PlayersBoycott

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Thursday, July 3, 2014

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.

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