The Internet has made the world a smaller place and in many ways it has democratized the world. In our “History of Sports Betting Section” we chronicled its meteoric rise in the 1920s as the public became fascinated with Babe Ruth, Jack Dempsey and Red Grange. The public agreed to trade fair odds with the sports book for the right to pick their team. On point spread sports such as baseball and football, the public would bet $110 to win $100, and needed a breakeven percentage of 52.38% to make money. This pillar went unchallenged until the 21st Century.
As the world evolved, the economic barriers to entry largely tumbled with the proliferation of the World Wide Web. Now smaller sports betting firms could form in offshore locales in the Caribbean and beyond and compete for business. With all of these new entrants pouring into the market, the competition was soon pretty fierce. There is one commonality across any competitive industry: when one firm is doing well and another isn’t, it doesn’t take long for the losing one to say “oh yeah, I’ll charge less.”
Welcome to the world of reduced juice sports betting. It is now common for sports books such as Pinnacle to take bets at $105 to win $100. That decimates the winning percentage needed to break even from 52.4% to 51.22%. As you recall from the “Efficiency in Sports Betting” article, Nobel Prize winning Economist Steven Levitt discovered that Sportsbooks purposefully push the odds so underdogs win 51.8% of the time to take advantage of the public’s fascination with betting favorites. If this premise were to hold true, you could simply bet the underdog in every game and clean up. A 51.22% percentage to break even is a world closer in the world of professional sports betting to profitability than is 52.37%. There are numerous biases such as large favorites in College football, 11-13 pioint favorites in the NBA and NFL playoff home underdogs that we can really take advantage of with the reduced juice option. The colossal shift in odds makes it very realistic for a bettor to be able to outperform the sportsbook consistently.
Throughout the history of sports betting the idea of buying and selling picks has been a common one. In 1996, San Francisco based commodity trader and sports bettor Jay Cohen had an idea. Why not match the trading he so enjoyed at work with his true passion: sports betting. He moved to Antigua in the Caribbean and set up shop as the World Sports Exchange (WSEX).
Cohen’s shop offered conventional sports betting and also the idea of buying and selling sports picks before they were even decided. For instance, if you were to bet on the Indianapolis Colts and they were receiving 13 points against the Pittsburgh Steelers, and you bet to win $100, the projected winnings were not worth anything as the teams took the field for the opening kickoff – anyone could get the same odds you just got, Colts + 13. If at half time though, Indianapolis was unexpectedly winning, 17 – 3, your bet would be looking very good. Indianapolis is up by 14 points and on top of that they are getting another 13 points from the point spread; they look like a certain winner. Now, you could offer at half time to share your claims to the $100 winnings if Indianapolis would win if they were to hold on. If you wanted to spare the agony of watching the second half and cash out right now, you might offer to sell the rights to the $100 winnings to another World Sports Exchange member for $90.
Cohen gained tremendous notoriety as a pioneer in the industry and became the first known sports book owner to make it onto the cover of Sports Illustrated. The publicity would later prove costly, as he became an easy target for the US Government who arrested him and jailed him for 2 years for violating a Federal Wire Act. At his trial, his famous lawyer Ben Brafman, asked what Cohen had done wrong? He offered the best known odds to bettors in the world, allowing them to recoup almost 99% of their bets as a whole while on the first floor of the courthouse, there was a convenience store selling state run lottery scratch tickets with an 83% playback – It seemed like the King of England preying on American Colonists all over again. While Cohen did run a longtime successful sports book, his ideas for exchange betting were only a minority of his bets; his exchange ideas flourished later.
In May of 2000, Irish betting firm Flutter brought the idea of a betting exchange to the United Kingdom. They soon merged with another competitor Betfair, and together under the Betfair umbrella, the company has risen to become the world’s largest betting exchange. Betfair’s premise is pretty simple, two counter parties bet directly with one another and the winner pays a commission on winnings – typically 5% but sometimes lower. The company claims 20-40% better odds for bettors than traditional sports books. Again democratization takes place here. Bettors are paired directly with each other and now face more friendly odds because they are paired with other bettors online. Betfair isn’t taking a side as did the Las Vegas Casinos in Steven Levitt’s study, they are merely playing match maker.
Established sports books have come out in force against Betfair for the company’s concept of “laying” horses. Horse bettors, or “Punters” as they are known in Europe, can bet on specific horses to win or lay (not win). Unfortunately, this takes the barriers to corruption down a few notches as it is much easier for a jockey to lay his own horse in silence and not win a than it is to devise a conspiracy involving multiple horses. Betfair counters this criticism by pointing out that it doesn’t take cash bets from clients and no one is allowed to have anonymous accounts – bettors need to produce identification in order to bet. In 2007, Betfair voided all bets on a tennis match between Martin Arguello and Nickolai Davydenko when rumors of fixing surfaced. Betfair has established a strong presence in England and is expanding throughout the world. They also have a poker product with better odds and even operate a site called zero lounge where table games offer a 100% payout – no house edge.
Its easy to see why Betfair has in a fairly short time become the largest betting house in the United Kingdom throughout the history of sports betting, where betting has existed hundreds and hundreds of years. The firm has become merely a matchmaker and through technology has paired bettors with one another and allowing the bettors better odds than the previous betting model. This model will certainly continue to proliferate throughout the world. This is all very good news to the skilled bettor. The reduced odds in this democratic model make it almost a certainty that a skilled bettor following a solid betting model and smart bankrolling can win.
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It’s hard to believe online sports betting is still so new. Awesome blog, thanks for posting this!