Investing: Good Sports

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Britain's Betfair, an online sports-betting exchange, has an unusual format and an unusual strategy for an Internet gambling company: it tries to be squeaky clean.

Unlike the majority of its online rivals that have set up shop in jurisdictions such as Gibraltar or the Isle of Man, Betfair is based on mainland Britain. And unlike most competitors, it won't accept bets from places where online wagering is illegal, including the U.S. Indeed, it doesn't actually book bets; rather, it matches up bettors, for a fee. The strategy has won it plaudits at home, including an award for enterprise from Queen Elizabeth. And it enabled the company to attract Goldman Sachs and Morgan Stanley as financial advisers--a coup, given the nervousness of big U.S. banks about taking on clients in the offshore online-gaming sector.

"In the long run, you have got to be on the right side of the law," says co-founder Edward Wray. "In the long view, the U.S. market will open up and will look at those who obeyed the rules in a more favorable light."

It's an admirable sentiment, but many in the industry wonder how much Betfair has left on the table in the short term. The firm likes to style itself as the eBay of online gambling because it enables people to place bets against one another. That has proved to be a recipe for growth: revenues almost doubled last year to $187 million, and more than 3 million bets per day now pass through the firm. But its profit margins are far lower than those of rival PartyGaming, for example, and its board recently decided against a public stock offering anytime soon.

Mark Davies, Betfair's international-marketing director, acknowledges the firm is caught in a bind, especially in the all-important U.S. market. And outside shareholders, including venture-capital firms Benchmark and Index Ventures, are growing impatient. But for the moment, the firm is betting that virtue will bring its own reward--in Australia if not in the U.S. Last month the government of the Australian island of Tasmania said it will allow online-betting exchanges, opening the door for Betfair to a huge market that it had resisted tapping illegally.