Archives for July 2014

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

ABOUT HORSE RACING’S SLIDE TO ECONOMIC OBSCURITY

The future of the horse racing industry continues to be depicted by continuing declines in pari-mutuel handle.  Yet upper-echelon racetrack executives carry go on just as they have in the past, as though the patient is just fine and the prognosis is bright.  In fact, the prognosis is grim, and people whose livelihoods depend on the racing enterprise—from trainers to grooms to breeders to veterinarians, etc.—are the casualties.

The uncompetitive takeout rates in horse racing are, in my view, the leading cause, by far, of the decline in pari-mutuel handle.  Yet racetrack executives appear to be incapable of intellectually addressing the problem.  Following are two recent examples.

Immediately before the 2014 Kentucky Derby, Churchill Downs racetrack raised the takeout rates on straight bets and exotic wagers.  A spokesman for the track explained that it needed to take this action in order to maintain purse levels.  In other words, he was saying that demand for Churchill Downs’ wagering products is inelastic, meaning that pari-mutuel handle is to some degree insensitive to changes in takeout.

To be specific, the simplest mathematical formula for price elasticity of demand = % Change in Quantity Demanded)/% Change in Price.  Thus Churchill Downs was acting under the hypothesis that the loss of pari-mutuel handle, expressed as a percentage, would be less than the percentage increase in price.  What transpired was the opposite:  pari-mutuel handle, excluding Kentucky Derby and Kentucky Oaks betting, declined in a big way.  The Churchill Downs pricing doctors violated the first principle of solving difficult problems:  do no harm.

Consider another example.  In an interview with The Racing Biz, the president and chief executive officer of the Maryland Jockey Club, which runs Laurel and Pimlico, said:

“Every year we look at the takeout.   At different times over the past years we’ve tried to change and modify.  We try to do a balance between what’s fair and equitable for the horseplayer and still allow us to proceed forward…   I would never recommend raising the takeout rates here at all.  The balancing act is to provide the best service and be sensitive to the players’ issues — but we still got to make a buck.   In a perfect world, if money wasn’t an object, you would lower and lower the takeout rate, but I still have to pay the bills, I still have to pay the salaries, and find money to do that. “

This statement connotes that takeout rates are optimal.  The CEO says he would not raise takeout rates and he would not lower them either because he has to “make a buck,” implying that reducing rates would not improve profitability.   If he has not experimented by significantly lowering rates over a protracted period of time, he is only conjecturing that the takeout rates are optimal.  Moreover, “what’s equitable and fair for the horseplayer” is an empty and patronizing statement.  Bettors who no longer wager on horse racing have decided on their own, without the help of the powers that be at Laurel and Pimlico, what is “equitable and fair”…and they have decided in a negative way.  That’s how things work in a free-enterprise economy where customers decide whether to buy or not.

The forgoing examples vividly illustrate the endemic problem of economic illiteracy in horse racing regarding takeout rates.  Churchill Downs erroneously acts as though demand is inelastic and the Maryland Jockey Club boldly insinuates that it has arrived at optimal rates.  The fact is that these two premier racing organizations don’t know and are evidently unwilling or fearful to conduct long-term experiments to determine profit-maximizing rates.  The fact is that racetrack executives’ refusal to try new approaches is condemning horse racing to a slow and painful and obvious descent to obscurity.

To my knowledge, no one knows for sure whether markedly reduced takeout rates can reverse the downward trend in pari-mutuel handle.  But at least give it a try over, say, a year’s time rather than passively standing by while the sick patient expires in front of your eyes.

Based on past actions, the prospects for change are, sadly, remote.

Copyright © 2014 Horse Racing Business

THANKFUL FOR AN ENGLISH LEGACY ON AMERICAN INDEPENDENCE DAY

The town of Newmarket in Suffolk, England dates back to 1200.  It rightfully bills itself as “the town where horseracing, the ‘sport of kings,’ was born some three and a half centuries ago and from where it was exported around the world.”

Charles II was the original “king” in the “sport of kings.”  The Newmarket Racecourses website provides some history about the origins of horse racing as we know it:

“It was Charles II who did more than any other monarch to advance the sport of horseracing in this country–he instituted by Act of Parliament in 1665 the first race to be run in Britain under written rules and exported the name of Newmarket and the sport of horseracing to America that same year–and his love affair with Newmarket (not to mention with his mistress in the town, Nell Gwyn!) is well chronicled.”

The sport exported by Charles II took root in colonial America and had fans among historic giants like George Washington, Thomas Jefferson, James Madison, and James Monroe.  On July 4, 1776, these men and others launched the only revolution fomented by the upper classes.

On this Independence Day 2014, we Americans are grateful that the Founding Fathers had the courage to break with Mother England.  But, speaking for myself at least, I am also grateful that one of the vast number of English customs and pastimes that continued on after the Revolution–and goes on today–was horse racing.

Wishing you a glorious 4th of July.

Copyright © 2014 Horse Racing Business

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