Betfair was founded by Andrew Black and Edward Wray in 2000 and became the world’s largest online betting exchange. These creative individuals essentially established a virtual betting marketplace where buyers and sellers could come together to negotiate with one another on odds, with Betfair taking a commission on the transactions.

In 2009, Betfair acquired the U. S.-based TVG. The subsidiary telecasts horse racing on its eponymous cable channel and runs a betting service that can be accessed online, by telephone, and through set-top remote in some locations.

On October 22, 2010, Goldman-Sachs led Betfair’s initial public offering on the London Stock Exchange. Betfair’s stock soared nearly 20% on its first day of trading. Seven weeks later, the stock price had declined by 24% due to slow growth in Betfair’s revenues from its core betting business.

Betfair has continued to perform significantly short of investor expectations. From its initial public offering until the present, Betfair’s stock price has plummeted by close to 50% and the future looks to be full of hazards for the company.

Barry Dixon, the director of research for the Irish wealth management company Davy, recently appeared on CNBC’s Squawk Box Europe and remarked: “Betfair was a darling of the market a couple of years ago when it IPO’d…[but] I think it’s going to face some challenging headwinds over the next few years…It’s a stock we’d really be concerned about.”

Dixon explained that about six percent of Betfair’s revenues from exchange betting are currently subject to gambling taxes, but that percentage is likely to increase dramatically. He sees Betfair’s profit margins narrowing as countries like Greece and Germany increasingly regulate online gaming, including exchange wagering. Dixon said: “We think that by 2015, 100 percent of the revenues will be subject to gambling taxes…with an exchange-based model, taxes on revenue will kill it and we think it could take a third off group profits.”

Betfair is almost sure to disagree with this gloomy assessment, but there is no denying that investors persist in factoring negative possibilities into the company’s stock price, as evidenced by the precipitous downward trajectory since Betfair became publicly traded.

TVG planned to introduce exchange wagering in California during the summer of 2012. However, that effort was blocked–in June 2012–by the Thoroughbred Owners of California, whose approval is required.

(Note: At its meeting of September 20, 2012, the California Horse Racing Board gave its initial approval to exchange wagering. As a result, California will likely to be the first state to have exchange wagering, even though further approvals will be required–taking at least several months.)

Copyright © 2012 Horse Racing Business

Originally published in the Blood-Horse. Used with permission.