Why Big Day Revenue Gains Work & What It Says About Horse Racing

In April, CDI raised takeout at their flagship track, Churchill Downs. It was suspected at the time by many industry analysts that this was a way to grab more money from two big days - The Derby and the Oaks - to make the bottom line look better to shareholders.

Those analysts were probably correct. In the recently concluded World Cup, if ticket prices were doubled if Brazil made the final, revenue would be increased. Derby and Oaks day would see a gain over a regular day at the track, too.  It's common sense, really.

Why would it work for those days?

When casual fans go to the racetrack, they expect to lose. On big days like the Derby or Oaks, it's a once a year occurrence. Those days, Joe from Queens, or Susan from Lexington say "I am bringing $500 to the track to take a shot at the Derby". They don't bring only $400 because the rake was raised. They aren't bet sizing or looking at longer term ROI. They are just bringing what they planned, fully expecting to lose it all.


While those folks are good for Churchill (or other tracks on big days with lots of casuals), what they are saying about horse racing drives a stake into its heart as a gambling game.

Joe and Susan are saying this is a game (handicapping) that can not be beaten. They don't care if the takeout is 18% or 22% because they don't plan to come back. They don't plan to buy a DRF book to learn the art of handicapping, read the Horseplayer Monthly for tips (August's issue is out today, by the way), or go out of their way to come on a Tuesday for the regular races. They drink mint juleps, lose all their money and go home.

Churchill, and other tracks who wish to, can happily raise takeouts on big days and probably escape unfazed. However, when they choose to do the same thing in the other 364 days, they are hurting the game of handicapping in untold ways. They are saying to Joe and Susan and everyone else, "you're right. This is a sucker game. But thanks for your cash. We'll see you next year."

I was vacationing this week with an old friend who used to play the races as a youngster. He's a fund manager now, busy with 12 hour work days and two kids, so he doesn't have a lot of time for horse racing. He asked me if horse racing was still hard to make money at. I told him yes, and relayed that takeout was even being raised, not lowered, to make it even more difficult. He said "the math isn't there to begin with, and they tilt the wheel even more against you?"

No business can grow like that; especially a gambling business. The horse racing industry needs to understand that to have a thriving gambling game, at least some winners must be sent home to come back tomorrow. They must have a chance to win, or at least perceive they have that chance; to tell others about the opportunity of the game. Until that happens, racing will be relegated to trumpeting increased "EBITDA" one day a year with blaring headlines, while in the fine print everyone knows how bad the other 364 are.

20 Percent (Reduced) Takeout Doubles at Del Mar

This week kicks off some great summer racing. Opening day for Del Mar is today Thursday July 17, 2014. Opening day for Saratoga is tomorrow Friday July 18, 2014.

Link to a Press Release on the Del Mar website: Here.

The press release contains the following quote:

"In a new arrangement for this meeting, Del Mar will drop its takeout rate on its "rolling" Daily Doubles to 20% after previously offering them at 22.68%."

While it may be true that at 20% the takeout for doubles at Del Mar in 2014 will be lower than the 22.68% takeout Del Mar had for doubles last year:  It is also true that the 20% takeout for doubles at Del Mar this year is HIGHER than the 18% takeout rolling doubles offered at the recently concluded meets at Santa Anita (April 26, 2014 through June 29, 2014) and Los Alamitos Race Course (July 3, 2014 through July 13, 2014.)

There is an untold story here. I think it is important that you the player understand how 20% takeout doubles (instead of 18%) came to be at Del Mar.

Sources are telling me it was the TOC (Thoroughbred Owners of California) who, at a meeting on Friday July 11, 2014, voted to discontinue 18% rolling doubles at California tracks.

I ran handle numbers for comparable dates between Hollywood Park 2013 and Santa Anita 2014: Here.

As you can see, handle for Santa Anita 2014 vs. Hollywood Park 2013 was up 16.81%.

I also ran comparable date handle numbers for Double pools in isolation:

As you can see, handle for 18% doubles at Santa Anita 2014 vs. 22.68% doubles at Hollywood Park 2013 was up 24.05%.

To put this in context:  The growth rate for 18% takeout doubles at Santa Anita was more than 1.43 times the growth rate for handle in general.

We at HANA think the wagering public deserves answers to the following questions:

  

If 18% takeout doubles were up 24.05 percent vs. 22.68% doubles from the previous year, why vote to discontinue the program?

Wasn’t the program doing what it was designed to do: Make the California wagering menu more attractive to players so that California tracks can grow handle?

--Jeff Platt

--President, HANA

Money Earmarked For Drug Research Sent to Lost Churchill Downs Purses

Gregory Hall in the Louisville Courier Journal wrote today that $125,000 of the $1 million from The Kentucky Thoroughbred Development Fund was allocated to Churchill Downs for purses in 2014.

"The $1 million was taken from a separate racing commission fund that pays for equine drug research," he wrote.

This, according to the article, was needed to be added to purses, because Churchill Downs had a purse shortfall for its spring meet after a massive handle reduction.

In April, Churchill Downs raised the takeout, and said that the increased revenue from the takeout hike would increase purses by $8 million.


This is what takeout hikes tend to do. Not only does the hike not raise purses by an amount like 8 million dollars, it ends up having a track, or horsemen group divert funds from equine drug research when purses fall.

Takeout hikes are never the answer to racing's revenue problem, and never will be the answer to racing's revenue problems. They only make things worse.

Horseplayers Understand How Dinny Phipps Feels

In the article "Jockey Club Supports Federal Oversight...." you can sense the frustration by Dinny Phipps. He, and others from the Jockey Club, clearly do not think federal oversight is the best solution to their issues, but getting horsemen groups and states, as well as other alphabets, to agree to some sort of reform is elusive. He looks like a man who is saying "I can't fix this problem, so let the feds take over."

Really, can anyone blame him?

As horseplayers I think we know how he feels.

Today there was a thread on Paceadvantage.com about a proposed (and rumored) hike in takeout rates at Del Mar racetrack, which will be carried over to all of California racing. It's titled "Is the TOC preparing to stick it to horseplayers again?"

The TOC, for those who do not know, is the Thoroughbred Owners of California. They have veto power over what racetracks charge us to bet the product. Why should an ownership group be able to tell tracks what to charge their betting customers, you may ask? It's because it's a part of the Interstate Horse Racing Act.

For example, at Del Mar, the state, Frank Stronach, the CHRB and horseplayers can be all packed with studies, economist testimony and econometric data to show that lower takeout rates of, say, 12% can work for everyone. Despite that, the horsemen group of record can say no. Then the policy would end.

They don't have to show a business case. They don't have to bring in experts to testify so that a decision can be made. They don't need data from economists.

They can just say "no" and it's over. We think that's just silly.

It's similar to a hay supplier going into Bob Baffert's barn and having the power to set Bob's day rate. That sounds nuts, and it probably is, but that's the power of the IHA.

Takeout rates should be set in a professional way, with professional people who know gambling economics in charge of the precedings. Giving a horsemen group the power to set takeout rates in a  capricious fashion - without any checks and balances - should've never happened in the first place.

It's a wrong that needs to be righted. The future of wagering for horse racing is too important for knee-jerk, non-scientific, arbitrary decisions.The IHA needs updating, and it needs updating before it does even more damage.

Pricci: For July 4th Horseplayers, It’s Morning in America

First of all, Happy Fourth of July to all of our readers in the United States.  Thank you for your continued support and enjoy your holiday with your friends and family (and place a wager or two or several if you feel so inclined).

Second, John Pricci wrote a piece entitled, "For July 4th Horseplayers, It’s Morning in America" for Horse Racing Insider, explaining the clout that all of us as horseplayers have in this era of social media and electronic communication.

An excerpt of John's piece appears below -

"The most encouraging and dramatic sign of progress in the first half of 2014 is a relatively new development; the emergence of the horseplayer as a political force that can affect change, almost at almost warp speed compared to the glacial pace at which progress is usually made in this sport.

Can’t speak for other betting-boycott supporters but I take no comfort from the fact that Churchill Downs Inc. took it on the fiscal chin to the tune of nearly $48-million in handle. That comes to $1.3 million every racing day not named Oaks or Derby. Without those days, business was down approximately 25 percent.

For all the slings and arrows shot its way, none of this would have been possible if it were not for dissenting voices on the Internet and social media. From websites speaking truth to power, to grass roots participation from fans in racing chat rooms, industry organizations took note.

The perfect storm for change turned out to be a disqualification in the final race of the day this winter at Gulfstream Park, allowing a carryover jackpot to continue. The DQ, in and of itself a controversial call, was met with great consternation and suspicion.

The response on the Internet was immediate and forceful, resulting in subsequent dialogue between fans and racetrack executives. The result was policy changes meant to improve the race adjudication process.

The back-and-forth bore fruit in that the response was in the main positive for bettors although, to date, not all promises have been kept. Horseplayers have long memories.

While no pleasure was taken from CDI’s travails, what was gratifying to see is what can happen when a disparate group of gamblers get together in a common cause. Bettors got mad as hell and decided not to take it anymore.  Each passing day, the influence of a grass roots organization such as the Horseplayers Association of North America continues to gain influence and beginning to get invited to sit down at the table.

And, so, as the nation celebrates its freedoms this weekend, there is reason for a very small segment of the American people to feel optimistic optimism about future. We know it won’t happen overnight but it finally looks like we won’t get fooled again."

To read John's piece in full, click here.

Bringing Down the Twinspires

This blog post originally appeared on Lenny Moon's Equinometry blog.  Lenny is on Twitter @equinometry and is a monthly contributor to HANA's Horseplayer Monthly e-magazine.

Corporate Genius 1: “We need more cash in the till to please the shareholders and increase our bonuses.”

Corporate Genius 2: “I have the perfect idea, let’s look like the good guys and take on those racing dates in September to drop our daily handle below $1.2 million so we can increase takeout rates.”

Corporate Genius 1: “That’s brilliant.  We’ll get good press for helping the local racing circuit now and then we’ll fleece our mindless customers next spring.”

Corporate Genius 2: “They won’t even notice because all the talk will be about the Derby and before they know it the meet will be over and revenue will be up a couple million.”

News of the takeout increase spreads like wildfire because unbeknownst to the two corporate geniuses a lot their mindless customers use the internet and social media.

It only takes a few days to orchestrate an official boycott of the takeout increase but the two geniuses ignore the warning and take a wait and see approach.

The end of June rolls around and to their surprise wagering handle is down $49 million and the increase in takeout rates can’t overcome the decline and results in a slight drop in takeout revenue.

Excuses quickly roll out but none can account for the dramatic drop in wagering handle.

Since the corporate geniuses won’t tell the true story and the racing media only tells part of it I’ll give you the whole story.

Excuse #1: Decrease in Field Size

Field size is often attributed to changes in wagering handle.

In some cases it does contribute but in others it seems to have no impact.

For example in the weeks leading up to the Churchill Downs meet I researched howchanges in takeout rates affected wagering handle in California.

In addition to takeout rate changes I looked at the average field size to see if there was any correlation between changes in it and wagering handle.

During the period of stable takeout rates (1997 to 2005) field size decreased by 7.41% while wagering handle increased by 20.39%.

During the period of increasing takeout rates (2006 to 2013) field size decreased 1.30% while wagering handle decreased by 28.30%.

The decrease in field size during the first period was 0.60 horses per race while the decrease in the second period was only 0.10 horses per race.

This would clearly suggest the change in field size didn’t negatively impact wagering handle.

With 17 years of data this study provides sufficient proof that field size doesn’t always impact wagering handle.

Giving Churchill Downs the benefit of the doubt, however I also looked at another study that did show field size can impact wagering handle.

The Thalheimer study, which you can find here, showed the correlation between field size and wagering handle to be 0.58.

Using this correlation and applying it to the change in field size at Churchill Downs from 2013 to 2014 would suggest wagering handle should have fallen by just under $3 million.

That’s a far cry from the $49 million drop that occurred.

Excuse #2: Decrease in Number of Races

My study of California didn’t look at number of races but Thalheimer’s did.

The correlation between number of races and wagering handle was 0.64.

Using this correlation and applying it to the change in number of races at Churchill Downs from 2013 to 2014 would suggest wagering handle should have fallen by just over $7 million.

Again this isn’t anywhere close to the actual drop of $49 million.

The chart below shows the actual drop and what the Thalheimer study estimates the drop should have been based on decreases in average field size and number of races.

Even if you combine both the expected drop in wagering handle caused by a decrease in average field size and number of races the total is around $10 million.

That accounts for only 20% of the $49 million drop, which begs the question: what caused the additional $39 million drop?

The answer is one the corporate geniuses will never admit: the increase in takeout rates.

This is Just the Beginning

The Thalheimer study also determined the correlation between changes in takeout rates and wagering handle to be – 2.30.

The negative correlation means that an increase in takeout rates will result in a decrease in wagering handle and vice versa.

While the affects of changes in average field size and number of races will be felt immediately the full impact of takeout changes typically takes 12 to 18 months.

Applying the – 2.30 correlation to the changes in takeout rates and blending them based on the mix of WPS and all other wagering types suggests the decrease in wagering handle should be about 31%.

The $49 million drop this meet is only a 12% decrease meaning the wagering handle should drop more rapidly over the final two meets this year and the spring meet next year.

The decrease for the remainder of this year will likely be much more than 12% because that number includes Oaks and Derby days, which skew the data.

When factoring out those two days wagering handle was down over 25%.

Conclusion

The decrease in wagering handle was a combination of a decrease in average field size, a decrease in number of races and an increase in takeout rates.

It’s pretty clear the overwhelming factor in the equation was the increase in takeout rates.

It’s also pretty clear that the players boycott accelerated the decrease in wagering handle.

The forecast for the remainder of the year is pretty bleak as well as there will be no big days to skew the numbers.

The last and most important point is this should be a wake up call to all tracks.

If you increase takeout rates expect your wagering handle to plummet.

Likewise if you decrease your takeout rates expect your wagering handle to skyrocket.

If you don’t believe me take a look at Kentucky Downs.

The data regarding the 2013 and 2014 Churchill Downs meets can be found here.  Please note that I did not include Future Wagers in my numbers so they may differ slightly from other reported numbers.