INTENSE CASINO COMPETITION TAKING ITS TOLL

Competition from start-up gambling establishments in nearby states has devastated the casino industry in New Jersey.   The Garden State has seen a 42% decline in gambling revenues since 2006.  In January 2014, Caesars Entertainment closed its bankrupt Atlantic City Casino Hotel.   Then, in June, the luxury Revel Casino Hotel on the Boardwalk filed bankruptcy for the second time in the two years that it has been opened.  Plans are to shutter the facility if a buyer cannot be found soon.

The situation in New Jersey can only deteriorate further as four full-scale casinos get up and running in New York.  New Jersey also lost its bid before the U. S. Supreme Court to overturn a ban on sports betting, though legislators and Gov. Chris Christie still plan to launch sports betting in September, according to reports.

The same week that Revel filed for bankruptcy, the Wall Street Journal ran a feature titled “Casino Boom Pinches Northeastern States.”  The article said that 26 casinos have opened since 2004 and there are now 24 casinos within 100 miles of Philadelphia.  In Delaware, gaming revenues have declined by 29% since 2011 and the casino industry is seeking tax relief.

A study by the University of Nevada, Las Vegas, reported that new casinos have resulted in “a 39% increase in total annual gambling revenue in the mid-Atlantic and New England.”   However, market share is being fought for fiercely among more casinos and divvied up.  An additional shakeout is a distinct possibility, with closings of underperforming casinos.

Racetracks with casino operations in states like Delaware, Pennsylvania, and West Virginia will continue to see some of their business migrate to states like New York and Ohio, where gambling has recently been expanded.   Slots subsidies to purses will come under intense pressure in the states that once had a quasi-monopoly on gambling in their geographic areas.

And racetracks in Kentucky, a non-player in the casino business, are playing the weakest hand of all.

Copyright © 2014 Blood-Horse Publications.  Used with permission.

HORSE RACING’S SUSPECT PROFIT MODEL

Two facts about horse racing in North America are not in dispute.  First, pari-mutuel wagering is in a long-term decline; with the exception of 2006, handle has decreased every year since 2003.  Handle fell from $15.2 billion in 2003 to $10.9 billion in 2013, not accounting for inflation, and has not improved in 2014.  Second, racetracks have resisted significantly lowering takeout rates, over a protracted period of time, to make the pari-mutuel wagering product more competitive with gaming, and in some cases have inexplicably raised takeout rates in the face of weakening handle.

Assume for purposes of analysis that racetrack executives are correct in their implicit assessment that reducing takeout rates won’t provide enough of a catalyst to handle to boost profitability.  If this is the case, then a key component of horse racing’s business model dooms the entire industry.

What ails horse racing is the profit model component of the business model.   Many people erroneously use the term business model interchangeably with profit model.  In fact, an industry or company’s profit model is only one aspect of its business model, along with its value proposition and various systems, such as the unrivaled distribution model that makes Wal-Mart a winner.  Likewise, advanced deposit wagering is part of horse racing’s business model.

North American horse racing is a niche sport, but one with a value proposition that appeals to millions of people, as evidenced by the number who watch the Triple Crown races and the amount of money bet.  While pari-mutuel wagering is ebbing, it is still a nearly $11 billion business annually and this amount exceeds annual ticket sales for American movie theatres.  Moreover, horse racing’s convenient delivery system provides a competitive advantage in that it is the only legal form of gambling on the Internet in the United States.

Nonetheless, the trend in pari-mutuel wagering is negative.  One hypothesis is that racing’s profit model is unfixable.  It is conceivable that pari-mutuel wagering can’t compete because of its inordinate brick-and-mortar overhead, as opposed to slots, for example, similar to how conventional bookstores have been eviscerated by Amazon and music retailers were killed off by iTunes.

Whether racetracks can alter their profit model, via takeout rate reductions, and thereby make themselves more competitive and more profitable is impossible to know definitively unless track executives are willing to experiment to find out.  If they don’t experiment, the prognosis is continuing declines in handle.

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In a future article, I will focus on what a vastly downsized North American horse racing industry might look like.

Copyright ©2014 Horse Racing Business

MORE ON TAKEOUT RATES

Consider a very simplified illustration of takeout rates (with zeros left off handle and handle set at a round figure).  Assume that a racetrack’s current takeout rate on win, place, and show bets is 17%.  Further, assume that the racetrack generated $100,000 in handle on such straight bets in the past year, providing it with $17,000 in revenue.

The following tabular presentation illustrates how much handle would need to increase in dollars and percentages for the racetrack to continue to receive $17,000 in revenue should it lower the takeout rate on straight bets.  In other words, what would be the break-even point at various reduced takeout rates.

Takeout Rate    Handle to Yield $17K     % Increase

17%                      $100,000                                NA

16%                      $106,250                                 6.25%

15%                      $113,333                                13.33%

14%                      $121,429                                21.43%

13%                      $130,769                                30.77%

12%                      $141,667                                41.67%

11%                      $154,545                                54.55%

10%                      $170,000                                70.00%

Would a 1% percent reduction in the takeout rate generate at least a 6.25% increase in handle, or would, say, a 4% reduction boost handle by 30.8%?

There is no way to determine the answers without experimentation over a representative period of time, perhaps a year.  Bettors are not automatons who respond immediately to changes in incentives.  Moreover, it takes time for word of pricing modifications to disseminate to people who are not avid gamblers.

In my view, the top executives at racetracks are reluctant to experiment for two reasons.  First, they fear that reduced takeout rates won’t result in enough additional handle, especially in the short-term.  Second, they are concerned about criticism and negative publicity from raising rates back to old levels if reduced takeout rates prove not to be successful.  These issues can be addressed, of course, by limiting experiments to test markets and/or certain bets, as one need not go all in by reducing rates across the board.

The view here is that the vast majority of racetrack executives, especially at racinos, are working under the strategic assumption that pari-mutuel wagering is a cash cow to be milked as long as possible while receiving as little time, effort, and money as possible.  The bloodstock side of the industry has its fate tied to individuals who increasingly tend to view pari-mutuel wagering as a sideline.

Copyright © 2014 Horse Racing Business