Two weeks ago the Australian Racing Board launched what was supposed to be "its strongest attack yet against betting exchanges" when a report commissioned by it from Access Economics was released to a meeting of Australian and New Zealand state racing ministers in Auckland.

The report, a copy of which has been obtained by Cyberhorse, suggests that Australian governments and racing would be $230 million a year worse off by 2007-08 if betting exchanges were legalised.

However, if it thinks the report was the strongest attack yet, the industry is deluding itself, as it is entirely unconvincing.

In fact the report shows strong signs of having been extensively rewritten, to beef up what was probably not an alarming scenario in its original draft.

In the process, it has lost all credibility, with the bulk of the $230 million "shortfall" made up of a wholly improbable 10% decline in wagering caused by an exchange precipitated crisis in punter confidence.

The report's authors seem to have completely ignored the affect on punter behaviour of the "betting exchange integrity crisis" in the UK last year. Australian racing is fond of using this one off incident as an illustration of how exchanges cause corruption.

But contrary to the alarmist conclusions of the Access Economics report, British betting turnover figures last year were barely affected by the scandal and the British racing industry actually received its highest ever income from betting levies. It is hypocritical in the extreme for the report to attach such weight to a probable non-event.

Despite betting exchange Betfair operating on Australian racing for more than two years, there is no evidence of a similar scandal in Australia. Punters' recognition that exchanges can and do report suspicious betting activity to racing authorities, combined with compulsory positive identification checks on account holders, has made dishonest activities using exchanges very hard to get away with.

In fact the biggest misconception being put about by Australian racing is that laying horses on an exchange is the only way to benefit from a horse losing. They seem to forget that for as long as racing has been going on, "running a horse dead" for one or more starts is a perfect way to get its handicap down as well as improving the odds for when it is fully fit to win.

If one discounts the integrity red herring, the rest of the numbers in the Access Economics report are nowhere near as alarming, but even these are based on false premises.

Firstly, Access predicts that legalised betting exchanges would have a 15% share of the Australian wagering market by 2007-08. Its own report shows that in the UK, exchanges have achieved an 8% market share in 4 years. Why the growth in the Australian market share should be twice as much in the same period defies logic.

Secondly, Access have assumed that all of Betfair's current turnover on Australian racing is coming from Australian punters and represents wagering lost to Australian TAB's. This assumption is wrong on two counts.

The vast majority of Betfair's account holders are British and it is simply not reasonable to assume that all its Australian racing turnover is wagered by Australians.
If any wagering operator is "losing" from Betfair's activities, it is just as likely to be Australian corporate bookmakers, rather than TAB's. In any case, both bookmaker and TAB wagering has increased since Betfair entered the Australian market, so any scenario which says that their turnover would suddenly plunge is seriously at odds with the real life experience.

Third, Access have completely ignored a market dynamic present in Australia which could see the racing industry extract a very much better return from betting exchanges than its own miserly assessment of their capacity to pay product fees.

That is the fact that TAB's currently spend hardly anything on marketing because of their state government granted monopoly on totalisator operations. As a result, racing receives only a small percentage of wagering revenue from TAB's. In fact because of TAB Limited and now TABCorp's ownership of Sky Channel, racing has actually been paying money back to the TAB's in the form of reduced revenue from vision rights.

Companies like Betfair wishing to enter the Australian market and clearly stating their desire to contribute to Australian racing, have the ability to pay sponsorship and rights fees way in excess of what Access believe they will. In the UK, Betfair have already demonstrated that their sponsorship of racing is an important part of their overall promotional strategy.

Fourth the Access report suggests that if betting exchanges were legalised, TAB's would have to be compensated for the damage to their exclusive licenses. This is another furphy. The bulk of the exclusivity for the TAB's is to do with them having no competition by way of retail outlets for totalisator services in their state. As betting exchanges have no shop fronts and operate as a bookmaker, not as a totalisator, any state licensing an exchange operator would not be in breach of its license conditions.

Fifth, Access attempt to argue that Betfair's rewards program which lowers the commission rate for punters who do more business with it, will lead to problem gambling, with attendant high social costs for government. One would have thought that a low 2-5% commission regime is far less likely to cause gambling losses than the 16-17% commission taken by TAB's. If that were the case, Access should have had a stab at the benefit to government of a reduction in problem gambling caused by competitive downward pressure on wagering margins. In the UK one of the strongest forces in favour of exchanges has been the Office of Fair Trading, the equivalent of our ACCC, who saw exchanges as a positive influence in favour of the consumer.

While on the subject of cost to government, Access blithely assert that prohibition of exchanges would increase returns to both government and the racing industry, without subtracting the considerable cost of enforcement.

Finally, the highly paid Access consultants left out the one factor which would allow the racing industry and government to extract a very good result from licensing betting exchanges.

That is the fact that Betfair, as the dominant exchange, has among its shareholders some of the world's major investment banks. It is no secret that they would like to see Betfair go public some time soon. It is also no secret that its value as a public company would be enhanced if it was licensed to operate in another country as well as the UK. Betfair's current value is mooted to be nearly A$2 billion.

The possibility has to exist for an Australian government to sell such a license to Betfair for a considerable sum. Similarly the possibility exists for Australian racing to strike a lucrative sponsorship and rights agreement with Betfair, sufficient to overcome all its concerns about loss of TAB revenue. Such expenses would effectively be paid for by investors in Betfair's float, not dissimilar to what happened when the TAB's were privatised.

With the racing industry fighting with TABCorp over vision rights, it makes sense to find a major alternative market for them. Betfair is the only operator with sufficient size and interest to provide that competition. Such a possibility provides a once in a lifetime opportunity for the Australian racing industry to secure its future in the emerging low cost wagering environment, in partnership with a world class operator.