Some thoughts on the Premium Charge

I thought I would do a post on some of my thoughts about the Premium Charge - it is going to be a long post so get a cup of tea first!

Firstly why have Betfair introduced this charge. The line from Betfair is that the charge has been brought in for customers who cost Betfair more to replace what they take out of the exchange pool than they pay Betfair. Now I can understand this point. For example last week I took out £406.27 and paid before Premium Charges £30.87 for that. However, Betfair are saying it cost them/will cost them more than £30.87 to bring in £406.27 in new money. It will cost them a further £69.10 making the total cost of bringing back in £406.27 to £99.97.

How they have got to this figure is only known by Betfair, there is no method for us to know how much it costs to replace each £1 taken out of the exchange. However this raises several points.

Firstly, am I still being 'subsidised' by the people who pay much more commission than I do now that these Premium Charges are in place. For example someone may breakeven in a week but may have paid £100 in commission during that week. If the answer is yes I am still being subsidised by these such people will that mean if the consistent winner to inconsistent winner ratio goes higher toward more consistent winners it must surely mean that in the future the percentage you pay in Premium Charges will have to go up to make up for the short fall.

Another important factor to consider is how this new money coming in is going to be spent. Will it be spent on attracting more money to the exchange? As I understand after being told by a Betfair employer, you do not pay Premium Charges on wins on the Arcade and Poker because the amount is already factored into the games. Therefore, the Arcade for example, is self funding.

By rights therefore we should expect to see an increase in spending on attracting money to the exchange that will be tightly linked to the increase in income from the Premium Charges. We should expect to see significant increase in new customers to the exchange, significant increases in liquidity on the exchange. Courses to show people how to use the exchange etc etc. Or are the Premium Charges going to be used to fill in the hole that has been left in Betfair's pockets due to undercharging exchange users in the past and then once that whole is filled the money will be spent on attracting exchange users. I for one very much doubt that this is really about increasing the marketing of the exchange.

Here is why. What actual improvements have we seen to the exchange in recent years as the costs of using it have gone up. We have seen the introduction of Betfair radio, my personal view is that this is very unlikely to have attracted sufficient new funds to cover its cost and running costs which are considerable. We have Betfair Radio for greyhounds but has the introduction of Betfair Radio for Grey Hounds seen a noticeable increase in the people that use the exchange for greyhounds. Again I do not think so. However again the only people that know are the accountants at Betfair who can see the actual figures. We have seen increased site stability but remember a week not so many months ago, the site was very very unstable crashing numerous times. We have seen time and again races not going inplay, as recent as last week a race did not go inplay. We have seen Timeform added to Betfair - has this seen an increase in money on the exchange, again I doubt it. One of the biggest wastes of money has to be the Betfair S.P. now I do not know the figures involved but the money spent on this I am sure is approaching the million mark and I would not be surprised if it was well through that figure. However, the uptake has been pitiful. Just look each race how much it is used, then calculate how much that could potentially generate for Betfair in commission and you will soon realise it will be a long time until it starts to bring in a profit to Betfair. I could go on but I won't. Many of these features Betfair have added are available else where in better format and for free.

So if the money is not going to be spent on the exchange where is it going to be used? Well I think that is very clear. It is going to be used on the likes of the Arcade. The Arcade for example can not lose. It will be programmed to on the whole take out a set percentage. Some people will win and win big and this makes great marketing but on the whole people will and have to lose. So people lose on the Arcade, where is this money going, has the Arcade been introduced to subsidise the exchange? Again I do not think so, it has been brought in to help boost the bottom line. People who lose on the Arcade then do not have that money to use on the exchange. When I load up Betfair the vast majority of the time now I see a banner for the Arcade, I only see one for the exchange a very small number of times. This to me makes it very clear where Betfair what users money to go. It really is hard to believe it is about the exchange anymore, it is more and more about the various add ons, the reason being these are more profitable to Betfair.

But how have Betfair got to the position of being able to fund the development of the Arcade and the like, well it has to be from the exchange users. That was their original income stream. It was the commission paid by the exchange users. So it is clear that vast sums of money from the exchange are being pumped into ventures that draw more and more money away from the exchange.

Right I shall now change direction.

Why has this charge been introduced now? Has it got to the point now where Betfair have been forced to act, or has it got to the point that Betfair can act now. I go with the latter. Since the exchange started people have been pulling out large sums from Betfair. I personally know someone who made approaching £50k in 3 months and was doing this time and again, it was not just a once off. I personally would expect it to cost more to attract new money in the early days than it does now due to economies of scale. Betfair has been around for 8 years, why has it only now got to the point where it has to bring in this charge due to the fact users such as me cost them more than I pay. I think the reason why is because it is a Monopoly and it is trying to exploit its position. It has successfully introduced charge increase after charge increase and people have taken it. I have heard that if this charge had been 10% people on the whole would have accepted it and I think that is true because of the Monopoly.

However, the barriers to exit are beginning to be removed. What keeps people at Betfair, well the main ones I think are liquidity, reliability and software. Which of these do Betfair control? None. Which do the customers control - all of them. I had to point this out to a Betfair employee recently as he was trying to tell me that they controlled them but they do not! Liquidity comes from us, the customer (more on this later) reliability is controlled by Betfair but they do not control the reliability of Betdaq and the software, they don't control this. They have their own software but I very much doubt any serious user uses it.

Well the software is coming for other exchanges from several third part vendors while some stick their heads in the sand. The reliability, well that is down to Betdaq but as I understand it they are and have worked hard in this area. The liquidity, well that too is coming at to Betdaq and I am sure will go up a lot more once the software comes for the exchange.

The price you pay to use the other exchange is now much less even once the 2% introduction rate goes. I have heard people say that they will have to introduced the charge a few years down the line, they may have to but then again perhaps they don't. Betfair's business model has led to the need for these charges, I would be confident that there is a way to alter the business model and thus avoid the need for the charges.

Changing direction again - onto a conspiracy theory now. I have heard a lot of discussion on this one. We are all aware of the Bet Matching Logic Bot that was skimming profits for Betfair, well what about the chances that Betfair are introducing this charge to encourage the most successful users, in terms of wins to losses, to leave and then Betfair can fill the void with there own market operators. Time and again Betfair have refused to say that they will not actively trade the markets, well what better way to start trading the markets by getting the bigger successful traders to leave and then fill that gap. Betfair could easily set up a trading division that will operate in the markets such as the pre racing markets and then make considerable profits. They have access to current users betting history, what is to stop them from reviewing these histories and working out how the people operated. They could also do this to ensure that any drop in liquidity from people leaving is made up from their own traders. They would not be paying any premium charge I am sure - food for thought and one Betfair have themselves refused to rule out, it is one thing losing to another exchange user but to lose to a Betfair employed trader???

I shall now just touch upon the way the charge was introduced. It is clear to everyone that the PR behind this charge has been dreadful. I along with many others was told by Betfair that the allowance started from 22nd September, it was discussed at length on the forum but no one from Betfair seems to actually have known what was going to happen. So what chance did the rest of us have? There are numerous other examples of the misinformation given out. They made one annoucement on the forum, sent out an email to 'most' of the affected users but clearly after yesterday several who were affected were not contacted and this has lead to Betfair having to repay the charges taken from numerous users. They held just one Q&A that led to more questions than answers and finished 10 minutes early with numerous questions not answered. The Q&A happened soon after the announcement of the charges at which stage many people had not come close to understanding it, why not do a follow up? Numerous times we have been told by Betfair they are going to improve their PR but time and time again they fail! As they have said themselves the vast majority of users do not use the forum therefore there must be huge numbers of users that are not currently affected by the charge that are going a long not even knowing it is in place, it is madness!

A few final points that I want to make. Betfair earn huge sums of money from interest on the money we hold in Betfair, we receive no recognition as to how much we each generate, what about people who lose will they get any form of rebate on their commission as they pay much more than they cost Betfair? How can the charge be applied to bets struck months before the charge was introduced? Why is it that there has been such a rush to get this charge in place before any method of checking your current status is in place? Why is it we have to take the amount of implied commission on trust, there is no way for us to calculate it? Why was the training of staff so so poor? What about the support users such as myself have shown to Betfair over the years to help get it to where it is today? Finally why do Betfair encourage people to 'go green' through their training courses if these are the clients that are costing them more than they earn from them????

Comments welcome!