Sunday, December 14, 2008

Will Slots Continue to Hurt Handles?

Thalheimer and Ali present an ominous scenario in their paper entitled, "Pari-Mutuel Horse Race Wagering -- Competition from Within and Outside the Industry" (The paper can be found in "Handbook of Sports and Lottery Markets" by Hausch and Ziemba). Their research shows that when video lottery terminals (VLTs) are placed at pari-mutuel facilities, pari-mutuel handle decreases by 29% at the 114 VLT level and 39% at the 3,000 VLT level.

This article in the Saratogian supports their findings:

According to the article, "purses are expected to reach $120 million by 2010; up from $35 million before gaming was introduced. However, handle has declined. NYOTB President Raymond Casey is quoted in the article as saying, "But there hasn't been a corresponding increase in handle -- the amount people bet -- an indication that VLTs haven't boosted fan interest in racing."

Why should racino gaming in New York boost fan interest? It hasn't boosted interest anywhere else where it has been introduced at racetracks.

Mr. Casey also said, "Perhaps some money now dedicated for purses should be reallocated to marketing efforts, to promote racing and generate fan interest."

It certainly can not hurt to spend money on marketing. However, if increasing handle is the goal, marketing alone is unlikely to achieve the desired result.

Handle peaked 31 years ago in 1977 and has been in decline since. The "Go Baby, Go" campaign could not reverse the trend.

When VLTs are operational at NYRA, pari-mutuel handle will likely decrease. If NYRA continues its policy of not sending its signal to all licensed ADWs, players will continue their subversive ways. They will send their wagers into unlicensed pools where transaction costs are lower, (e.g., betting exchanges, illegal and/or unlicensed bookmakers). Tracks, horsemen and the state will derive no benefit.

Horsemen who race at non-VLT tracks are going to face tougher times as their purses shrink. The non-VLT tracks will probably raise takeouts resulting in more player subversion. Many non-VLT tracks will cease to exist -- a sad story for another blog.

It is likely NY State will see an increase in VLT gambling revenue, but a decrease in pari-mutuel revenue. Horsemen will see an increase in purses via VLT subsidies, but a decrease in the amount of pari-mutual handle that helps fund purses. The increase in purses from VLTs may be so large that the decrease in purse funding from pari-mutuel handle will be inconsequential.

It is hard to blame anyone who comes to the conclusion that NYRA and NY State do not care much for existing horseplayers.

Why should the horseplaying community that has supported the industry for the past 100 or so years not derive any benefit from VLTs? Players only want a game with low wagering transaction costs (on and off-track) and signal availability through their ADW of choice.

At the very least, NY State officials should care about NY State taxpayers. Tax revenue is being lost as untaxed betting revenue goes to untaxed bookmakers. Non-horseplaying taxpayers should be furious that a source of taxable revenue is not being collected due to the negligence of government officials.

Given the competition from gaming, professional sports, lotteries, alternative entertainment and other regional racetracks the only way to boost handle is to cut transaction costs for the player. A lower priced wagering product will sell more than a higher priced product. Fewer and fewer people are willing to pay for a horse race wagering product at it's current cost. And spending marketing dollars on an over-priced product is a waste of money.

Lowering takeout and widely distributing the racing signal are simple concepts for increasing handle. This is not rocket science to horseplayers, however, to government officials and industry leaders, it must be.

This is Part II of a series on subversion by HANA VP John Swetye.


Anonymous said...

Racing was told before they put slots in anywhere that the addition of them would hurt handles. I wonder why they are still doing the same things today? Why wouldn't they help the player bet more with some of the slot money?

Theodore L. Grevelis said...

I would suggest the following:

- that if the total money available now to the enterprise is increased it's a good thing. It means that money that used to go elsewhere is at least staying at the facility;

- if that extra money is now funding higher purses that is also a good thing;

- that Mr. Casey is correct, some of that dough needs to get plowed back into marketing the racing product;

- and you are absolutely correct - racing takeouts ARE too high, though just lowering that alone will not be enough.

Anonymous said...

With purses skyrocketing in some areas due to slots I can tell you one thing - the vets and suppliers like it. They have been making a pile of money.

Anonymous said...

Is the Thalheimer-Ali article available online somewhere? You reference it as if everyone should know about it.
For those unfamiliar with their work, they have studied parimutuel wagering for 2 decades, and for particularly academic readers, you can find much of their stuff in the Journal of Applied Economics (check if it is at your local research library). Reprints bought online run $10-$30.

Newman said...

It is very dangerous and short sighted to think that that the slot money will be helpful in the long run. As state budgets continue to get squeezed it is only a matter of time before people start asking why should this money be going to a small special interest group, when the general fund needs money.

As the years go by the money allocated to racing from these racinos will decline, which will drive down purses, and of course handle will follow.

The only way out of this mess, is totally rethinking the whole way racing is marketed, which includes the takeout rate, distribution and many, many other issues.

Anonymous said...

The Thalheimer/Ali paper is available in the newest book by Hausch and Ziemba, "Handbook of Sports and Lottery Markets".

Anonymous said...

The purses for MOST races should be sirectly tied to the number of horses in the race......we can't continue to have 5-6 horse fields running for $80,'s a non-bettable race.