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Thursday, August 21, 2008

Horseplayers to Pope: It's Our Game Too

In the Paulick Report’s “POPE TO OWNERS: ‘IT’S YOUR GAME,’” Ray Paulick described Fred Pope’s 16-year effort to unite thoroughbred owners, and wrote, “[Jess] Jackson is a powerful individual whose written testimony before the Congressional hearing in June included a lengthy article written by Pope.”

A transcript of that testimony is located here (a pdf) and Pope’s “Change the Law – Engage Racehorse Owners” appears on pages 13-29.

I found Pope’s arguments there to be as thoughtful and compelling as those from his Blood Horse articles “A Level Field Within” from 2005 and “Breeders' Cup to Lead Way” from 2006

It’s not hard to see why disgruntled owners might embrace his ideas just as dissatisfied bettors are now considering reforms advocated by grass-roots horseplayers’ groups. Pope’s vision for racing as run by owners is based on their “forming a major league like the PGA Tour.”

“While there are many stakeholders in the Thoroughbred industry, the racing segment had only two stakeholders; racehorse owners and track owners.

Sports marketing is successful when the players, or owners of the talent, acquire the rights of the facilities where they play, then package and present the sport to the public.

Every sport operates that way, except ours. In Thoroughbred racing, the owners of the talent (racehorse owners) give away their rights to the facility (racetrack) where they race. …”

“At one time, the golf courses controlled professional golf tournaments. The golf courses jerked the players around the country for low purses and low attendance. Then the professional golfers engaged, pooled their rights and adopted the major league model for the PGA Tour. … “

His discussion of what went wrong with simulcasting and why is insightful.

“The business model for pari-mutuel wagering started with a deal between … the tracks and the racehorse owners. With each stakeholder having a significant investment in putting on the show, they agreed to a 50-50 split of the after tax takeout from wagers. The 50-50 split of on track wagers netted and equal 8% into the purse account and 8% to the host track putting on the show. …”

“Simulcasting has grown from nothing to where about 90% of racing handle is made off-track today.

… the percentage of off-track wagers going into purses has decreased form 8% to about 4% today.”

“Why is this $540 million (4% of $13.5 billion) in off-track wagering leaking out of Thoroughbred purses? The culprit is an insane business scheme that the small tracks and resident horsemen devised, giving the lion’s share of the money (18%) to “where the bet is made”, instead of “where the show is produced” (3%).”

“When simulcasting started, “where the bet was made” was at either a host track or a receiving track.”

“The tracks and horsemen are so addicted to the large margin the make on imported races (about 18%, versus 3% going to the host track) that it has blinded them to the amount leaking out. The only way to bring change is … to establish a new off-track model that will allow the host track to make a profit and insure a fair amount goes into purses.”

“… the current model rewards the tracks with the least live racing.”


His case for change is focused on restoring the $540 million from off-track wagers he describes as “leaking” from purses; which I’ll abbreviate as LEAK.

“Although commercial breeders are not one of the two stakeholders in the racing segment, they … should be very concerned about … [LEAK]… because racehorse owners wanting to purchase new racing prospects could reinvest a good percentage of that money.” Today none of … [LEAK] … is being reinvested in horses.”

“… the majority of the generation born since simulcasting started in 1978 does not have a favorable opinion of Thoroughbred racing.”

“Is it any wonder the tracks and horsemen are at each other’s throats? They are literally picking at the bones and trying to establish new business to go after the …[LEAK].”

"Currently the horsemen’s groups are fighting with the account wagering companes to start putting more into purses. But, the amount they are asking for from account wagers ($30 4o $40 million) pales in comparison to the …[LEAK] ...”


His proposed solution will not be popular with track-partnered ADWS.

“If racehorse owners develop a two-tier pricing model at the host track, we can continue a favored distribution system through other racetracks, while closing the leakage that occurs with other bet takers.

… The first tier could be … half of the takeout goes to the host track and the other half goes to the receiving track. That should keep 8% in purse accounts when tracks trade signals.

The second tier … should start with a license fee of close to 8% going to purses at the host track.”

“When this change occurs, we may lose some distribution as off-track buyers adjust. If some current outlets are lost along the way, technology will allow bettors to continue wagering with the host tracks.”

“Who will lose when the leaking is stopped? The only people who will lose … are those not involved in live racing. … [or] doing something they should not have been doing. TrackNet, a joint venture of Churchill Downs and Magna Entertainment, wants … ADWs it owns to pay 7% to host tracks (3 ½% to purses), then a wild mix of “source market fees” and 2% to 3% of handle to the television company they own. For the areas of the country without a track nearby, all the rest of the money goes to TrackNet. That means the purse account at the host track would get 3 ½%, but their partner tracks would get upwards of 15%. That doesn’t seem to fit the agreed upon split of 50-50 does it?


A contrasting, but consistent approach appeared earlier in his presentation.

“In the real world, the Lottery organization pays the convenience stores only 5% for punching in the numbers and taking the Lottery “bet”. (YouBet.com has said they can make a profit with just 5% of the off-track wager). If … bet takers receive 5% for taking off-track wagers, there will be little or no [LEAK].”

In his Thoroughbred Times article, “A billion-dollar mistake” from 2001 Pope wrote, “What is a fair and equitable rate to pay bet takers for placing bets into Thoroughbred racing's pari-mutuel pools?

Lotteries across the nation have settled on 5% commission for retailers taking the bet. Some states pay a little more, some less, but 5% is the working average. The demands of selling lottery tickets are not dissimilar to selling pari-mutuel tickets. It requires about the same effort and technology.”

A lot of racings ills might be cured if -- rather than concede 5% to independent bet takers -- track-owned ADWs were to offer a 5% rebate to all their customers.

Despite his impressive presentation, Pope’s vision, in my opinion, lacks one critical component. He is either overlooking or ignoring a stakeholder in what he refers to as the racing segment of the industry. They are called bettors, and it is unfortunate that Pope’s passion isn’t likely to be harnessed in a partnership with horseplayers.

Unlike the PGA, very few people would watch races on or off-track without being able to wager on them. And since it is the bettors whose competition with each other pays for the purses for which the owners compete, Mr. Pope and the THG should consider a course which will keep existing players supporting those purses while attracting new off-track bettors to grow them.

The role of racing fans is substantially different from that of other "major league" sports fans in that most racing fans have virtually no experience “playing” the game as a jockey, trainer, or owner; even at a less competitive level. Even their rooting interests as displayed on the odds board are out of synch with the “home team” support by owners.

The fact that an independent third party is required to guarantee neutrality in conducting, officiating, and policing the parallel competitions that take place between owners and between players for most events suggests that the parallels he draws with the PGA and MLB have questionable merit. Pope and Jackson want trainers to be removed from the IHA, but players and tracks might prefer to see owners also be required to take responsibility for proper medication of their horses before that should happen. What perhaps the Feds could add to the IHA is that every horseplayer in America, regardless of the State in which he/she resides, should be able to wager on-line in the privacy of his/her home.

I can understand Pope’s finding fault with TrackNet’s approach, but how is the latter’s predatory policy toward owners any different from the TOC’s policy of allowing rebates to high-end bettors, but not low-end ones? By supporting only the highest-volume 1% of all players who reliably generate 10% of handle (as was demonstrated by the selective signal suppression during the negotiations between horsemen’s groups at Calder and Churchill Downs), the horsemen are catering to a static source of handle rather than nurturing one with enormous growth potential.

It seems to me that if the owners were to attempt implementation of Pope’s proposed changes without also agreeing to lower takeout for all customers -- either directly or else indirectly through rebates -- they will be unable to grow handle, and will still wind up scrambling for purse money at venues not subsidized by other forms of gambling. If the owners are serious about lowering the costs of off-track bet taking and televising races, they might succeed if they also make sure all bettors get a fair shake as well, and that customers are provided with the product(s) they actually want.

The main flaw I see in Pope’s plan is that -- despite recognition by many that takeout is too high to keep existing players in the game much less attract new ones given today’s competition for the gambling dollar -- his model retains those rates while making purse accounts the sole beneficiary of change. Another is that he doesn’t address the problem that there are already too many races being run with too few contestants too frequently at too many tracks with too little attendance except to imply that a 50-50 split between host and receiving tracks will result in survival of the fittest.

Jackson complained that purses don’t match expenses, but winning and losing are what the game is all about. The owners are supposed to compete for financial reward – just the way it is on the wagering side. Expecting players to continue funding fashion-inflated bloodstock prices and medication-inflated veterinary bills while the size and quality of fields are diluted by excessive racing suggests either arrogance or ignorance; neither of which can be tolerated any longer.

The owners do have the power to improve the game, but to improve it for themselves, they will have to improve it for everyone. What will implementing a uniform medication policy -- with all the testing being contemplated -- accomplish if handle keeps shrinking because fewer people are interested in playing the game.

This opinion was submitted by a California member of HANA.

9 comments:

Anonymous said...

One of the single biggest issues prohibiting racing from the consolidation necessary to assure quality and for the surviving players to be able to operate profitably is the historical model of track facilities operating as a regulated oligopoly on a state by state basis

Under the current operating model; the industry can no longer afford situations like Calder and Gulfstream operating within miles of each other. The legislatures and regulators foster this by the process in which racing dates. In many states nostalgia suggests that "tradition" has or should dictate the racing calendar. I believe the people that adhere to that notion have likely turned a blind eye to politics and corruption; but that is another topic for another day.

Instead of the process of applying for racing dates; let the free market take over. If Gulfstream and Calder; and Tampa for that matter all want to race 24/7/365; let them, and may the best track win.

The same holds true for CHDN, Ellis Park,Turfway and Keenland. Ditto for Arlington and Hawthorne, Santa Anita, Hollywood Park, Del Mar, and Golden Gate. Aqueduct, Belmont, and Saratoga as well.

Let the tracks compete for horses; rather than politically pander for racing dates. Only the strong shall survive.

The consolidated handle will result in less; but better racing. Do we really need two tracks in Ohio (or any for that matter?) closing down, or shifting to quarter horses? How about one track running fewer calendar dates during only the prime weather season, and fewer days per week.

The best horse stock can compete for more money under the best conditions; resulting in fuller fields, and still compete less frequently in the earlier years perhaps making for more durable blood lines.

With fewer racing venues and lesser opportunities, this will push out the small family breeding operation, but why do they deseve more protection than the small retailer that pushed out by WAL MART or Target, or the local pharmacy that got pushed aside by Walgreen's and CVS?

Part of the challenge to the industry is that there is too much racing, at too many venues, and the overhead to operate all of them for 40-100 days per year in a micro regional economy has exceeded not just the profit; but in many cases the gross revenue as well.

Anonymous said...

This article reflects significant insight into the current hassle over takeout splits between track operators and horse owners. And, it goes one step farther to show how horseplayers are the "forgotten" segment of the horse racing partnership.

People like Pope should be ashamed of the majority of the racing show that is being presented today and should spend more time improving the product and eliminating the bad-actors who bring the sport's integrity into question; and, less time engaging in exercises designed to suck the lemon dry.

Indulto said...

Anonymous 9:06,
If the industry continues practices that inhibit handle growth, then “handle consolidation” seems an inevitable result, but even if meet scheduling were to be deregulated, the moving of at least 80% of handle off-track makes the kind of meet-scheduling free-for-all that led to the formation of NYRA, and which you seem to advocate, unlikely.

Also, in comparison with the small retailer, the small family breeding operation involves more than just inventory-pricing-location considerations. One size doesn’t fit all here, but I wonder whether the products of these operations are any more or less sound – or subject to questionable sales preparation practices -- than those of large operations. If they aren’t improving the breed, they aren’t helping the game.

Race-scheduling conflicts lower the quality of the racing product as well as the breeding product. Tracks should cooperatively schedule graded stakes to ensure that the next divisional iron horse could compete in every one. Rather than cannibalizing each other’s prospects, they would attract fuller fields. By augmenting purses with bonuses based on performances in all prior events, re-matches would be incentivized, and fewer undeserving performers would be credited with black type. Applying the same strategy to allowance and claiming levels might increase the sizes of those fields as well.

kevin morris said...

Wow! Digesting this entry, the original Pope article that it is based on, and the posted comments to the entry has required a lot of work. As an advocate for live racing, I feel the need to put my two cents in on a few of the issues presented. 1. Yes, we need to get a greater share of the off-track handle back to the host tracks. In addition to all the other reasons referenced here, many of the greatest venues for horseracing are dilapidated and in need of updating-Pimlico is a disgrace, and Belmont isn't much better (as this year's Belmont Stakes' plumbing fiasco proved). 2. Indulto is spot on regarding cooperative scheduling of stakes races, small vs. large breeding operations, and the possible calamity that would result with total de-regulation of race dates. Regarding the last, we really will not have a better industry if half the tracks in the country close down, just a temporarily better made-for-TV/internet product. Not to beat a dead horse, but the live version of the game is what creates new fans. Some of the geographic redundancy probably needs to be culled, but different venues draw different people-Saratoga vs. Aqueduct, Laurel vs. Pimlico, Churchill Downs vs. Keeneland, Santa Anita vs. Del Mar-these are very different options that compliment each other when (if?) managed effectively. 3. I absolutely agree with any changes that eliminate gambling advantages of one group over another when betting on the same race, with one possible exception-if any group of betters is to get a lower take-out or rebate, it should be those who spend the money and time to go to the track. If racing wants to increase attendance they should provide incentives for being there. Did I mention I'm a live racing advocate?

Anonymous said...

Today's Blood Horse article with respect to CDI's response to counter claims made against them by the THG, by indicating theri belief that a collective negotation by geographically disbursed horsemen's groups under a national umbrella organization is tantamount to "price fixing".

As has been previously discussed under other subject headings; "price fixing" occurs to the detriment of the customer in horse racing; when the take out rates are established by state statute, state regulation, or in those cases where licensed operators have individual flexibility, then by the operators themselves when applied uniformly by all licensed operators within the local jurisdiction.

It would seem to me that an Amicus Curiae brief be considered in response to the allegations of "price fixing", for those jurisdictions where the licensed operator retains some discretion wih respect to "take out".

Cangamble said...

Kevin, in principle I agree with you. However, the sport is dying because of lack of competition. Lowering takeout for those who bet live will do nothing to gain new customers.
Lowering takeout or increasing rebates throughout the industry will, and it has to benefit internet players, because not only is that the bulk of the existing major players, but it is also the source of the potential players that the industry is trying to attract, or should be trying to attract, in order for growth to occur.

kevin morris said...

Camgamble, you're first point is right. No new horseracing fan will be convinced to come to the track because an exacta takeout is 20% rather than 23%. But folks who are already fans may come to the track rather than stay at home to bet, increasing attendance, which fuels secondary cash streams via parking, concessions, etc.
I also agree that reducing overall takeout is necessary to build the sector of the customer base you allude to in the second graph. But this group is not new racing fans. Getting the current horseracing betters to bet more is a short-term fix. We also need new fans, and these come through live racing. Making the tracks places people enjoy coming to should be a primary focus of the industry, if only to build the base that will eventually be betting online. And to do that we have to take care of the existing viable venues. I think boxing has shown us the error of thinking short-term. All the good fights went on pay-per-view, and it was very profitable for a while. However, no one who wasn't a boxing fan would ever pay $50 to see a fight, the fan base got old and died, and now no one cares about boxing.

Indulto said...

KM,
Thanks for wading through it all. While I disagree with some of Pope’s conclusions, I greatly respect the quality and volume of effort and thought he has contributed toward the sport’s well-being; which is why I made reference to other works of his that I had also read. Hopefully, HANA will encourage others more scholarly than myself to attack the problems horseplayers face with the same determination and demonstrable effect that Pope has had on owners.

I too am a live racing advocate and totally agree that recruiting new fans is far more likely on-track than off, even though most new players will eventually play off-track predominantly; especially those who live in remote areas.

Indeed, tracks should use every incentive possible to get people to the track and bring someone with them. While the goal remains rebates for all, it wouldn’t hurt to get the ball rolling with on-track rebates to at least attempt to rejuvenate attendance.

CG,
Perhaps you could expand upon the lack of competition from which the sport is dying. Certainly small, uncompetitive fields are part of it as is the competitive edge rebated players enjoy over non-rebated players. Are you also saying that that reduced participation by horseplayers lessens competition between them? Also, is it true that the bulk of existing major players use the internet. It was my understanding that both RGS and Elite were phone operations. Does more OTB and NYRA-1 handle come from the internet than phones?

Cangamble said...

Kevin, in Canada, parking and admission is a thing of the past. Racinos are a way of life here.

Indulto, I screwed up my sentence/thoughts. What I meant was that competition is killing the game, and the best way to grow is to try to attract those who play sports/poker etc on the internet by competing for their business.

This can only be achieved by lowering pricing.

When I say internet betting, I also mean phone betting. I haven't made a phone bet for such a long time, I forgot I still could do that from home.