Sunday, August 17, 2008

Perception Problems

I found this weeks issue of The Blood-Horse very interesting (Aug. 16 #33). In particular Tom LaMarra's article on THG and Fred Pope's article about racehorse owners responsibility to assume more control over the destiny of the game. Both articles revolve around the same issues - generally speaking - and that is takeout (money) and it's distribution.

Anyone who has read my blog from it's inception will know I have addressed this issue more than any other. I think for anyone that loves racing this is a major concern and one that threatens the sport. It seems almost everyone agrees that the system is broken. The most notable dissenter from this thought would be the ADW outlets. As with all matters that concern money it is not hard to figure out why a group is in favor or against a system; look for those whose pockets benefit the most and you find a system's staunchest supporters.

The system as it is now configured does not give enough back to those that put on the show and by extension that means the sport itself is not benefiting from the money it generates. Most particularly these parties are the horsemen, owners, fans and the tracks that are not also ADW's. As I have written about this before I don't want to get into the dollars and cents, per se. Both articles correctly site that only about 3% goes back into the game directly as purses. That is simply not enough.

Fred Pope offers a reasonable solution based on the lotteries scheme where bet takers are given 5% and the lottery producers are given the rest of the takeout. He uses 22% for that figure (27% takeout, I had no idea!). There may be differences from state to state and game to game, especially the multi-state lotteries, but his point is well taken. Why shouldn't this be a model that the industry follows? It seems to me that if followed the takeout can be lowered and the sport will still reap more benefit.

How is that possible? As it stands now the takeout is divided between horsemen, host tracks and ADW's or other off track facilities that accept bets. The cut is determined by state regulations mainly having to do with host/source market laws etc. Of course many ADW's find ways around paying the most by incorporating in other States etc. To make my point the specifics don't matter. Simplicity is almost always best except when you rely on shadows for your benefit.

What I propose is simple. Drop the takeout to a flat 17%. Give the hosting track 11% of the takeout. This to be divided further with 8% going back to the horsemen and owners through purses and 3% to the track operators for maintenance etc. This insures a healthy industry and a revenue formula few on the production side could find any fault with. Give the other 6% to those that handle wagers off track. What this accomplishes is that it puts the ADW's, OTB's, casino's and other NTBA's in competition with each other for their profit, instead of preying on the horsemen and tracks. This in turn would benefit the fans because it would force those outlets to provide better fan service. I can't speak for everywhere but almost every OTB I have been to in New York is tragic. The monitors are few, old and of poor quality to begin with, not to mention that quite often nothing will be on many of them until you bring that to a managers attention. The tellers are too few and generally non-interested. And if the parlor you're at has personal terminals they are often out of order or in poor working condition and also too few. Availability of information - DRF's or programs (and never anything else) - are on a first-come, first-served basis and usually after a few no more are served. All these contingencies result in many of those watching the signals at an OTB to bet through ADW's or other accounts. I can't speak for everyone but most of those I know would prefer to bet where they are, if for no other reason than your winnings are cash in your pocket, not in an account in Oregon. So, under this system for a provider to receive a benefit they have to take the bet. In order to get the bet they have to serve the customer. Of course this works in theory. In NY OTB's take 5 or 6% of anything you win as well. So you would think they would bend over backward for the fan. But they don't! Go figure. If I could make money that easily from someone I'd teach and help them win in every way possible. Just more short sightedness. But I would also get rid of that tax. Why should they have the right to soak the fans even more? It's also another reason fans choose to bet elsewhere. Why pay a 6% surcharge on winnings on top of the the 20% you had already payed for the right to wager? As a result, in essence, many OTB's are giving their signal away free! One of the major reasons they have such financial woes!

Okay, many will say that the ADW's and OTB's will go the way of the dinosaurs if left to this formula. I doubt it. In LaMarra's article THG's executive director, Wilson Shirley is credited with stating that ADW's 'currently generate about $100 million for tracks and purses, but if the growth trend continues, that figure could be $800 million in 10 years.' I don't know how much they actually handle to create $100 million for the tracks but if figured as 6% of the take it's roughly $1.7 billion; at 3% it's more than $3.3 billion! Yes the numbers will be turned around, they will be earning the $100 to the projected $800 million, not the billions, but not only is that as it should be it's more than enough money to ensure that we will always have wagering options. Not only is it a lot but it's enough that if they want to offer rebates let them do it with their money, not ours. For the average betting fan I know of nothing that is more aggravating than knowing that the big operators get rebates from our dollars! It's called gambling! If you don't want to risk losing what you bet, DON'T BET! And for all those entities that offer those rebates, if you want to do it to lure big time gamblers, do it with YOUR OWN MONEY!

This brings me to my only disagreement with Fred Pope. In summing up, while urging owners to take control, he states: "We need some racehorse owners with a little maverick in them to engage now and save the sport of thoroughbred racing. You, know, their game. (BH #33, 4032)"

The horses may be theirs but it's not their game. Without the fans they'd be racing them in their backyards. As expansive as they may be I don't think it' would be quite the same, or satisfy the ego to the extent that many - not all- need it to be massaged. As John Sabini, NY's new racing board chief said "We don't run races so horse owners can watch their horses race." However, I do agree with Pope's overall point, owners need to have more say in the control of the sport. It is sad that, as he puts it, "You can own a horse and your only responsibility is to pay the bills (BH 4030)." I believe he meant to say that their only function seems to be to pay the bills. Certainly their responsibility is a privilege that they need to exercise much, much, more.

I know this entry is quite long but before ending I just have to comment on the 'state of the game'. I, like many fans I know, have been concerned about the future of racing. Perhaps we ought not be. We are, after all, talking about BILLIONS! of dollars before even considering the industry's peripheral economic impacts, as well as many, many thousands of jobs. It is unlikely that such an industry will dwindle and die or be allowed to do so. I think the problem is perceptual. Perhaps it is also manipulated. I believe, that in general the public takes a poor view of racing resulting from two distinct perceptions.

The first is gambling. Gambling always seems to carry with it the vision of the degenerate, the person that lives on the fringe of society not in it. Gambling and gamblers are things that we, as a culture, are generally taught to avoid. While any vice that becomes addiction is a serious problem the biggest problem here is that all fans are lumped together into the same category. No matter how one handles their bankroll we are all thought of as the $2 bettor that will soon be spending the family grocery money on Peanut Butter in the fifth! Just like the teen that first experiments with pot is surely on his way to a broken life and heroin! It's a bad perception and should be fought by promoting the intellectual aspects of handicapping, both the numbers side and equine knowledge. Also money management should be part of any and all promotion to create a responsible atmosphere about wagering on horseracing.

The second poorly perceived aspect is the tracks themselves. On a normal day at Belmont there wouldn't be enough people to crowd the apron! It looks plain bad, as though no one cares or watches the sport. Why? Obviously many reasons. Off-track opportunities, difficulty of getting to a track, the areas in which many tracks are located, it's a daytime sport etc... But, I think most of all it is how the product is sold to the fan. You get whacked to park your car, you get smacked by having to pay admission for the right to spend your money and then you are pummelled by the price of concessions! How much can a fan take! As time goes by the fan has also slowly been denied access to the sport. One cannot even go to the training track in the morning at Saratoga to watch the workouts unless you have credentials! Of course most of these problems don't occur at premier meets like Saratoga, Keeneland and Del Mar. Why? because the product is great! The product is great enough to overcome the gouging that people put up with. It's that good because the purses are great compared to anywhere else. Good purses brings the best horses and talent the industry has to offer. We need to get that money back into the sport. That is why the money issues have got to be settled. I think the poor image of most tracks is manipulated to some degree by state government. In the long haul I think they see racing as a cash cow that can be restricted to the smallest possible space with other space now used for racing eventually going for other types of tax creating development. I especially think this is so in NY. I don't have enough knowledge of too many other jurisdictions to be as confident about them. But, we will say good bye to Bay Meadows in a few weeks. Hollywood Park is not likely to see many more seasons. I fear for Aqueduct here in New York. If Hialeah hadn't gotten historic designation I'm sure that the talk going on now about bringing it back would be moot. These are just a few examples.

Over all my final point about not worrying about the health of the industry is this: If the industry is so sick how does it manage to create more money almost every year! I think it is just the product that is ill, suffering from malnutrition, but the industry is well. You can't deny nourishment and expect something to flourish. Just some food for thought.


Steve Zorn said...

Very nice post. I don't necessarily agree with everything you propose -- 3% for the sending tracks might be a little low, and perhaps the THG model of 1/3-1/3-1/3 (which, at current takeout levels, would be 6-7% each for the tracks and the purse account). Would give everyone enough to play with, and improve the owners' chances of breaking even.

Some numbers: about $15 billion is the total handle on US racing. Of this, 89% is bet on simulcasts, either at other (receiving) tracks, at OTBs or at ADWs and other non-racing sites (think Jai Alai frontons and dog racing). The growth is in the ADW segment, so that's where the rest of the industry has to get more money, as the THG is seeking. I believe Wilson Shirley's $800 million from ADWs includes both growth in that sector and getting a fair deal from them.

One special problem: the "whales." Again, according to Shirley and Bob Reeves of the THG, about 10% of total handle comes from a handful of professional bettors who wager (very) large amounts and who get significant rebates. In some cases, the ADW through which they bet may retain only 1.5%; the track sending the signal gets perhaps 4.5%, so their total effective takeout is 6%, compared to the 20% that the ordinary race track bettor pays. You can't just say these guys should pay at the same rate as everyone else; if you charged them 14% under the THG model, they'd take their money and bet it on something else where they had a better edge. So it'll take some creativity to find a sweet spot for these guys--keep them in the game, but get more of a contribution from them.

George said...

Thanks for the information Steve. As far as the whales go, it is a problem,however, I think we would all be better off without them. With he numbers you supplied the whales account for approx $1.5 billion in handle of which @ 6%approx. $90 million is revenue. At a takeout rate of 17% the sport would only have to attract about $550 million in business to recoup that same amount of revenue. Sure, "only" is a big if when we're talking about $550 million, but I don't think it's impossible. I also don't think all the "whale" business would dissapear. If it did I still think in the long run it is better for the game. That kind of money can minipulate pools and puts all other bettors at a disadvantage. In an industry that needs to ensure the integrity of the game both on the track and on the tote I think it's would pay divedends in the long run. -George