16 March 2006

Betfair and Softbank - deal making more sense

After a little research, I can speculate a little more about betfair and Softbank since I first wrote about them on 6 March. Two things have come to light, at least for me. First, Softbank is involved with Japanese Horse Racing. Second, Japanese Horse Racing is big business. These two points lead me to some new ideas and conclusions about the deal.
Softbank does have some prior experience with Japanese horse racing. Atei.co.uk reports in Sep 2005 that “Softbank is on track to become Japan’s first Internet group to enter the online betting market” and Softbank “plans to set up an Internet portal to provide information on the races, take bets from punters and broadcast races, under a deal with the Iwate Prefecture Horse Racing Association.”
I’m not sure of the timeframe, but ketupa.net lists Softbank interests, one of which is “JaJa Entertainment - horse racing data services (70%)”
Gaijinpot.com reports in Dec 2005 that “Softbank Corp. has begun to sell betting tickets on most local horse races in Japan on the Internet and over the phone… To launch the business, an affiliate of Softbank has taken over Nippon Racing Service Ltd., a subsidiary of the Japan Local Racing Association, which sold local horse race tickets.”
Softbank themselves in a recent quarterly report mentions “Odds Park horse racing portal” that will offer live streaming of races and will be launched in “Spring” 2006. It also mentions “D-Net” a company that provides “Internet sales of betting slips” was acquired in Dec 2005.
Add to this the significant purchase of betfair shares, Softbank is clearly involved in horse racing, and probably even has a few competencies in the area. So, how big is the horse racing pie in Japan to arouse the interest of Softbank?
Going back almost 10 years, “Anomaly” in Nov 1996, (from williamsinterference.com, apparently from the Washington Post) tells us: “Horse racing is more lucrative in Japan than anywhere else in the world. Eight of the top 10 prize-money horse races in the world are held in Japan. The Japan Cup paid a first-place prize of about $1.5 million - more than twice that paid to the winner of the Kentucky Derby.”
I found that initially a little hard to believe, but there’s more, and this from the equine’s mouth. The JRA (Japan’s larger racing organization) reports USD 24B in “Net Pari-Mutuel Handle” (i.e., turnover) in 2004, down from a high of USD 33B in 1997. The NAR (Japan’s smaller racing body) reports USD 3.3B turnover in 2004, down from 5.6B in 1998.
So it appears that the “horse racing in Japan is HUGE” claim above is credible. To keep things simple, lets assume 80% (likely less) of that parimutual pool is returned to punters and the other 20% (likely more) is kept for gambling operations, taxes, profits, and everything else to run the pools. 20% of (a combined) USD 27B in turnover so that’s… USD 5.4B in gross profits. I don’t have US, UK, Hong Kong, Australia, or any other reasonable horse racing market gambling figures at my fingertips, but I suspect that those turnover and gross profit figures are pretty compelling.
A product like betfair also has provided some revitalization to the market, at least in the UK. Softbank may also be looking for a similar effect in the flagging Japanese racing market. Perhaps cleverly, Softbank could skip a few phases of maturity that the UK went through by jumping right to exchange betting and skipping the fixed odds (“traditional bookmaker”) step. In fact, this is a check in the judgment column for Softbank to read the writing on the wall about how traditional bookmakers are being beaten down severely by betfair (if you don’t believe that statement, look at the turnover versus profitability of racing bookmaking for your favorite 3 bookmakers for the last 5 years; don’t let the hypergrowth poker numbers hid the truth of business erosion folks!).
Softbank has also demonstrated good business acumen by getting the whole value chain lined up. They have set up streaming video of races via yahoo – all important to exchange, particularly in-running, betting. They have also set up on-line wagering for the parimutuals.
Do I believe that all of this will result in a 4x increase in betfair’s turnover to warrant the P/E (that I guessed at previously) offered by Softbank? I’m more a believer now than I was, but I’m still pretty skeptical. If you’re one of the lucky few that has a few shares of betfair stock, you may want to flog it. A purchase like Softbank's won’t exactly accelerate the IPO process, and this has been the only chance the stock-owning masses at betfair have been able to sell their stock in the 6 years some of them have had it. Nor have they received any dividends from the significant profits that betfair has been earning.
Conversely, betfair are practically in a monopoly position in betting exchanges, and a growing significant position in racing betting (and sports betting), and putting your money on a monopoly is usually a wise choice. It all depends on what your timeframe for return is! I guess time was up for Europ@Web, Benchmark, UBS and all the flutter VC hangers-on to get a little payback.
I want to touch on one other thing the media has misrepresented about this deal. Although Softbank will become the largest *single* shareholder of stock if Andrew and Ed “have to” (perhaps they want to?!) sell down to 15% ownership each of betfair. One might notice that 15% + 15% = 30%, and 30% is well more than the 23% (at most) Softbank will have. Have E&A done anything but play nice over the last 6 years? I think the E&A voting block will trump the Softbank one.


  1. You seem to have a good understanding of the situation, however Betfair blocks all Japanese customers after the deal. Do you think that Japanese horseracing will be that big in non Japanese punters?


  2. Yow, thanks for the info! I had no idea that the deal meant no Japanese punters could use betfair after the deal.
    I think that there is ZERO interest in Japanese horse racing outside of Japan, so now I'm back to scratching my head about what's under the covers between Softbank and Betfair.
    The only thing that comes to mind is that Betfair (the website) might block Japanese punters, but a SoftBank Japanese Newco could use the betfair engine/API to offer exchange betting to Japanese punters (and that's complete speculation on my part).


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