TWO POSITIVES FOR RACING IN 2011

American horse racing in 2011 had its share of ups and downs. Two developments on the positive side of the ledger are promising for 2012 and beyond.

Racing at the highest level was traditionally the bailiwick of extremely wealthy individuals because of the immense outlays involved. The increasingly popular limited partnership concept has changed this requirement, and syndicates consisting of small-percentage partners have brought in new owners at a time when racing badly needs them.

In 2011, the actively marketed partnership genre reached another milestone when Animal Kingdom won the most coveted race in the United States, the Kentucky Derby. This occurred only nine years after the bargain-basement auction purchase Funny Cide became the first entry owned by a commercial partnership to accomplish the feat.

The victory by Team Valor International’s $100,000 acquisition Animal Kingdom showed that the ownership modus operandi behind Funny Cide was no fluke; a diverse group of owners can pool relatively meager resources and have a chance to compete with the best of them. Similarly, in 2011, a Pinnacle Racing Stable partnership won the Sentient Jet Breeders’ Cup Filly and Mare Sprint with the $22,000 auction purchase Musical Romance.

As a result of the partnership structure of ownership, a collection of everyday people–whose names will never register with racing historians–possess what eluded some of the most esteemed names and biggest spenders in racing—a win in the Kentucky Derby or Breeders’ Cup.

The other trend that bodes well is the sport is able to attract as owners some of the most accomplished American entrepreneurs, and do so while they are still in their 30s and 40s. Mike Repole of Vitaminwater fame has a deep bench of racehorses and his Stay Thirsty won the 2011 Travers Stakes. Kevin Plank, another young magnate and racehorse owner, founded the fashionable Under Armour line of clothing and deployed some of his rewards to buy and restore the late Alfred G. Vanderbilt’s Sagamore Farm in Maryland, where the “Grey Ghost” Native Dancer is buried. Bobby Flay, the celebrity chef, restaurateur, and television personality, has become very active as an owner and involved with promoting racing.

Racing has shown it has appeal for eminently successful younger entrepreneurs who know how to create a brand.

Copyright © 2011 Horse Racing Business

Originally published in the Blood-Horse. Used with permission.

CULTIVATING NEW BETTORS

Steve Byk, the informative host of At the Races on SiriusXM, recently had an on-air discussion with the knowledgeable Andy Serling of NYRA about the long-term process required to get new bettors up to speed on handicapping. They were of the opinion that racetracks should not “dumb down” their offerings to attract beginners, though they did agree that a few simple bets would be acceptable for this purpose.

My view is that it is not an either/or proposition. There is no reason that bets requiring little or no handicapping skill would interfere with the more complicated fare for experienced players.

The 2011 McKinsey & Company study sponsored by the Jockey Club clearly emphasized the fact that handicapping of horse races can be intimidating for neophytes and cited it as a barrier to recruiting and keeping new players. McKinsey’s presentation at the Jockey Club Roundtable in August demonstrated this with a video clip of a flummoxed young man struggling to make a bet with an ADW company.

Learning of complex subject matter requires one to start out with a thorough grounding in the basics. Students quickly get discouraged when they can’t cope with material that is beyond their skill level and are then apt to change their major so to speak.

Horse-racing handicapping is so esoteric to beginners that many people who try it get frustrated and quit. For this reason, racetracks and ADWs need readily understandable luck-laden bets that people can begin with and get the reinforcement of winning occasionally. This is how one lays the groundwork for graduation to higher level handicapping.

I once talked with an attorney who was a devoted player of card games at casinos, and pretty good at it.  He said he tried betting on horse racing on a couple of occasions and gave up because he never cashed a ticket. For learning to take hold, there has to be some positive reinforcement, which was lacking in this case and many others like it.

“Dumbing down” is a relative term. What seems overly simple for a seasoned handicapper may be intriguing to a novice. Racing needs all the new players it can get and the way to encourage this is to formulate bets that allow rank amateurs to crawl before they walk.

Copyright © 2011 Horse Racing Business

TAKING THE GUESSWORK OUT OF RACING’S MOST IMPORTANT ISSUE

Points of view are plentiful in the world of horse racing about the appropriate level of takeout rates on handle in order to optimize racetrack and ADW profitability. Virtually everyone agrees that pari-mutuel wagering has an uncompetitive takeout rate, as compared to alternative gambling products, but that is where the agreement ends. A wide disparity of thought exists on what are the right takeout percentages on straight bets and exotics. Most of the time, opinions are based on anecdotal evidence, or conjecture, or simple correlation, rather than on scientifically collected data put to rigorous statistical analysis.

At the December 2011 University of Arizona Symposium on Racing and Gaming, Caroline Betts, an associate professor of economics at the University of Southern California (and horse rescuer par excellent), and Steve May, vice president and business manager for the Association of Racing Commissioners International, discussed the need for controlled experimentation to estimate what handle would be at various percentage takeout rates.

These two are correct in their assessment. Dr. Betts perceptively mentioned the Laffer Curve, named for Arthur Laffer, who rose to fame as an economics adviser in the Reagan Administration. The Laffer Curve depicts that at tax rates of 0% and 100%, the federal government will receive no revenue whatsoever. At some point in between, government revenues will be maximized. Tax at too high of a rate and revenues will decline because people will not have the incentive to work harder; tax too low and government revenues will fall short of what is necessary. The same principle applies for takeout percentage and handle: too high of a takeout discourages bettors and too low of a takeout provides a profit shortfall for racetracks and ADWs.

Controlled experimentation is indeed an absolute necessity if the Laffer-like optimal takeout rate is to be determined for straight bets and exotics. While it would be a sizeable undertaking to set up the experimental design, premier consumer marketers like Procter & Gamble and McDonald’s routinely conduct market tests to ascertain how best to price (especially) new products. The main obstacle in horse racing would be to get clearance from regulatory authorities that approve takeout rates.

It is not surprising that there is almost no published scientific research on the subject of optimal takeout rates because racetracks and ADWs harbor the proprietary data. It may be that one or more racetracks have privately undertaken carefully controlled experiments to determine what happens to handle and profits at various takeout percentages, but if that is the case, the racetracks are prudently not telling. On the other hand, if a racetrack has not conducted such experiments using its vast repository of data, that is a sad commentary on its management’s lack of sophistication.

Racetracks and ADWs could get the research process started–for the benefit of the entire pari-mutuel industry–by anonymously pooling their wagering data into an information warehouse so that it could be analyzed and the findings shared among the contributors (this was the concept behind the PIMS Institute that was sponsored and supported by some of the world’s best-known companies–many of which competed with one another). But far more valuable would be to manipulate takeout percentages in real time, while controlling for extraneous sources that could effect handle. To some extent, takeout percentages are already manipulated because a rebate to a big bettor is a reduction.

Copyright © 2011 Horse Racing Business