:: The Park Paradigm ::

Markets for the Digital Generation

The Betfair IT department has once again been in the news for their impressive exploits building and managing one of the most robust and successful electronic markets on the planet (shhh don’t tell the NYSE!) Referring to the opening match of last year’s football World Cup:

On the day of England’s first match, 4.4 million bets were placed and only 20 took more than one second to process. It means 99.999 per cent of bets were placed in less than one second.

‘To get five nines is fantastic,’ says Devine. ‘The reason why performance is so important is that lots of activity is done on the site in a short timeframe.’

Last summer, Betfair worked with its database supplier Oracle to increase the target percentage of bets processed in less than one second from 99.1 per cent to 99.9 per cent.

Devine says estimating opportunity cost for delays in processing transactions is not an exact science, but he suggests the mathematics is impressive.

‘Reducing the amount of time it takes to process a bet by 0.5 seconds – on five million bets per day – saves 694 hours, or 28 days of total customer waiting time per day,’ he says.

I’d be interested in finding out how this performance stacks up against the major stock exchanges and financial futures markets. (Any readers that have this information to hand please feel free to comment.) In any event, I’d be surprised if Betfair didn’t stack up nicely.

The parallels with more ‘traditional’ exchanges or derivative markets continue to grow and mature. One parallel I find particularly compelling is the vibrant community of professional traders and trading solution providers that has arisen around the Betfair exchange; with automated and algorithmic trading solutions adding significant liquidity to the markets (and creating their own challenges in terms of managing traffic on the exchange.) This is something I’ve highlighted before. The founder of RacingTraders, one such software provider, eloquently describes why Betfair has enjoyed much success with traders:

In appearance Betfair was no different from the financial markets, the only difference was the underlying instrument which was being traded. Instead of buying and selling stocks or bonds, people were buying and selling bets on sports events. There was nothing stopping me from Laying a bet with one person at a certain price and then placing that same bet with somebody else at a slightly higher price, so long as I could read the short term direction of the market. The major advantages that Betfair had were how easy it was for anyone to get started and also how cheaply you could start learning. To get back into the futures exchanges as a trader takes capital and some hefty monthly bills on seat lease, round turns etc, Betfair immediately struck me as the poor man’s stock exchange, instantly accessible to anyone. Even their commission structure was better than the financial markets: Betfair takes a small percentage of your winnings instead of a fixed transaction fee based on Volume. I was free to trade huge volumes of ultra short term positions whilst trying for only single tick profits and was still able to make it pay.

In addition to trading systems like RacingTraders above and others like the Sports Trading Workstation and Bet Angel, there are many blogs that focus on discussing Betfair trading strategies and results, such as The Betfair Trader and WizardGold (the latter who interestingly comments both on sports and forex trading strategies and systems.) I will continue to look for connectors between these parallel (market) universes, and increasing signs of convergence, especially on the institutional front; in jurisdictions such as the UK, convergence on the retail (buy & sell) side is an already well established niche with providers from Betfair to IG Group offering a variety of options to trade both sporting and financial outcomes.

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…was the title of a panel last week at the World Economic Forum annual meeting at Davos. For those not invited to the conference, a video is available here if you have an hour to spare you can watch in on video here. Gordon Brown was on the campaign trail and trying to look and sound less creepy, and notwithstanding the fact that he kept referring to notes and giving a stump speech on universal world education after having insisted he was ‘here to listen’, was slightly more charming than usual.

Anyhow, apparently the WEF searched far and wide and brought 60 smart young people from around the globe together for a few days to discuss and agree what the youth of today sees as key issues facing the world today, and to come up with possible solutions. Their conclusions were presented at this session. Basically they focused on two issues: increased spending on universal education (via creating a ‘Global Fund for Education’ and identifying and promoting ‘Active Global Citizens’.

It all sounded pretty bureaucratic and idealistic and uncontraversial but not very pragmatic. Perhaps it’s just me but these young people and their suggestions seemed to come straight out of the 1960s. Maybe they were all really just 50 year olds that overdosed on botox. Don’t get me wrong, improving education and access to education is something I (and I hope most people) would endorse. And the idea of trying to create more ‘Active Global Citizens’ around the world is also something that resonates enormously with me - indeed without being presumptuous I would consider this a reasonable desciption of myself. But these goals in and of themselves are pretty obvious, what is much more interesting in my view would be creative and innovative suggested solutions or courses of action to achieve these goals. I don’t want to be cynical, really I don’t, but somehow I think the WEF failed to find ‘real’ young people and got the model United Nations echo-chamber crowd instead.

I was really disappointed. I passionately believe in the ‘wisdom of youth’ and in the tremendous potential to solve previously intractable problems by embracing the viewpoints and tools of the digital generation, and I was hoping to hear some of this on this panel. Instead I heard a same old, same old, top-down paradigm endorsed and Gordon Brown going on and on…blah blah blah. I’d hate to have to sit through a panel where he was expected to speak rather than listen!

***Update***

Queen Rania of Jordan was also on this panel and having never heard her speak before, I must say I was impressed by her clear and thoughtful analysis. In particular, she lamented the millions of people ‘that languish in a digital desert’ - without access to basic communications and called for focus on addressing this issue.

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Thanks to Adam for the pointer to this interesting Case Study on Betfair over at Startup Review.

They identify several key success factors:

Initial product designed for niche (sophisticated gamblers), not mainstream consumer

Tremendous cost advantage over traditional methods

Took steps to develop high liquidity marketplaces

And summarize nicely:

Betfair’s success, particularly relative to their better-funded competitor, Flutter, spurs one topic worthy of further discussion. I find it interesting that Flutter’s initial product was geared towards a mainstream audience, while Betfair was serving a smaller niche of sophisticated gamblers. The VC money bet on the mainstream play (Flutter), but as it turned out, starting with the niche of sophisticated gamblers was the right way to approach the market. In hindsight this makes sense, as targeting the early adopters who are more likely to understand the value proposition feels like a tighter go-to-market strategy. Flutter spent a lot of money acquiring mainstream consumers that didn’t adopt the product the same way that Betfair users did. Is the Betfair approach the right way to launch a consumer Internet service, i.e. build the product to early adopters rather than the mainstream consumer?

As I have been thinking about the common themes across successful Internet companies, Betfair encompasses many of them. First, they offered a low cost alternative to a previously high cost service (bookmakers). Second, they empowered some users to supplement or make a living using their service. Third, they targeted a niche that turned out to be much larger than most people expected. Fourth, they were able to jumpstart user acquisition through a distribution partnership. Fifth, they had a story that lent itself well to mainstream PR. Lots of ingredients at play!

As many of you may know or have guessed, I have followed Betfair from the start and have been inspired by many of their successes and in particular Ed, Bert and David’s transformative application of technology to create a new business model in a traditional and hidebound sector. I am especially interested in the many parallels can be drawn with financial markets (as articulated in AmazonBay and dozens of other posts on this site.) For any budding entrepreneur, it is certainly worth spending the five minutes or so to read the whole case study (and if possible spending several hours studying their site.)

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Spotted this short piece yesterday in the Times online:

ODL takes on spread betters

DERIVATIVES and foreign-exchange broker ODL Securities has bought Bestconnect, an electronic-dealing service, from investment bank Dresdner Kleinwort for about £5m. ODL, led by Graham Wellesley, a descendant of the Duke of Wellington, aims to use Bestconnect technology to launch into the retail spread-betting market competing with rivals such as CMC and City Index. Last year Wellesley lost out to City Index in the battle to buy IFX, the spread-betting and forex group.

The bestconnect team was previously part of the Digital Markets group I ran at Dresdner. I wish them all the best and a great start in their new home.

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Some of you might recall my desperate plea to be extracted from the mobile phone hell that is T-mobile…well it is as of yet unanswered (and I am still in hell…although I now consciously avoid using my phone whenever possible - my average monthly talk minutes must be down more than 80% on T-mobile and up 1000% - from a low base - on Skype)… but it was nice to see that misery has company! Check out Martin’s great T-stuck and T-rash posts!

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More really bad (ie easy to fix/avoid-in-the-first-place) customer service errors.

Starting with the local air travel quasi-monopoly British Airways. I used to be happy to recommend BA to people I knew and was generally very happy with what they had to offer, however over the past few years they have consistently been frittering away this reputation and now, I’d have to say I only fly with them because, well if you live in the UK…there really isn’t any other choice, at least not with anything like the same flexibility, schedule, etc. for a full service airline. (Most major airports in the world have a similar ‘lock-in’ with one major carrier creating a vast network of local monopolies where the customer is basically told to take it or leave it (despite these same customers being the voters that elect the legislators who ultimately oversee the regulators who perpetuate this ridiculously anti-competitive state of affairs…)

Anyhow, yesterday was a classic example of why instead of being treated like a respected and important client of BA (which call-me-crazy but as a gold card holder for the past 7 years and having earned well over a million miles while purchasing thousands and thousands of pounds of their services each year…), I was treated like just another guy with a ticket - rules are rules - move along buddy… I had some excess baggage, and they charge a fortune for extra baggage, £250 in my case…) Doesn’t matter that I’m a gold card holder. Doesn’t matter that on the inbound flight I had no baggage (they didn’t offer me any money back, funny…), doesn’t matter that for that matter, probably on 80+% of the flights I’ve taken with them over the years - most of which have been in business class - I’ve had no baggage, doesn’t matter what the actual amount of baggage/capacity of the flight overall was, you are over the limit sir and unless you pay up your baggage doesn’t go with you. Why don’t all these other things matter? Well because they don’t have any idea of who I am at the agent level … all that data BA has on me, used for nothing more than to send me promotional emails (and since my kids get the same emails, I figure the only data they seem smart enough to use is the email address…) Indeed yesterday I have to say the agent was courteous and seemed even slightly embarrassed (and then relieved that I didn’t jump up and down and shout at him for 5 minutes - I think they get alot of that…) - the problem isn’t the staff, it’s the policies. Their policies don’t recognize top customers, their policies don’t include arming their customer facing employees with customer information, their policies don’t empower employees to make discretionary decisions, basically their policies are more akin to those of a bureaucratic monopoly that those of a customer-focused firm in a competitive marketplace. Very sad indeed and frustrating. Maybe it was appropriate that I pay the excess baggage, perhaps I should have been comp’ed - I don’t know…that’s not what wound me up. What wound me up was the complete lack of any sort coherent customer-aware policy and worse that I didn’t have any course of action: taking my business elsewhere - as long as I am based in London - is just not an option. (It would inconvenience me far more that it might hurt BA’s bottom line…)

Next up CNBC.com… a couple days ago I linked to a video on cnbc.com featuring Weatherbill’s CEO. Today I wanted to show it to someone and clicked on the link. Well, after 24 hours you need to have a paid subscription to see the archives. (I’m not going to debate now whether or not that is a good policy or business model etc. - you can probably guess what I think in any case…) It costs $9.95/mo (no option to pay in another currency of course…); I already pay for a cable subscription to CNBC (gee why wouldn’t they think to offer web access to their cable subscribers…); but I’m more often in front of my laptop than my TV and I think it’s a really good business news service so I thought what the hell and spent 5 minutes signing up and giving them by credit card number. Then I went to back to try an watch the Weatherbill clip. Boom. You need a Windows PC and Media Player to use CNBCplus. Mac and Quicktime users bugger off. Funny thing is the free service works just fine with Quicktime. What the hell is up with that kind of decision??? You actually convince someone to buy a paid subscription to your website and then you give them fewer choices and try to lock them in to one proprietary standard. And they can’t even hide behind some lame excuse that they don’t know how to make it work because it works on the free-to-view site! (Maybe I shouldn’t shout too loud lest they disable this compatibility…)

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David Friedberg, Weatherbill’s CEO was on CNBC yesterday explaining the ideas behind Weatherbill.com to the world:

Click here to go to video.

A longer (audio) interview (20 minutes) can be found here. (Thanks to JD for the pointer.)

There has been some noise around the idea that businesses hedging weather risk with Weatherbill online is akin to gambling. If you are interested in my views on the semantics of investing / hedging / risk management / gambling / etc. I would refer you an earlier post. But quick and dirty: if the same business hedges it’s interest rate or credit or currency (etc.) online with the CME or an investment bank, is that gambling or prudent risk management? Making the distinction according to the underlying is just plain non-sensical. Especially when the underlying in this particular case - the weather - is probably the risk underlying that can be least influenced by the actions of market participants (well you can always try I guess! ). You can buy all the warm days you want, but it won’t make the sun shine any harder.

Anyhow for most small businesses - and many large ones - their financial exposure to weather risk is probably an order of magnitude higher that their exposure to interest rate or equity market risk, the opportunity to manage this pro-actively will be - like for other financial risk management tools before, only moreso - a significant advantage insofar as it reduces business risk, financial volatility and as a result the cost and efficiency of capital. (Which means higher productivity, more prosperity, greater wealth, more jobs, etc. etc.)

Small and medium size businesses are the backbone of most (all?) modern capitalist economies; the democratisation of risk management tools via new information and communications technologies will be a powerful factor underlying the next phase of growth and wealth creation in this century.

***Update***
BusinessWeek gives its take on Weatherbill.

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I wanted to give BA a constructive suggestion to improve their website. It’s a site I know all too well, and I must say it’s pretty good and encouragingly actually gets better with each new iteration. The suggestion I was going to make was something I’ve been annoyed at for some time now: when you book a flight for your family online, the site does not allow you to enter Executive Club numbers for children which is a real pain in the ass, because now you have to check in physically at the airport and remember to give the agent the kids’ numbers or (and this is what I was doing this evening) you have to go through the somewhat tedious process of claiming ‘missing’ miles online after the fact. What makes this all the more annoying / dumb is that it would make no difference to their booking process to allow a field for the executive club number for all passengers; it is not a required field so I cannot see how their web workflow is improved or simplified by excluding this option. Ah but you might ask, how many kids have executive club numbers? Well obviously I don’t know, but I wouldn’t be surprised if there is quite a few as BA has a great ‘family account’ where you can pool miles from all family members, so if Mom and/or Dad have a card given their frequent business travel, it makes sense to sign up the kids too even if they only fly a couple times a year…

Anyhow why am I writing about this on my blog? Well sheer frustration. Spent a good 15 minutes trying to find a ’suggestions’ mail address or forum or something on the site and nada… One way commerce… we speak - you listen. Very annoying. They should have a blog. Maybe they are scared of their customers? We’re not all angry. At least not all the time. And it would be a million times more useful than those stupid surveys you hand out in the plane that just annoys your clients and embarrasses your staff. I guess no one at BA has read Scoble or Doc or Euan. (Euan there has to be a consulting gig there for you!)

If somehow this message does get to someone at BA who is responsible for the website, please fix the booking bug outlined above. Thanks.

***Update***

Dom has some ’suggestions’ for BA too! …could the someone referred to above fix this as well?

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The Africa bike. Stumbled across this great idea/initiative via Bicycling magazine:

In addition, Kona unveiled the Two-For-One Kona AfricaBike sales program. For every two AfricaBikes sold worldwide, Kona will donate one AfricaBike to Bicycling Magazine’s BikeTown Africa project, or to other non-profit and non-governmental organizations (NGOs) whose missions include helping to improve the quality of life in sub-Saharan Africa.

The Kona AfricaBike caught the imagination of cyclists everywhere as they followed the design and development of the special edition bicycle last year. As with every Kona, the AfricaBike was built for a specific purpose: to assist home health care workers in Botswana with the delivery of antiretroviral drugs for HIV/AIDS patients.

Kona’s Design Group, normally employed in the design of world cup racing caliber bikes, teamed with African experts and other bicycle industry manufacturers in the research and design of the AfricaBike. The result was a simple, durable, comfortable and effective means of transportation that could handle all of the unique social and environmental challenges Africa presents. To Kona’s delight, the same design elements that make the AfricaBike an efficient means of delivering medicine in Botswana, also make it attractive to urban commuters as they search for reliable, affordable transportation alternatives.

What’s not to like? Practical, useful, green…fun(?) If I wasn’t so terrified of riding a bike on the streets of London I would definitely be thinking hard about putting one of these in the shed.

Delivering hi-(bio)tech with a good ol’ low tech bicycles. Love it. Now all we need to do is hook up a pedal-powered battery recharger and a $100 laptop &/or iPhone dock to the bike and you’ve got a mobile internet/phone kiosk. Talk about enabling and enpowering technology… (And just in case you are wondering, no I’m not kidding…maybe I can drum up some interest for this idea at TED Global - Africa: The Next Chapter.)

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From the Betfair forum, ‘Is it still worth betting on horses?’:

Backing, laying, trading, it doesn’t matter.

Having read the input from various gurus on here over the past few months, I’m beginning to wonder if any of them still bet on horses as a major part of making a living.

I ask because I’m trying to develop a winning (laugh) system for horseracing. If I’m wasting my time, would somebody please tell me and point me at snooker or darts or even football if that’s where the profits are to be had.

According to many on here, horseracing markets are now so accurate that there’s no percentage to be had.

Serious question. No offence intended.

Replace ‘backing and laying’ with ‘going long and short’, ‘horses’ with ’securities’, and ‘horseracing’ with ‘markets’…and what follows in this thread is an interesting debate on efficient market theory and whether or not one should believe in such things as hedge funds.

(btw please welcome Betfair founder Andrew ‘Bert’ Black to the blogosphere!)

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