THE BALMORAL PARK TAKEOUT-RATE EXPERIMENT

Pari-mutuel wagering in North America (USA, Canada, and Puerto Rico) has been in trouble for nearly a decade. The amount wagered on horse racing peaked in 2003 at $15.2 billion and declined to $10.8 billion in 2011. Factor in inflation and the drop off is even worse than it looks.

Multiple causes contribute to this malaise. My hypothesis is that an inordinate takeout rate for pari-mutuel wagering, as compared to gambling alternatives, is the principal factor. The vast majority of handle on horse racing is accounted for by a very limited number of prolific bettors, who are acutely aware of takeout rates. These players get takeout-rate reductions in the form of rebates. Other “whales” mostly avoid horse racing and opt for betting plays wherein the takeout rate is less punitive, particularly sports betting.

If opinion is not to masquerade as fact, hypotheses need to be tested empirically. Data from Balmoral Park harness track in Chicago offer some preliminary insights. In 2009, the takeout rate on the racetrack’s Pick-4 wager was 25%. In 2010, the takeout rate was slashed to 15%, for a whopping 40% reduction. In 2010, handle on the Pick-4 increased by 53.7% over 2009. In 2011, handle increased by 75.9% over 2010. In total, handle rocketed by nearly 170% in two years.

The numbers kept getting better in 2012. For example, the January 2012 Pick-4 handle was up an amazing 272% over January 2009.

I don’t have access to Balmoral Park’s internal financials, but I estimate that the Pick-4 was more profitable for Balmoral Park in 2009 (with the 25% takeout) than it was in 2010 (with the 15% takeout). However, by the end of 2011, Pick-4 profits were better for the racetrack than in previous years.

These results strongly suggest that it takes time for word to spread about lowered takeout rates, but once it does, handle and profitability markedly improve (until the optimum takeout percentage is reached).

The 2011 McKinsey study for the Jockey Club found that big bettors are very aware of takeout rates, whereas fewer than 20% of casual bettors are knowledgeable. Though casual bettors may not be cognizant of takeout rates, when rates are lowered by 40%, they begin to notice that their returns from winning bets have escalated. This good news encourages more betting and promotes word-of-mouth communication.

No hard-and-fast conclusions can be drawn about the response of handle and profits to takeout-rate reductions from the Balmoral Park trial because the sample is not representative of all racetracks and all kinds of bets. Additional racetracks need to replicate the experiment.

Racetrack managements tend to be oriented to the next quarter’s financial performance, particularly in companies in which stock is traded by the public. Thus management is reluctant to drastically reduce takeout rates–even if experimentation shows that it takes only a couple of years for large percentage takeout-rate reductions to cause handle to surge and profitability to increase.

Top racetrack executives need to demonstrate resolve by dramatically (not by a meager one or two percent) reducing takeout on select products. And they need to stay with the reductions to test the outcome over several years, regardless of the short-term effects on profits. This strategic initiative should be explained in advance to shareholders. In the privately-held racetracks, of course, there are no public shareholders to assuage.

The view here is that over two or three years’ time, the price elasticity of demand for pari-mutuel wagering is highly elastic (i.e., the magnitude of handle is very sensitive to obvious changes in the takeout rate). More Balmoral Park-type experiments are needed to confirm this hypothesis.

The future of pari-mutuel wagering depends on some bold trial-and-error moves by a normally staid cadre of racetrack executives. As is usually the case, the risk is in not taking risks.

Copyright © 2012 Horse Racing Business

Click here to see the month-by-month handle on the Balmoral Park Pick-4 since 2009.


Comments

  1. PhillyMan says:

    There is a frenzy over Lasix, the NY Times, etc. and the real problem with horse racing is an uncompetitive product due to the fact of takeout. Make the payout better and the bettors will come back.

  2. Thanks for shedding more light on this Bill.

    Of particular interest for me, was the overall handle bump at Balmoral. In the first race of the pick 4 sequence, handle has skyrocket, both ex and tri in a big way, because people are handicapping the pick 4, and the card.

    More money in players pockets, a fair shake, and a good product breeds more handle. It doesnt happen overnight, and low takeout proponents have made that clear. But those who try, and stick with it, usually end up better than they are.

    PTP

  3. Every racing executive should read this article and look at the Balmoral growth in handle. You hit it on the head with this analysis. The Balmoral managers are thinkers and risk takers and are to be commended.

  4. T.J. Burkett says:

    Thank you, Bill, for pointing out a bright spot in the harness racing industry. Balmoral Park saw substantial handle increases when they cut takeout in 2009. Then in April 2011, the track began guaranteeing their Pick-4 pools through the USTA Strategic Wagering Program (handicapping.ustrotting.com), which certainly made their snowball roll a little faster. It’s truly been a success story all around.

Trackbacks

  1. [...]  While other tracks have lowered takeout rates in recent years, some with great success such as Balmoral Park, and others in the past few weeks or months such as Charles Town and Canterbury Downs why is NYRA [...]

Speak Your Mind

*