacks:    The Online gambling is among the few profitable industries in the internet with a projected revenue base of US $ 11 billion by the end of 2004 (Appendix A) Hardly any regulation or control about whether these systems are fair and impartial In the United States, the National Gambling Impact Study Commission has requested and received approval from 1999, that any form of internet gambling is illegal because of its inability to assure fairness and safety1. As a result, until any further notice, online gambling of any form is prohibited in the United States. Why Betfair? Advantages of Betfair.com system:       Impartial system, the company does not care who wins or loses Small percentage commission only on total win, unlike bookmaker and totalisator systems, which took a commission on every bet One can bet against anybody who is willing to accept the challenge; and one can reverse roles/choices A wide variety of wagers, from conventional sporting events to other events, such as Big Brother competitions and the Oscars Bets are accepted until the very end; even while the game is on. This is not true of bookmaker systems One can place bets continuously around the clock and around the world

1 Porter, Rebecca. Prosecutors, plaintiffs aim to curb Internet gambling, Asscociation of Trail Lawyers of America (via www.higbeam.com), 8/1/2004.

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How does BetFair Make Money?   By charging a small commission for only combined winning transaction Profiting on the money through accumulated interests left by depositors

How can Betfair.com Make More Money?  Increasing the number of transactions occurring on the site. This can be achieved by adding new categories of bets, such as predicting weather, advertising, and adding sticky features through promotions PEST Analysis Political  Rules about online gambling legislation are not standardized and are transitional as local, state, and national governments are finally beginning to grasp with them and understanding the complexities    Jurisdiction between the player’s physical location and betting website are vague Regulation and enforcement of online gambling rules are difficult In the United States, online gambling is still illegal and vague on describing what constitutes online gambling Economic   Social  Revulsion for gamblers and online gaming sites although it is not clear whether most betters do it for recreation or are addicted by it Technological   Internet proliferation is bringing more customers on board worldwide Decrease in the cost of internet and communication technology make Online gambling attractive for consumers and entrepreneurs 5 Integrated world economy by regional alliances such as the European Union (EU), NAFTA, and high human mobility Mass outreach with the wide use of credit card access and use

SWOT Analysis (see Appendix B) Because Betfair.com established its business model first and has gained wide publicity and leverages on its management and technological strength, it will be a formidable player in the years to come. However, because it has such a profitable business model, there will be many imitators. It will be controversial as there are no clear legislation and regulatory guidelines for it and will draw headlines each time there are changes. The US is one of the largest markets, but by law, people are prohibited from betting on such sites. Marketplace to Marketspace/Value Creation Analysis (Appendix C) Betfair.com is able to leverage on the internet to draw a wide audience to its website. Since it has taken the business online, it does not have to deal with the huge physical infrastructure costs. Most of them are technical investments for the website and can be done relatively cheaply in comparison to physical investments. In the traditional marketplace, a consumer with a desire to bet would spend considerable time (transaction costs) seeking the right wager and opponent to lay/place a bet against. Using Betfair.com, which has links to additional news feeds, the users can find opponents and information quickly on the site. The users do their own research and help reduce operational costs for the information and as users input their preferences, more accurate statistical data is compiled. Statistical theory maintains that larger the number of samples better is the quality of information. As there are thousands of individuals using the platform, the average cost of the site comes down. The users have an added advantage of looking for information whenever they want and can use that information in the way they want. Object Oriented Strategy (Appendix D) The establishment of Betfair can be considered an object oriented strategy as most modules such as credit cards, banks, betters/gamblers, Internet, database and integrated aggregated news feeds technology preexisted. By embedding a new object (the site), the Object Oriented firm was established quite easily similar to Calyx and Corolla built its business2. Although marketing and adding other functionalities might have been an enormous effort, it would have taken Betfair a lot more resources and time to attain the customer and profit volumes through bookmaker and totalisator systems.

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Watson, R., Zinkhan, G., Pitt, L., Object-Orientation: A Tool for Enterprise Design, California Management Review, Vol 46 No. 4, Summer 2004.

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Summary and Take Away of Academic Frameworks      By having just one site, as Betfair promotes and improves its site, it is able to increase brand awareness which ultimately result higher organizational and brand equity. When the company develops better reputation, it can negotiate better prices/deals with its partners Using Metcalfe’s principle, as more users join the site, the company has more equity as it can develop more value As the technical and financial performance of the company improves, they can develop better relationships with their customers and introduce loyalty programs which will let them sell more Using the law of digital assets3, the same infrastructure and programming logic can be used to create new products and ideas or licensed to other companies. Using data mining and data profiling techniques, Betfair can continually improve its product offerings. Questions raised by Management: Should the Company be listed on a major Stock Exchange: Probably this would not be Betfair’s management first choice but because of Securities and Exchange Commission regulations governing private companies of a certain size, it would be forced to disclose its financial statements this spring even if it did not go public. Since the company will soon lose a key benefit of staying private, it is conceivable to think that the company will try to reap the rewards of going public. On the other hand going public may lead Betfair’s to be more vulnerable to market fluctuations and less flexible in choosing strategies when the value of the share price is the main judge. Competition and Reaction Betfair.com has a myriad of competitors which include physical casinos, bookmakers, horse and dog tracks, and other online gaming sites. Online stock brokerages are also a part of the competition. As unregulated casinos from the Caribbean entice gamblers by giving away money for promotion, Betfair needs to stress its unique business model which ensures impartiality and fairness. UK has a relaxed legislation for gambling, Betfair can use this advantage in its integrated marketing communications. It can continue to take smaller commissions from users who gamble more often and in higher amounts. It can emphasize the country of origin as a safe and reliable place to conduct business compared to its competitors.

3

Rayport, Jeffrey, Sviokia, John, Managing in the Marketspace, Harvard Business Review, November-December, 1994.

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How to Grow Betfair.com  One of the hardest but most gratifying would be to lobby in the US and make it a legitimate operation for American betters. This would increase their markets significantly as consumers in the US have more disposal income, lots of sporting events and easy access to credit cards    It can also open the sites in native languages with the country domain extensions to give users an impression it is a local site. Advertising and cross-promotions in global markets, such as auctioning of sports gear used by athletes Some countries such as Thailand and Spain have a high betting culture. On the other hand, there are consumers in countries such as Japan and Germany that have higher disposal income.  Also have a section for individuals who want to bet the odds without pledging money i.e. this would be to increase the size of the community and word of mouth promotion would occur because of an extensive community of enthusiasts. Strategic Partnerships  Betfair can partner with companies like Ticketmaster which compliment each other’s business. On the other hand, it can also request cross-promotion activities with agencies that promote sports, such as having a link at the Manchester United club or the Japanese Wrestling Association  Betfair can use the Object Oriented Model to modify its code and implant into other projects, such as auctions. It can leverage its IT knowledge and platforms for other projects such as stock trades, bond trading etc. It needs to be astute of legal, cultural and social styles in different countries. For example, it has to avoid getting into trouble for underage or illegal betting. Growing the Betfair Business Model  The best way for Betfair.com to grow is by entering new markets and including more and more activities into its portfolio. This can be outside of traditional sports. It needs to ensure that the reputation of the company is not jeopardized otherwise it will be a challenge.

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Appendix A: Size of Online Gaming Industry
Online Gaming Revenues ($ in billions) 12 10 8 6 4 2 0 2002 Source: Bear Stearns 2003 2004

Appendix B: SWOT Analysis

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Appendix C: Marketplace and Marketspace

Appendix D: Object Oriented Strategy

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