Saturday, July 5, 2008

Ellis Farce

The tea had been tossed overboard at Churchill and Calder earlier in the year and now the shots of Lexington and Concord have been heard at Ellis Park. It doesn't matter if the year is 1775 or 2008, one can call it taxes or takeout, but the issue still remains the same:MONEY! Now don't get me wrong I don't think money is a four letter word. I like money, a lot. In the right hands it often does a great deal of good. However, it can also be humanity's most corrosive force and I believe that is going to be the case for racing. It is very possible that these battles, based in Kentucky, will soon escalate into outright industry war. I, for one, hope it does because then it would force government regulation into the realm of industry financing. And I believe this is an absolute necessity. Simply put, not enough of the money that is siphoned off of each parimutuel wager is making it's way back into the industry. That money is needed in order for the product to remain healthy. The takeout is divided among several entities: the tracks; horsemen; and wager handlers (ADW's, OTB's), municipalities etc...

The big issue is ADW's - advance deposit wagering outlets - and how the money they take in is distributed. I'm not sure most fans know how their takeout is distributed. Perhaps some don't care but if they knew the reality of how it is being divided up they might care a little more. And to be honest I still am not 100% clear -too many spin doctors for each side- though I feel I've got a good handle on it.

Before I go any further let me say that I have been trying to obtain accurate figures from different sources in different states but have not been as successful in getting responses as I had hoped. Some may still return my inquiries and at that time I will pass on that information and any sense I can make of that info. I am also in the process of wading through a copy of the 2008 franchise legislation for NYRA but it's going to take a while and then a while more to decipher it, if that's even possible! But as I haven't posted in a few days while I tried to pull this together I have decided to post my impressions at this point otherwise a few more days may go by without a post. So consider this entry the beginning of a process not my final thoughts. For the sake of this entry, I will use information from the racing jurisdiction from which I have received the most help. Here's a breakdown that I was provided with. The percentages are based on each $1 wagered. So each pct. equals a penny. Keep in mind these are not exact figures but accurate ones:

The distribution of takeout on ADW wagers differs in state and out. For this
purpose, let’s assume we’re focused on out-of-state ADW wagers on a race;
otherwise, they can be quite different. Assuming a 20% takeout:
· 2 to 3.5% to purses – Host Fee split
· 2 to 3.5% to track commissions – Host Fee split
· 13 to 16% to ADW company

In states where an ADW has to pay a source market fee (payment to local track/horsemen) – few – it looks like this (on average):
· 2 to 3.5% to purses
· 2 to 3.5% to track commissions
· 3 to 7% to local track/horsemen
· 9 to 13% to ADW company

When source market fees are paid, the 1/3 revenue model horsemen are talking about is met; by adding the source market and host fees together.

After reading this one can see the problem at Churchill. Churchill can act as its' own ADW through Twinspires, so in effect they are getting an ADW fee and the track commissions. The locality of the breakdown above was not Kentucky but I imagine the percentages are not too different. In that case, on out of state bets, CDI would be retaining, at very least 75% (fifteen cents of every 20 cents of takeout) and as much as 90% of the takeout, with no extra money going to the horsemen. That money does not go back into racing but to profit, less operating expenses. And based on the figures above 10% to 17-1/2% covers that and more for most tracks. I believe the horsemen's argument for receiving the 1/3 revenue would be based on the fact that CDI operates in Kentucky so they would be a source market. However, Twinspires wagering hub, the ADW that CDI owns, is in Oregon. So I imagine that CDI would argue that they are not a source market. Now I am not certain of these arguments but they are reasonable to assume. But, undoubtedly, it is much more lucrative for Churchill to take wagers on their own tracks from out of state. CDI is taking money coming and going. If one looks into their empire Churchill Downs Inc. you will see that they have a hand in every aspect of racing from transmission technology to OTB's, racinos, tracks, a network partnership (HRTV) etc... I wonder how all this works with anti-trust laws? (Fodder for another entry). I would argue that the horsemen deserve at least 1/3 because they are, at the very least, equal in importance to the production of the product. I would say more than equal, but if they are happy being equitable, so be it.

I imagine most fans don't spend a whole lot of time worrying about the takeout. That is unless they are professional handicappers and are trying to beat the break as well. But for most of us we accept it as the price we have to pay to be able to enjoy the wagering side of the sport we love. The only problem is that the money is not going back into the sport! Look at those numbers again! Between two and three and a half percent goes toward purses! That's what feeds the industry in the above jurisdiction. The backbone of the industry is the horsemen and the owners. For the horsemen it is their life, everyday! Most love it and couldn't imagine doing anything else but that doesn't make it easy or even feasible in many cases. That purse money is their lifeblood! And when possible it trickles down through their stables. But, believe me, a lot more flow is needed!

I know they call racing the Sport of Kings and you have to be! It's true that many of the owners are usually very well off financially but because of their dreams and the bricks of money they invest in these horses we can enjoy the show. They purchase, break, train, vet, race and in some cases breed these athletes. And for most their only return is purses. Sure there's the occasional home run when one becomes sought after as a sire or broodmare but that's far from the rule. And for the small owner the problems are the same only more critical and problematic.

I'm not really certain what the ADW's offer that makes them able to demand those fees. I imagine it must be the systems that are being used. But with the technology today I feel certain there are many other companies that would be able to service the industry. I wonder why and if a neutral server should not be employed for a flat rate. I'm sure IBM could, or already has, an application that would work wonderfully. I think the industry would be better off paying them a flat rate than to continue to be shaken down by the ADW's now in place. But of course many of the industry players are in the business of being ADW's! How's that for catch-22? It's a little like a parent stealing money from their child's piggy bank! Again I have to wonder about the anti-trust aspect of this situation.

This whole situation down at Ellis Park just stinks! I wouldn't be a bit surprised to find out that CDI was sending arms to Geary to carry on their fight for them. Geary bought the track from CDI in 2006 for a sum that I don't believe has ever been published. Has a chip been cashed? It's like the industry's own little Iran-Contra affair!

Of course as I write this calmer heads have prevailed and an agreement has been reached and the horsemen will receive 6% up from the 2-1/2% last year. That's from a blended take of approximately 19.5% in KY (very close to the numbers provided) [DRF article]. Almost the third the horsemen wanted.

I am very pleased that the horsemen didn't give in and made some gains here. They stood up to Geary's bluff and gained some ground. Still more needs to be done. Don't believe for a moment the cries of poverty from Geary and his cronies. If he wasn't going to make money there would have been no reason for him to have acquiesced. Perhaps things are getting so hot down in Kentucky on the heals of the Senate committee hearings that even CDI is beginning to sweat! I believe this issue is still far from settled.

Let's not also forget that CDI, Magna et al, have the resources for a big P.R. department. The press is almost always tainted against the horsemen. We hear they are stopping the signal, they are being unreasonable, they are causing the fans inability to watch and wager. While in fact they are the ones that are causing the signals to be stopped, it is their only resource with which to wage the battle. This weapon was written into the IHA of 1978 for, I imagine, precisely this reason.

I applaud Judge Joseph H. McKinley the U.S. District Judge who refused to issue a restraining order on the horsemen to force them to accept Geary's deal and allow the signal to be transmitted. In effect this will cause the issue to be brought to a head and either the sides will have to find agreement or I imagine some binding arbitration would come next. I don't think CDI, Magna and the ADW's want to go that route.

As fans we all have an obligation to do what we can to make the sport healthy. Get involved. Find out where your money is going. Ask questions. Demand answers. And demand that fairness be meted out with every dollar that we put in! You have a right. The horses may be an owner's investment and a trainer's charge but it is YOUR MONEY that ultimately makes racing possible. That gives we, the fans, power if we choose to use it.

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