ADW Opinion: Bad Precedent

It was announced a few weeks ago that Ellis Park in Henderson, Kentucky struck a last hour compromise between Ellis and the KHBPA, allowing for racing to begin in 2008. With it, close to 6% of ADW handle will be going to purses this summer. It appears that Ellis is charging ADW’s up to 8% signal fees for the right to broadcast Ellis races.

The Thoroughbred Horseman Group’s Bob Reeves said this recently about the deal as reported by Ray Paulick of The Paulick Report: "We are trying to save racing."

We think deals like this will do the exact opposite. And we’ll tell you why.

An ADW normally pays about 5% (which is about what the current free market dictates) for the right to broadcast a signal and sell it to their customers. It is like a web-affiliate bookseller selling a book and keeping a commission. Then the ADW pays expenses, keeps some of the generated handle for themselves to run their businesses, and returns the rest to the player in a few ways:

1) Player Rewards – A video game, maybe a hat, trinkets of some sort, what have you. We all have received these perks.

2) Innovations and Customer-centric Benefits – An improved betting interface, R and D (like Twin Spires TV), free handicapping information (like Ian Meyers’ paddock reports at Premier Turf Club, his deal with Woodsideassociates.com, or partnerships with Thorograph at betfair), free past performances, free video. Things to encourage the player to up their handles.

3) Cash Rewards Through Rebating – Churn baby churn.

This model of giving something back to the player and delivering it in a customer-centric way has resulted in a rise in handles for ADW. Up over 17% last year – our only true blue growth segment.

If ADW’s are charged a higher fee, things like free rewards, hats and shirts; or the interesting innovations we have seen like race replays, and conditional wagering and paddock reports can all be cut. This hurts us in attracting new fans to our Internet platform, as well it alienates our existing customers (ask Vegas how they'd do without comps or adding a concert as an attraction; and ask them now what would happen if they took them away!). All those rewards and incentives are very important, but the most important point however to us as a business: It effectively increases takeouts. If 3% more is charged for a signal, 0.5% might be absorbed by the ADW. Where does the other 2.5% come from? Yes, the customers pocket - the customer that already pays for purses to the tune of 21% blended rakes.

When the signal fee is raised 3%, more than likely 2-2.5% will be taken from the cash rewards from certain ADW’s. If you were receiving a rebate of 5% on win wagers at track ‘A’ and they are cut in half you know, we all know what happens, you bet less. With these price sensitive players, where 2.5% can mean a huge difference, it can kill their handle. As Dan, a professional player, said recently to us “Even miniscule reductions of 2 points can make a HUGE impact on a player’s bottom line. The intelligence of the modern player is frankly overlooked by those in positions of decision.”

This is of course not only a big player phenomenon. Every player I know who is non professional enjoys getting a boost, and guess what? They rebet it, and rebet it hard.

With a conservative elasticity of demand of 4 for rebated players, this takeout increase could result in a 10% drop in handle (many would argue it would be much more). Not to mention any new players (or current ones too), especially the younger demographic we covet, that are attracted to some of the perks like free past performances, or innovations, will find they are not there any longer, and it makes the customer experience deficient in a demanding 21st century business model. Online poker anyone?

It’s like going to McDonald’s and finding out that yes, the price of a Big Mac was raised 30 cents, so you might eat one less a month now; or maybe go to Wendy’s instead, but not only that: Now your more expensive Big Mac is served not complete in a nice wrapper, but in a do it yourself kit. When sales of Big Mac’s go into the tank, it would not surprise any executive at McDonald’s, they would know they cut their own throat.

Increasing takeouts, poor customer service and an absence of both soft and hard innovation through reinvestment is something we should have learned has helped kill this business by now. Year after year the evidence is overwhelming. In fact, this study written several years ago by a gambling expert and reported to racing, stressed the takeout point and making sure horseplayers are taken care of.

Racing has lived with rising rates of takeout for so long that they have become a way of life. They are the line of least resistance whenever the industry needs money. It is all too easy for the industry to see that if we have a constant $100 in handle, and we raise the takeout by one percent, we’ll make a dollar more. It is much less easy to see that handle is not constant and, over the longer term if not the short, we won’t have that $100 any more.

If we don’t offer a low takeout (via rebate) to customers, we’re going to lose them, or at least a significant portion of their money. Hence the efficacy of rebates: they target reductions in the takeout to the customers who would respond the most to them.. (Analysis of the Data and Fundamental Economics Behind Recent Trends in the Thoroughbred Racing Industry, 2004)

Sometimes I wonder. I really do. Do we actually want racing to lose market share? If we do, we are certainly doing a good job at it, handles were off last year.

Everyone needs to work together in the current ADW impasse and the business must know where players stand. If players are not heard from and respected, we will not grow the pie, we will simply end up having less of a pie to split.