Monday, July 21, 2008

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, 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.


Anonymous said...

The KTA posted some interesting analysis on this subject as part of their response to CHDN's litigation against KHBPA, KTA, KTOB et al, that would probably be worthwhile reading as part of the discussion around this issue. I don't have time to offer my oy own input on this now, but I thought that I would post it for others to read in the event that they had not seen this. This come in two parts; first their response, and then secondly their projections for nationwide ADW growth going forward.

Here are the links:

KTA Response to Churchill:

ADW Revenue Distribution under CDI/Tracknet Model:

The other intersting aspect to come out of this so far, has also been the actual KHBPA legal brief response, in which hey allege that CHDN's has been in direct violation of their purse agreement, and appear to provide supporting documentation in the form of the contract language, as part of their brief.

Apparently; under the terms of the current contract between CHDN and KHBPA, all wagers; irrespective of their point of origin (Inter-Track, In State-Off Track, Out of State and ADW, are to be treated as the wager was actually made live at the track, for the purpose of determining the revenue split which funds the live racing purse account.

Allegedly, CHDN was not treating the Twin Spires ADW wagers as having been made on track; as required under their contract, and as a result they have allegedly under-funded their purse account for last year, and the current year.

The KHBPA sought an injunction against CHDN for the 20% purse cut that they were making unilaterally, on the basis that the contract called for an adjustment to purses going forward based on a retrospective caluclation of its funded status at the conclusion of the meet. The injunction was not granted however and the purse cut was allowed to stand. The purse cut was established based on CHDN's projections of purses going forward; recognizing the prohibition of the distribution of their wagering signal to ADW and off track locations.

This litigation as we all know is still pending, and the premise and behavior of both parties to the litigation (ownership and horsemen) seem to raise some competitive anti-trust issues, which could be the door opening for congress to step in and address some of their concerns on other inductry issues by levergaing the benefits allowed under the Interstate Horse Racing Act to accomplish the unifrom policy goals that Congressman Whitfield has previously suggested.

This could become the mother of all situations which scream out to both sides; "be careful what you wish for" here because where this is potentially headed, nobody may like the result.

Create Attraction With Women said...

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: