Saturday, December 20, 2008

Old Versus New

There is a very good chat going on at the Paulick Report regarding the Pope plan regarding wagering. Mr. Pope believes that tracks should get the most cash for putting on the races, not the resellers. It is a populist message that resonates with racing because that is the way they have always done business - hey, I put on the show, I want most of the money! Of course, this makes some sense, but Mr. Pope's plan would confiscate virtually all of the reseller money, which HANA believes is clearly a mistake.

The bettors, or the people who start an ADW tend to think differently because we know that ADW is the only medium that is innovating, cutting prices to encourage churn and reinvesting most of the revenue in advertising and marketing. There is a reason that it is the only growing part of this sport - because they are virtually the only group to reinvest in the customer.

A question asked to Mr. Pope in the piece is "sir, what about the 30-60% of the money that resellers reinvest in the sport?" If you give $200 to a track and a horseman group the golden rule is: Never expect to get any change. You won't get a penny back for marketing, or rebates. At least these folks reinvest. As one poster mentioned, youbet took down $120 million in handle fees. They made around 2 million, or 2%. Over 30% of their money went to business development, player rewards and advertising. This is not unlike poker sites - you know the ones we complain about that steal our customers.

The message is clear: Reinvest or die in the 2000's.

In an interesting twist, a horseplayer put up his thoughts on what the ADW model should look like to encourage handles. It is forward looking, it makes sense, and it preserves the ADW reinvestment in the player, which should have a positive effect on handles. It is amazing in this day and age, especially with social media. Dog food manufacturers use the web to find out what products to offer. Cable companies use the web to find out what packages to offer, and much more. Racing rarely if ever listens to the customer, but when reading many sites, the customer him/herself is often the one with the best and most workable ideas!

And this is one. Here is a sharp customer, who is probably a non racing businessman, who knows that the monopoly days are over. We can not do business like it is 1974 any longer and proposals like this are exactly what racing needs - split the pie yes, but don't stop there - put a system in place to grow it.

A while back I did some thinking about what a new model could look like, and that I thought made sense from a revenue sharing point of view, but also made explicit the sort of investments that needed to be made for this business to exist. It allows for both more money for the tracks, and for a flexible and vibrant reseller relationship.

I do think the industry can afford to pay more than 3% on a 20% signal to the host track. Part of that is the elimination of the subsidies in the form of source market fees. So in the following, we are assuming all fees paid for the signal are going where they belong, to the host track. And of course, the total fees already paid are well above 3%, so that is a moot issue.

I’d like to get anyone’s thoughts on a structure somewhat like the following.

So lets start with the baseline fee structure, this is where we start. We are using a 20% takeout number for all of this, after tote/taxes, that is what exists.

Track: 5.5%
Purses: 5.5%
ADW: 9%

This represents a significant increase in revenues for tracks and purses. This is however only payable by an ADW that has one severe limitation, a significant reduction in takeout in the form of rebates, a key driver for a large percentage of our business, is not possible under this fee structure. But however, for some customers, this ADW would be able to provide a great experience, and can and should exist just fine, under this fee structure.

But what we need is some flexibility, we want a wide variety of ADW’s out there, and here is how we get it.

1.) Rebates can be made solely at the discretion of the ADW.
2.) The design of their rebate program is likewise solely up to them.
3.) And, they can rebate any amount the want, up to a certain limit. The limit exists, because the funds for the rebates will be coming equally from all 3 parties share. This is the key point.

What this engenders is an explicit admission on the part of all three parties that reducing takeout in the form of rebates is important, and that reducing takeout has a benefit to all involved. This is a true partnership.

The ADW can rebate up to a total of 6%, by an equal reduction in all parties share. At this maximum rebate level, this gives us:

Track: 3.5%
Purses: 3.5%
ADW: 7%

For each party reducing its share, they are rewarded with a higher handle. Everyone shares the costs, everyone shares the benefits. The ADW can, at their own discretion, rebate beyond this 6% level, and some would, but the remainder of that rebate would come from their share alone. So for instance an 8% rebate regime would see tracks and purses stay constant at 3.5%, and the ADW operating funds would drop to 5%. This would be on the most price aggressive side of the spectrum.

Rebates are not the only form of flexibility this kind of sliding scale, co-investment structure allows for, the host track and the ADW could, if they come to agreement, offer any sort of innovative features they could come up, with an equal investment from all parties to cover the costs.

The only key distinction is that rebates, if the ADW chose to make them, are solely at their discretion. Everything else is collaborative.

The other thing about the model is that it is the same structure offered to every ADW. There is no need for a multitude of different models, one dynamic one will do. We want competition amongst the ADW, we want them to do the sort of experimenting that will ultimately find the best product mix for the customers. Wide signal availability, under a single unified model that has specific protections for the entire spectrum of business models to exist. Let the market tell us which one is best.

This is a model that returns more money to the tracks, encourages a reduction in takeout, and allows for a vibrant and thriving ADW community. In other words, this is the kind of new model racing should be looking into. Something much more dynamic, and something that actually encourages the kinds of actions that will increase handle, than what has been proposed here.

The difference in the two plans is apparent - one is new and fresh and vibrant. It is not static. It is not old world. It gives racing a chance to grow, while simultaneously giving more back to the track and purses. And guess what? It was written by a customer.


Steve Zorn said...

I don't have a problem with your basic 9-5.5-5.5 model, even though that's less than the 6-7% for purses that the Thoroughbred Horsemen's group is seeking. Especially if we eliminate source market fees, that would leave an acceptable amount for purses. Remember that those of us who put on the show can't really be expected to be in the charity business.

But if the original split is in those proportions, why shouldn't the rebates be split the same way; i.e, for every unit of rebate, purses would pay 27.5%, tracks would pay 27.5% and the ADW would pay 45%. That would keep the ratio of who gets what the same as it would be in the non-rebate situation.

And let's do a serious experiment with substantially reduced takeout and see if, through the ADWs, it can have the effect that economic theory would predict.

Anonymous said...

Hi Steve, thank you for the comments. I am glad to hear that in principle you seem to like the idea.

I think there are a variety of ways the split could actually be structured -- the main reason I opted for the splits I did was because in my mind they are doable so far as hitting the rebate targets that I think we need to have available, while giving a fair starting point so far track and purse proceeds for ADW models that are not rebating.

If we keep the starting point the same, and keep the percentages constant as you suggest, that takes us to 6.3% ADW for the the 6% model, and 4.3% for the 8% model. I'm just not sure that is enough (especially to get to 8%), but I could certainly be wrong.

It does have the benfit of making things cleaner if we do as you suggest. Two options to allow us the possibility of getting there using constant percentages would be to either move the starting splits slightly, or simply allow for the co-contributions to extend past the 6% limit, to 7 or even 8%.

I do think there is an answer here that works for everyone, the details just need to be hammered out.