Betfair has revolutionised betting but its effect on the on-course market has squeezed margins – good for punters but bad for racing, with its income based on gross profits. Do you have any sympathy with the view that Betfair should pay more to UK racing?

There is no evidence that margins have been affected. That was the finding of the Donoughue Commission which looked into starting prices. Even the traditional bookmakers no longer say that margins have been affected in any material way.

Do I have any sympathy with the view that we should pay more to UK racing? Absolutely not. We pay effectively the levy on 10.75% of our gross profits on British horseracing like every other bookmaker. The fact that we get there through a different business model is largely irrelevant.

Betfair may be based offshore but we pay the levy as though we are British-based. Racing has not lost out from the fact that we are not licensed in the UK.

Your deals with other racing jurisdictions have been more favourable than to British racing, as you have had to pay to get the support of overseas racing nations. Is this not short-changing our sport?

No. It’s the basic principle of business that you pay the rate necessary in each jurisdiction. The cost of transacting in a country is the same for all operators, so if Ladbrokes wanted to operate in Tasmania, they would have to pay 20% as well.

But the fact is that there are any number of factors to take into account, such as the overriding tax position in those countries. We’re quite relaxed about what the levy rate may be here but we’re not going to pay any more than anyone else.

So you’re saying if the rate doubled it would be the same for everyone?

It would be the same for everyone but of course that would be an absolute disaster for British horseracing, because there would be no incentive for any operator to promote the sport. If you double the cost of that product then what will happen is that operators will promote only the products that are competing with British horseracing.

One of my frustrations with horseracing is that I don’t think it has quite understood that it has to compete with any number of products that it didn’t have to compete with ten years ago.

But isn’t that idea, that bookmakers would pass up the chance to promote the Cheltenham Festival or Grand National, ridiculous because these events generate so much revenue?

No, and I take issue with that point. If Don’t Push It wins the Grand National then it has a major cost for the levy, because it’s a heavily backed favourite ridden by Tony McCoy. What I would say is that Cheltenham, Aintree and the Derby are to a large extent self-promoting. It’s absolutely vital to have those crown jewels in the sport but they are a very small part of the overall picture.

Are you saying that bookmakers would turn their backs on the sport?

Yes. You’re seeing it even at 10.75%. Promotional budgets are going to other sports that have a much better margin for bookmakers. That’s commercial reality. Of course we promote horseracing and we also compete for sponsorship of the crown jewels. But much of the promotional activity from the major bookmakers on racing – the best price guarantee, for example – is effectively a loss leader.

Their business model is to get people ‘in’ with such offers and then cross-sell them other products. The pressure on us to emphasise other products would greatly increase the more expensive racing becomes. If you increase the rate of the levy, you might see a short-term spike, but it would lead to long-term decline.

Betfair pays British racing a voluntary levy. How can this be satisfactory?

Is the sport dissatisfied with the situation? The most important thing to remember is that without a long-term commercial agreement, you necessarily have a year-by-year agreement, so racing has never had the certainty of what the levy will deliver more than 12-24 months in advance. We paid the £6 million on the first day of the 50th levy scheme and we’ve entered into a legally binding deed for the 51st scheme [that starts in April] so that no-one can say we’re not legally obliged to pay for it.

As for the 52nd scheme, who knows what the position is going to be and whether we’ll have a commercial agreement in place? It wouldn’t be appropriate to extend the legally binding deed to pay for the 52nd scheme but I don’t anticipate there being any change to our commitment.

What share of your overall business comes from British racing?

Around 30%. Football accounts for more and about 50% of new customers place their first bet on football. The percentage of customers placing their first bet on British horseracing is declining all the time; you’d be lucky if it’s 20%. That’s not a Betfair problem and it’s not an internet problem, it’s a racing market share problem.

When I started with Betfair in 2004 British horseracing accounted for around 65-70% of business. There’s been a decline in market share but not in absolute terms. That reinforces my point; racing has to understand what a competitive world it is out there.

Is quality racing more important to you than traditional bookmakers?

No, it’s important to the whole industry equally. On a Saturday, good quality action is enormously beneficial to our horseracing business. But we mustn’t overlook how important the more ordinary fare is to the levy coffers.

We were the first operator to share our data with the Levy Board and Race Planning Committee so races could be planned with levy yield in mind. It is important that the fixture list is produced with information on how much levy certain fixtures produce.

In 2004, British racing accounted for 70% of business on Betfair. Now it’s nearer 30%

How important is race sponsorship to your business?

Sponsorship of better quality racing, such as the Betfair Chase, is important commercially to our brand and our identity among the British horseracing public. But there are a lot of initiatives that we do that have no commercial benefit but which we do because we believe it’s the right thing, such as giving £1m each year to grass roots racing and racing charities.

Unfortunately, that’s going to have to stop because of the BHA/William Hill litigation. That £1m represents what the levy would be on international customers betting on UK racing.

What other initiatives have you started?

We’ve launched a new jump racing series with JCR tracks that will culminate with a £50,000 final over fences and hurdles on Easter Saturday, for horses that you wouldn’t expect to see at Cheltenham. Last year we gave a six-figure sum to Scottish racing, producing a series that culminated with a raceday that saw 0-70 horses running for a £25,000 first prize.

But is it a good thing to get moderate horses running for big purses?

People argue that [lower class racing] will dilute the quality of the breed. I’m afraid that sort of thinking is consistent with the idea that racing doesn’t have to compete. The fact is you have to look after the owner – and there are 65% of owners whose horses never see the winner’s enclosure. It is vital that the bread and butter owner has a chance of a big payday.

Would you support the ‘premierisation’ of British racing?

We support Champions’ Day at Ascot and believe premier racing is vital for the industry. But if you do that to the exclusion of the smaller owner then you do so at your peril. You should bear in mind that over 50% of prize-money goes to about 30 people. The industry is benefited by ownership from the many thousands beneath those 30 people.

What about a third tier outside of the levy, supported by a commercial agreement between racecourses and bookmakers?

You have to be careful what you wish for, because for the prize-money it pays out it brings in a larger amount for the levy. We would welcome the ability of the bookmaking industry to get together and commercially fund third tier fixtures providing we didn’t have to pay levy on the income from those fixtures. You can’t have your cake and eat it.

How does Betfair view the proposed abolition of the levy and the possibility of a licence condition for bookmakers in order to take bets on British horseracing?

The BHA and racing are mistaken if they think this is the silver bullet. Even if the government introduces legislation to bring the UK business of offshore companies into the regulatory and tax net, the idea that it means you can impose a licensing condition that you make a payment to a particular sport is one which is bound to be open to substantial legal challenge. Arguably it will be state aid and the government, if it wants to do that, has a very tricky legal minefield to navigate.

All of the more reputable companies would have no choice but to seek a gambling licence from the UK if the legislation demanded it. But the idea that they would do it without a legal challenge is far-fetched, in my view.

Changing from a private to a public company must have had a huge effect on many levels of your business. Why has the share price been so disappointing since the float?

We have to accept that we did disappoint the market with some of our numbers last year. The IPO process made us take our eye off the ball. It took an enormous amount of management time, time that should have been focussed on the company. The share price is also compressed because of the regulatory risk of going into other jurisdictions.

But we’re now seeing a return to double digit growth, as we made clear in our last results announcement.

The Voler La Vedette problem was a result of a perfect storm of all sorts of things; we’ve fixed it now

What is your relationship like with the Betfred-owned Tote?

Our relationship with the Tote continues to be constructive. They recognise that we’ve been good for them in allowing our three million customers to access the Tote product through our site, which has had a positive effect on Tote income. It is also great for our customers who don’t have to leave our site to place a Tote bet.

Have the traditional bookmakers accepted you after years of hostility?

In over 11 years of existence, various aspects of racing and traditional bookmakers have attempted to get the way we pay the levy changed, through Treasury reviews, through the Gambling Commission, through the HBLB consultation, through the Bookmakers’ Committee, and so far we continue to pay the levy like everyone else.

Now is the time for the bookmaking industry to work together and come up with a really good commercial deal that supports racing.

Do you resent efforts to remove you from the Bookmakers’ Committee?

We’re entitled to our seat, even though William Hill and the BHA have tried to take it away from us. It would be difficult to justify the seat on the committee if we didn’t commit to legally pay the same amount of levy as if we operated under a UK licence. It’s important that betting exchanges are represented at this level.

The Voler La Vedette saga created plenty of negative headlines for exchanges and Betfair. Discuss…

Being as much a technology company as a betting operator, this wasn’t great for us. We’ve identified what the problem was, which was a result of a perfect storm of all sorts of things that may happen once in x million times, and we’ve fixed it. Clearly, in any technology company where you process over six million transactions every day, there is always a risk of technology failure. That’s why the money stays in our system, to mitigate that risk to protect not only ourselves but also our customers.

We made the decision to void the in-running win market and the place market. By ex gratia payment we compensated those customers that had placed winning bets up to the time of the technology fault during the race. But if you placed a losing bet up to that time then you still keep your money. So we’re taking the hit (reported to be £100,000).

Did you feel the media criticism and reporting was over the top?

We suffer slightly from people wanting to see us fail and trip over; elements in the media, our competitors and horseracing. We need to try and change that. It’s subjective whether or not the reporting was over the top. It was to be expected and I don’t have any complaints.

Could we have communicated with our customers better? Probably. But, again, the first priority would have been to identify the source of the problem and fix it.

Do you let customers bet on credit?

In very small instances for larger customers, but it is de minimis; if you happen to be a very large customer and your money is tied up in a number of bets throughout the market. A number of them are bookmakers. If a rails bookmaker bets with another rails bookmakers, they don’t pay out straight away, they settle up later.

Is Betfair intrinsically linked with betting corruption?

California was the first state to introduce drug testing on racehorses. Funnily enough, there were positive examples, so people said therefore California was responsible for doping in horseracing. The recent corruption case demonstrates that we have been the only company to share specific account information and details to help police the sport.

The idea that corruption in horseracing started when we arrived in 2000 is ridiculous.

No-one has said there was not corruption before Betfair, but you have made it possible to lay a horse to lose by one click of a mouse…

If you know a horse is not going to win then you’ve been able to profit from that information since chariots were racing in the Roman coliseum. Yes, in theory, laying a horse is easier in terms of pressing a button. But the fact is if someone is determined to make money through a corrupt activity they will do it, on any platform.

The most important thing is to say that if you do it through us, you will be detected, you will be warned off and you may face criminal prosecution.

“Roy and Topping? They’re the Statler and Waldorf of UK racing”

Last year the Levy Board took the decision that betting exchange users should not be liable for levy payments, including those said to be acting as ‘quasi bookmakers’. The BHA, under the guidance of Chairman Paul Roy, believes differently and has joined forces with William Hill to launch a court challenge against the decision.

Cruddace says: “In relation to the challenge I’m immensely saddened. This is going to cost millions in prize-money – we’ve had to suspend our £1 million grass roots contribution for the next financial year. The Levy Board’s costs in defending its position are already around £650,000 and could be a lot more. Then, of course, you have the BHA’s costs.

“Even if the BHA were to be successful, and we were unsuccessful in our appeal to the Court of Appeal and, if unsuccessful there, the Supreme Court, it would go back to the Levy Board for a reassessment of its original decision. And then there is no guarantee the Levy Board would come to a different verdict. If it did, we would judicially review that decision.

“I’m so sad that the BHA, as the sport’s regulator, has got into bed with one of our main competitor’s in an effort to damage our business. Any sane person would say it is ridiculous to have this litigation.

“The only way the BHA could affect our business is if they could change the primary legislation and I don’t see the government interested in that in our lifetime.”

Whilst the BHA and William Hill have brought the judicial action against the decision of the Levy Board, interested parties – which includes Betfair – can intervene, and this has incurred significant legal costs for the betting exchange.

“For the first four months of this litigation our legal fees were £500,000; the estimate  for the year is £1.7m,” says Cruddace. “I cannot go to our business and say, ‘We’re paying £6.5m in voluntary levy, we’re paying an additional £1m in voluntary contribution to grass roots racing and, by the way, can I have another £1.7m as the BHA has had a temporary loss of sanity?’

“I want to make it absolutely clear: if we’re successful I will be seeking those costs. The BHA is risking millions of pounds of prize-money with William Hill, whose online business is Britain’s largest non-levy paying bookmaker. It gives William Hill a badge of respect by joining forces and bringing this action; for the two to get into bed together is utterly wrong and history will show that this has been a catastrophic decision for UK horseracing.

“Paul Roy and Ralph Topping [Chief Executive of William Hill] have shown themselves to be the Statler and Waldorf of British horseracing by taking this action.”

Cruddace adds: “Ralph has decided to plough his own furrow in various areas. He’s decided to single Betfair out for considerable attack, not only on the Bookmakers’ Committee, but at Gambling Commission level, at government level and also at HBLB level through this action with the BHA. But frankly, to us, he’s no more than a mosquito bite in his annoyance.”