Stephen Morana Q&A: Betfair CFO and former interim CEO

eGaming Review (eGR): What have been your major achievements during your time as interim CEO?

Stephen Morana (SM): I was in a very lucky position in the sense that the business was in nowhere near as bad a shape as it was being perceived externally. The perception of Betfair was worse than the reality, so my job was made much easier by that, and a lot of what I have had to do is make sure the outside world realised Betfair is in the shape that it’s in. I think we have done that very well, and I think we’ve kept the momentum in the business, which is very important. The team and the business have rallied around me and I’ve been really proud of that, and I think we’ve delivered a strong set of results and put a platform in place for future growth.

When I hand the baton over to Breon I think it’s in pretty good shape and there are not too many bumps and bruises over it. I’m particularly pleased with the value campaign, while we’ve just launched the start of the fixed-odds sports betting proposition, and we’ve delivered all the numbers we said we were going to hit. So basically we’ve ticked all the boxes and restored a lot of external confidence in us. I think there are a lot of things for Breon to get his head round and understand, and the great thing now is that the business is in good shape and he doesn’t need to come in and immediately change things. It isn’t a turnaround job that’s needed, he just needs to get up to speed and decide which areas he must prioritise.

eGR: Mobile has been a real success. After mobile revenues doubled in the last year, what differences are you seeing between this and other channels?

SM: Cost of acquisition of mobile players compared to regular players is similar at the moment, although I think we will see an increased Average Revenue Per User (ARPU) if we can move people onto mobile ““ it probably goes up about 10% ““ and I’d probably say the acquisition costs are close to the same as with normal channels. The challenge with mobile is that it’s more a case of getting people in the normal way and then cross-selling them onto mobile, so at the moment I think we’re still just scratching the surface in terms of getting people directly into mobile. In terms of cross-sell, it’s made possible by the quality of the products and their constant improvement. These aren’t just wrappers; these are native applications in multi-languages.

We’re in 26 app stores worldwide where many others are maybe in one or two, and we’re in about 17 different languages compared to most companies only being in one or two for that as well ““ we’ve invested and built a platform for mobile growth, and it really simplifies the product too which is a real benefit to us.

It’s an area we are improving all the time, and as of a few months ago you can now register directly onto mobile, but I do think the standard channels normally work and then once you’ve got people online you can move them onto mobile. We’re in a position now where we have 50 in-house

developers on both sides of the Atlantic and we are pretty comfortable ““ we can do three to four major releases per application, that’s Android, Blackberry, iPhone and iPad.

eGR: After the struggles and the delays getting exchange betting up and running in California, what is the outlook for Betfair in the United States?

SM: We have got a profitable business in the US with TVG and that’s outperformed the rest of the industry there ““ it is growing by 7% year on year and is now profitable. The long-term goal is still to get the exchange licensed in the US and we’ve taken some steps to do that: we have got the primary legislation passed in California for exchange wagering as well as doing the deals with tracks that you need to do.

The next two things we need to do are to agree a deal with the thoroughbred owners of California and the California horseracing board. We feel we will get there over time, we’ll continue to press and make that work. For the time being we can continue to grow TVG as the advance deposit wagering (ADW) business. We’ve done a lot of the building work for the exchange so investment levels will hopefully drop as we’ve done the big part of the build, but we are comfortable continuing to invest in the US as we think it’s a big opportunity.

There’s a lot of talk around poker in the US and there has been for years. We’re in a strong position having TVG ““ it’s a US business, it’s been around for years, we’re licensed in 18 states and deal with regulators every single day. You can see in California and in Illinois when they’re looking at the terms of potential licensing, ADWs are among those companies that can get licences. We’re in a strong position, but I am very realistic about how challenging the US poker market would be, as well as the speed that anything would happen ““ it’s very much on the back burner but we want to make sure we are not excluded.

eGR: How has the lack of exchange betting affected Betfair in regulated European markets?

SM: We don’t have the exchange at the moment in Italy and we turned off games and poker. What happened in there is our revenue dropped 30% (£22m to £17m) due to the lack of marketing and turning off games, but underlying numbers are stronger than they look. We hope in both Italy and Spain that we’ll have an exchange product there by the end of our financial year, but it’s out of our hands now ““ it is with the regulators and the politicians and we are working with them as best we can. With regards to poker in Spain, it’s a relatively small part of our business.

We will turn it on at some stage but we are just working through it, and it’s a lower priority. Germany equated to about 5% of our EBITDA last year ““ from our perspective we have our Schleswig-Holstein licence and will continue to operate under that. If we had to leave Germany it would obviously come at a cost of about £5m for us but we believe we can continue operating under the Schleswig-Holstein licence and that’s what we will continue to do. We always work with all authorities whenever we can, and we will continue to monitor the situation but we believe under German law the Schleswig-Holstein licence gives us a degree of certainty that we can continue to operate.

eGR: What are Betfair’s social gaming plans?

SM: We’re doing bits on social but didn’t want to talk about it in too much detail [in our FY results statement] as we’re doing it as part of our ongoing business. We’ve been a social business from day one ““ we had our forum from day one so we’ve always had that kind of social interaction. We obviously own a 10% stake in Kabam, who have been very successful in the social space, and we get a lot of knowledge through from them, while we have also launched a game ourselves on Facebook called Betropolis as well as doing a lot of marketing through both Facebook and Twitter.

We are doing a lot but what we’re not doing is pulling out a multi-million pound investment to talk about separately. Betropolis is a fun exchange game that’s up now on the Facebook platform and we’re learning from it all the time. We’ll keep on looking at the possibility of doing something else on Facebook, but it’s the play-for-real that we want to be involved in. The way to do it is to work with Facebook, to understand how they work, and do lots of stuff around it but in terms of making an enormous investment that’s not for us now.