I have always been a huge fan of Betfair. I have also been a massive fan of online gaming companies NOT going public since before the first wave of gaming industry initial public offerings (IPO) caused the US to pass the Unlawful Internet Gambling Enforcement Act (UIGEA) in 2006, which in turn compelled all the public companies to exit that market.
As I predicted back in 2004/5, going public is like shooting yourself in the foot while out hunting. However, since the passing of the UIEGA, none of the public companies in the online gaming industry have accepted any blame for their own predicament, choosing instead to sit there crying about level playing fields.
I would argue that a level playing field is impossible when that field includes companies with leadership that, despite being repeatedly warned not to do something, plows right ahead and does it anyway. Then, when the predicted negative outcome plays out, these leaders have the nerve to act as if this scenario hadn’t been foretold? To now argue for a level playing field is like a kindergarten all girls football team saying they want to play in the NFL, as long as the rules are the same for everyone… Huh?
This brings us back to Betfair. When Betfair decided earlier this year that an IPO would be their next big gamble, it wasn’t a particular surprise to many of us who witnessed that first wave of online gaming IPOs, as well as the subsequent failure of other companies to learn from their predecessors’ mistakes.
In Betfair’s prospectus, they identified 15 pages worth of risks but nowhere on that list was the risk of their shares suddenly plunging in value (or the company going entirely out of business) due to the principles that actually create the value of their business model — the network effect.
The two firms that guided Betfair into the market — Morgan Stanley and Goldman Sachs — predicted this fall in share price. The online betting exchange didn’t sound that bothered originally, but following the share price dropping to as low as £12, you can be assured they’re paying attention now.
You have to remember, the investment banking firms ALWAYS have a conflict of interest. They make money when you go public and then they make money if your stock goes up or down. Therefore, they will ALWAYS advise you to go public. At no point in the process are they on the side of the shareholders of the company they take public and they have zero interest in what happens to the company after they receive their fees for the IPO. In our industry, paying guys like these to take you public is like Napoleon agreeing to pay the Russian army’s wages if they’ll agree to kick his army’s ass.
My friend, the Bodog Europe CEO, explained his thoughts on IPOs in an article on eGaming Review. It read thus:
In the case of the IPO the problem here is simply the rapacious nature of the shareholder; always needing, not only, instant gratification but also and ever upward curve. This naturally makes long-term investments hard to agree on and, therefore, quick-win solutions are sought. In Betfair’s case, already no longer always best price, this is likely to mean playing with commission rates which, in turn, will further erode the customer’s value and thus their major unique selling point (USP).
THE NETWORK EFFECT
The magic of the Betfair business model was its first mover advantage, which enabled it to get critical mass and for the ‘network effect’ to kick in. But by going public, they risk kicking off a domino effect of events that sufficiently reduces their liquidity to allow someone else to take over their spot, with this same network effect protecting them (for a time). Or worse, they squeeze the ‘layers’ (those offering to take rather than place bets) to increase profit and then lose their ‘best odds’ tag, which is already happening beyond UK horseracing.
Think it cannot happen? It’s already happened more than once in poker, which has a similar network effect. In fact, PokerStars have been the beneficiary of this effect. They were set to be the next lamb to the IPO slaughter, but they changed their minds post-UIGEA, and keeping their name off the stock market listings has enabled them to thrive.
Basically, Betfair was a great company, and is still a good one, but I would wager that they’re already regretting their decision to go public. I also predict their worst days are still ahead. If my predictions come to pass, there will be a lot of long faces around the campfire, wondering what the hell happened and thinking about what might have been had they had the will to resist the siren song of bankers and their IPO fantasies.