Sunday, September 6, 2009

Takeout & Some Fat Cat Republicans

At HANA we study the data and try to come up with a worthwhile policy. Over the past year we have tried to present any data we find as plainly as we can. What we have discovered is that when the data speaks forcefully about something, almost without fail the industry tends to file it away, if it does not fit their preconceived notions, or biases.

In 1998 the University of Louisville came out with a comprehensive economic study of some of the factors that effect wagering. They looked at a few factors and how our customers react to them: Field size, size of purses, takeout reductions and number of races. What they found should not be surprising: A reduction of takeout results in the highest increase of handle (e=-2.3), followed by field size and number of races (e=~ 0.60) and coming in last was purse size (e=0.06).

So in a nutshell, if we place money into increasing purses from the mean it will have literally no effect on overall handles. If we place cash into field size and number of races it will have a small effect on handle. If we place cash into lowering takeout, it will result in a large hike in handle.

The report states: ".... wagering would increase by only 6% if purse were doubled. This is a surprising finding considering the importance that is attached to the purse variable in all major policy decisions to increase the wagering in this industry."

This is not shocking, nor surprising. Massive purses increases in Ontario, at Penn National, Philly Park, Presque Ilse and many other slot rich tracks have done nothing to increase handles. In fact, handle has dove further than the congress's approval ratings.

So why when we read over and over again that if we have more money placed into purses all will be well? Why do we keep raising takeout rates instead of lowering them?

I think the answer is as plain as day. Each faction has their own wants, and will do everything to protect them, even if the data flies right into the face of their arguments. And most importantly, we don't have someone there to make decisions and give everyone one swift kick in the ass when they do that. Facts don't matter, money for their slice does.

In the 1960's the National Football League had some issues and that was television. Pete Rozelle, the commissioner, had to convince the owners that television was the way of the future and that the only way the sport could grow was to work out a collective plan to exploit it for the leagues gain. The owners were up in arms. At that time live gate was the major revenue driver for football. The owners, especially in small cities did not want to do this, fearing a loss of gate revenue.

Eventually Rozelle convinced these businessmen that the status-quo was not an option. The NFL was the first league to embrace television, creating NFL films, the Super Bowl and much more.

Fast forward several years. As television got bigger and bigger and the league and teams were making more and more money there were the inevitable problems. Up popped revenue sharing. Rozelle had to convince 30 or so folks that sharing TV revenue would be good for all.

It worked. Multi-billion dollar TV deals has made the NFL the most successful sport in the western world.

In the words of Art Modell, the then Cleveland Browns owner: Rozelle got "a bunch of fat cat republicans to become socialists".

Now let's think about this: How did a league worth millions upon millions with owners the ego the size of the federal deficit agree on something so large and fundamental to do what is right for everyone, not just a few? The easy answer is that they had a commissioner, and I think that is too easy.

Let's rewind to 1960, but apply some racing to it. Not only is there 25 or 30 owners of the AFL/NFL teams sitting around the table, but each team has a player group associated with it. The players all have a seat and there is not one, but one for each team. As well, let's say they control 50% of all the revenues.

Would they have been able to get together to do what is right? Not a chance.

My bet: The player organization in New York would vote "no" to television to protect their large salaries. The player organization in Green Bay would be mad at them, and not give an inch. The owners would throw their arms in the air and want to leave the madness. Rozelle would probably quit and send in an application to work for the NBA.

In 2009 players are signing ten million dollar contracts due to the forward thinking that went on in the 1960's. Without that forward thinking they would probably be making a million a year, if they were lucky.

In racing we keep slinging billions of slot money to purses and appeasing the masses, because it is easy. It is inconsequential that this has proven to be our death-knell. It is inconsequential that we already put 6% in handle to purses, while the UK places 0.99% into them, and are healthier than we are. The people who yell loudest win, and those who protect their self-interests win. Instead of lowering take and increasing handles, and making our sport more popular, we opt for the cash.

We have hundreds of acronym groups in racing. It is easier to appease, rather than lead. And that my friends is a disease that has infiltrated racing for a hundred years, and that is what we have to extinguish. If we do not, handles will be down even more in 2011 than they have this year and last, and brick by brick racing will fall further down in the sports and gambling conscience of the North American public.


Cary Fotias said...

Kudos to whomever wrote this article --

You hit the nail on the head with a SLEDGEHAMMER --

Cary Fotias

HANA Advisory Board

Cary Fotias said...

Double kudos to whomever wrote this article --

You hit the nail on the head with a SLEDGEHAMMER --

Cary Fotias

HANA Advisory Board

Anonymous said...

"The report states: ".... wagering would increase by only 6% if purse were doubled. This is a surprising finding considering the importance that is attached to the purse variable in all major policy decisions to increase the wagering in this industry."

Another hole shot in industry nonsense. They seem to think if they repeat the mantra, it becomes true.

If they ignore this advice, what else have they ignored? Could racing be great today if they acted on these things ten years ago instead of ignoring them?


Anonymous said...

I love it. Great article. Who is the author? We need more from him.


wmcorrow said...

In a previous post at this website I stated that lowering takeout will reduce the income of casino racebooks, OTBs, and the income of Churchill and Magna's ADW hubs; as 90% of total handle is now off-track, will the racebooks and OTBs be willing to stay in operation if their income is reduced by lowering takeout? Won't a reduction in takeout contribute to a reduction in the number of outlets where people can wager, and thus futher reduce handle?

You want a fact? Here's one: other than the whales and hardcore bettors who wager substantial money, few bettors neither understand or care about takeout; and I am inclined to believe that they represent over 95% of all bettors.

Handle is not declining because of takeout rates, or drug use, or the perception that people have of the racing industry. Handle is declining because of one thing: attrition. Bettors, like me, who have followed racing for years are dying and are not being replaced by a younger group; and the reason?
Because racing has no central leadership and a marketing program that promotes racing for what its actual attraction is: the ability to gamble.

Increasing purses supposedly attracts the better horses, and only financially benefits the owner, trainer, and jockey. Bettors could careless what the purse amount is. If the money that goes to increase purses went, instead, to advertising/marketing racing (specifically directed at slot players), handle would increase - don't most successful business depend on marketing for survival?

Scott said...

How hard would it be to have a co-op own and run a track? There are folks out there spending millions on yearlings that can't run a yard, surely there must be a handful who would be willing to sink a bit into an ambitious project like this.

Take a small struggling track.
Sell $50 shares to racing fans everywhere. Get a guarantor behind it to keep horsemen happy that they aren't wasting their time.
Cut takeout rates down to 10% WPS and a max rate of 20% for exotics, probably lower.
Retain data rights if possible and distribute as much as possible for free.

Co-ops are used in all sort of businesses; dairies, banks and even a professional soccer club in England.

It would be messy. People will be queuing up to say it can't be done. Other tracks and ADWs will probably hate it with a passion.

With the right folks on board, this could be achieved. This has been scratched up with two minutes of thought and a less than thorough understanding of the intracies and complexities of US state laws and the broadcast & wagering deals. But where many see problems, others see opportunities...

Cangamble said...

Wmcorrow, how many times does this have to be explained to you? People do not know what takeout is for the most part. But they know they don't last, and they know what their expectations are.

Income will increase if takeout drops.

I'll give you an easy example (at least I think it is easy).

Takeout or house edge on slots is around 10% on average. Do you not think that if casinos thought they could make more money at 20% or 30%, they would lobby like hell to raise the takeout? Of course they will. But they realize that they make close to a maximum amount of net income at 10%.

What that really means is lets say 1 million is wagered on slots in the short run. The house makes $100,000. In the short run they would make $20,000 if takeout were increase to 20%. However in the long run, they know they will get more than twice the amount totally bet if they keep slots at 10%. So instead of say 1 billion bet at a casino at 10%, they only get $400 million bet at 20%. They make more with the lower rate. Why?

Because the players aren't discouraged so quickly. They have less of a clue on takeout than the horse racing crowd, yet they would stop going or going a lot less often if the house take was raised.

When players aren't discouraged so quickly too, it can become a social outing where more friends and family may be introduced, thus increasing revenues even more.

Peter B said...

This shows how hard it is to do anything in racing. The author of this piece cites a University study showing that lower takeout results in increase wagering. The 4th comment is from a racing insider that says takeout does not matter.

I tell ya, in racing where people have their slices to protect and where everyone gets a say, if someone said the sky is blue on a sunny day, there would be someone there to tell them it's cloudy.

What a $(#)@_)$n mess.


Scott said...

Takeout doesn't matter to most of the folks who go to the tracks - the ones that care about it have already left and won't come back unless something is done. Only strong, pro-active steps will bring back the disillusioned. But the elasticity of wagering in relation to takeout has been proven over and over again - in university studies and with betting firms all over the world.