PRICING THE FUTURE BY ALAN F. BALCH

Alan F. Balch is the Executive Director of California Thoroughbred Trainers.

(Reproduced by permission from the latest issue of North American Trainer, the quarterly magazine for the training and development of the Thoroughbred. For additional information about the publication, please visit www.trainermagazine.com/america.)

Just why is it that our sport, which is dependent upon the objectivity and precision of the photo-finish camera, seems not only to tolerate but to stimulate the most exaggerated, unclear, and irresponsible talking and thinking imaginable?

There are a few choice, provocative, and impolite words I could use to describe that fuzzy talking and thinking, but I’ll refrain. One has a certain bovine tinge. I have always preferred equines, myself.

Before I get any deeper into this metaphor, I’ll just introduce a fundamental topic that’s been on our minds in California lately: prices and pricing.

The whole racing world knows that takeout on two-legged exotic bets has been raised in California as of January 1 by two percentage points from what it was previously, and on three-or-more-legged exotics by three points. That makes the takeout on those bets now 22.68% and 23.68% respectively – increases of 9.7% and 14.5%, from the previous takeout on both types of exotics, which was 20.68%. (“Only” two and three points more in the takeout, we are relentlessly reminded as by our grammar school arithmetic teachers, are really a lot more.) 

These were literally overnight price increases – which is to say that the takeout was at the lower level on December 31, and suddenly the higher levels on January 1. A great hue and cry went up in anticipation of these price increases when the legislation mandating them was enacted in September, and an even louder wailing has been reverberating in racing’s house since New Year’s Day. The fact that higher purses are the intended recipient of the funding from the price increases has not appeared to mollify those who object, even though higher purses should (theoretically, at least) result in better field sizes than we would otherwise be seeing, and therefore improved wagering opportunities. In short, better quality justifies a higher price. Anywhere. In anything. Or so it is said.

Who is objecting? Some of our customers, that’s who. Quite probably many of them. Racing fans who live in California and like California racing, and those who may live outside California but like to bet on our racing and don’t like the higher takeout.

About the only good thing I can see in this controversy is that a bright light is now shining on a subject that has bothered me for nearly 40 years. Bets on the races are still priced as though we are in the Stone Age. Everywhere, not just in California.

Name me one other product category (or any brand) that has its essential offering priced according to immutable law, regardless of market forces, and has that simplistic price enforced by a regulator? I suppose there still are other such regulated industries out there somewhere, besides racing, that you might name – but I don’t know what they are. If they exist, they’re probably in the same trouble that racing is. As Milton Friedman, the Nobel Laureate economist , once said, “Any price the government sets is wrong.” Or, more famously, “If you put the government in charge of the Sahara Desert, in five years there would be a shortage of sand.”

Where did “takeout” even come from? It is a creature of state government regulation over pari-mutuel betting, of course, dating in almost all American states back to The Great Depression. After all, contemporary racing in the United States was widely enabled and regulated as a stimulus to the agricultural and greater economy in the 1930s, particularly in California. Probably because of the primitive calculators and totalizators of the time, straight, place, and show bets all had the same takeout for ease in figuring prices.

When exotic bets were introduced – hard to fathom now how popular the Daily Double once was, and that it is now “exotic” in name only! – the takeout for such bets could be higher because of the higher expected payoffs.

Since the gaming market in those days was local or regional, and competition mostly illegal or across some border and therefore extremely inconvenient (to put it politely), machine guns and alligator-filled moats couldn’t keep the customers away.  We used to say.

This competitive situation was changing forty and even fifty years ago in most places, and ever more rapidly since then. But as Professor Friedman would have predicted, governments could not and did not respond fast enough; managements and horsemen have likewise appeared to be paralyzed in their reactions to market forces. Governments are not markets! And it’s all so understandable: people in racing had little if any experience in truly competitive markets, and therefore no practice in responding to real market forces. Those of us who were advocating enormous changes in our business model and pricing structures decades ago, as well as research and development to combat competition from other forms of gaming, were often laughed out of the room. Or worse. Anyone in management who didn’t really love horses or the sport is long since gone, shaking his or her head.

So, what to do? Embrace the possibility of truly flexible takeout … which is to say modern, competitive pricing applied to betting on the races. Only a Neanderthal thinks everyone should pay the same price for something no matter how much of it they buy, whenever they buy it, and whatever the quality is! (And those are only a few pricing criteria.)

First, recognize the problem for what it is – fundamental. Second, brainstorm and explore the theoretical and practical opportunities (given the present need of enabling legislation) for flexible takeout. Third, recognize the impact of local, regional, national, and international competition for the gaming, sports, and entertainment dollar, and then use a sophisticated understanding of it to unsparingly inform all potential pricing scenarios.

Let’s stop yelling at each other, and get together to improve our pricing in a collegial fashion. We just might be able to fix the problem if we stop wasting our time fixing the blame. The entrepreneurs originally responsible for the concept of takeout as it is still largely imposed upon our sport and our markets have been laughing at us from their clouds for quite some time now.

Comments

  1. Where is the TOC on this issue?

  2. Miller467 says:

    Bravo, Mr. Balch. The horsemen evidently know what is smart and dumb.

  3. Califdreaming says:

    The genuiuses that run Cal racing raised takeout when the demand for the parimutuel product was declining. Now the excuses are being made for their actions and most of them are just that –excuses. The entire CHRB should be terminated and replaced with people who know what they are doing. I have been a fan of Cal racing for over 30 years and hate to see what has been done to it.

  4. H. Reasoner says:

    Nice try, but these idiots known as “HANA” are dissolving into the woodwork because, the fact is, most of racing’s customers couldn’t care less about the take-out.

    You are indicative of the boneheads behind the scenes once again looking in the wrong place in an attempt to solve the problems that comprise North American horse racing circa 2011.

    You speak of your “product” as if you offer goods or services to anyone. The fact is, you offer no such thing.

    Racing is akin to an empty parking lot on which a group of horsemen congregate to race their horses against one another. Knowing this, interested members of the public show up to watch and wager on the outcomes.

    The “house” merely takes from both sides despite offering not much more than a parking lot.

    If you want to speak of a “product” in the traditional sense, then the “house” would have to actually do something for either side in the equation.

    Since it is the public’s dollars which are driving the whole industry, it would be nice if you would concentrate your efforts on getting the dis-associated and carefree ‘house’ to begin doing something for those members of the public who do bother to show up.

    And let me suggest that you hurry your (edited out) and do so in this day and age where those members of the public can stay at home and get a lot more action from parking lots all across the world (and they aren’t even charged to park in those lots either).

  5. The Reasoner post is incoherent. This guy or gal is drinking strong stuff for a Sunday PM. He/she evidently has it in for Balch and HANA as well.

  6. Harry, the majority of the public may not care about takeout, but it affects everyone. Give bettors back less, and as time goes on, they become less interested.
    If you don’t think takeout matters, you are in total denial.
    Now, for those of whom are cognizant about takeout, well, they are speaking with their wallets, and Santa Anita looks like they will lose something like $50 million in handle this meet compared to last meet, while tracks like Tampa Bay are showing handle increases.

    Good thing those “idiots” at HANA have been so wrong. Could you imagine how much handle at Santa Anita would be down right now if they were right?

  7. H. Reasoner says:

    Cangamble, you’re still talking…

    How was that meet at Hialeah this year? – the one which you so vigorously endorsed.

    Surely you were the one with the lone winning tickets on those pick-3’s and pick-4’s when there were just $600 in the pools (you never have to fear the IRS forms in those instances – so there’s another ‘edge’ in your heavy support of Hialeah).

    Cangamble, your position sounds intuitive, almost, but when the rubber met the road, you and the HANA crowd would have been betting Hialeah to the tune of at least having occasional exotics pools greater than $5000… had you only believed in your own clueless position.

    Now that I think about it, you and the HANA crowd probably WERE backing Hialeah with all of your collective wagering might.

    (that’s probably why Hialeah was uninspired to even offer details as to their bottom line during the 2010-2011 meeting)

    Now, in the future, what say you retrain yourself to consider elements of horse racing which really matter in the present and which will really matter to what little future racing has left.

    And for heaven’s sake, quit playing little league ball, Cangamble. Those dumps in Alymer and Trois Rivieres are so insignificant that racing can’t even tell the difference between their being open or shuttered.

  8. H Reasoner says:

    In the interest of educating everybody with the capacity for such understanding, I just tallied the pick-4 data for the last two seasons at Hialeah.

    Last year (2009/2010), with takeout numbers somewhere near to industry standards, the average handle on Hialeah’s lone pick-4 each day (for 38 dates) was $1091.

    This winter (2010/2011), with the revolutionary 12% takeout as the guiding light for the industry, with Cangamble trumpeting what a great and proud service Hialeah was doing for the good of the horseplayers’ cause, and with “HANA” and its large flock firmly behind Hialeah… the average handle on Hialeah’s lone pick-4 each day was $809.

    In raw terms, that is minus 25.8% in the latest season, and with the magically delicious 12% takeout in effect.

    Now consider that Hialeah’s Christmas Eve card in 2010 drew a staggering 43% of the season’s pick-4 wagering. Factor that one date out of there and the average among the rest of the 23 race dates was a paltry $478.

    In all fairness, we’ll discount the single largest daily pick-4 handle from both seasons. The difference in the adjusted daily average pick-4 handles for Hialeah’s last two seasons shows a staggering 54% reduction from last winter to this winter.

    This despite a track whose own website assures that handle and attendance for 2010/2011 were “up across the board” when compared with last year.

    So on behalf of Hialeah, and on behalf of Cangamble (I’m sure)… I’d like to thank the many committed HANA members and supporters for helping to make Hialeah’s average pick-4 handle see a steep reduction this year no matter how widely endorsed the “12% takeout” had been by the HANA constituency.

  9. H Reasoner says:

    Aaaaaaaaaaaaaand, here was a determination from the McKinsey & Company report titled “Driving Sustainable Growth for Thoroughbred Racing and Breeding”, released in August of 2011:

    “””…..fewer than 2% of most fans know about takeout. Thus, the report makes no recommendations on an issue that has boiled over this year, particularly in California.”””

    Not only does approximately nobody care about takeout, only two percent of most fans even KNOW about takeout. With the microscopic bit of the fanbase which would profess to care about takeout being so collectively inept that they could only ignore Hialeah’s 2010/2011 offered gold mine, takeout is a non-issue in solving racing’s problems.

    In fact, the only use racing has for the HANA absurdity is that it serves to identify followers of racing who are clearly a greater part of the problem than all others.

    In these tough economic times, state lottery gambling is up to record levels almost everywhere in the U.S.. People are playing the lottery because everyone has the same opportunity there.

    The major reasons why horse racing revenues are down across the board is that the general public feels that the “insiders” have a much greater chance at success than do most members of the general public. For that reason and that reason alone, the general public will not take to racing.

    Nowthen, any and all HANA-minded people ARE among the ‘insiders’ who are the perceived problem which prevents the general public from taking to horse racing.

    When just 2% of people “know” about takeout, and when you are among a teeny-tiny fraction of those who CARE about takeout, then it goes without saying that YOU ARE THE PROBLEM!!!

    As such, you CAN NOT BE part of the solution!

    Now go play Hialeah beginning next Saturday for it shouldn’t be very difficult at all for you to boost their mutuel pools exponentially if you each throw in 50 cents a race and split a couple of bets. “CanGrumble” will collect your funds and plunk them down for you. (unless the tiny track at Alymer, Quebec, in his little league backyard, opens up again between now and then)

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