Thursday, December 10, 2015

Selling Horse Racing as a Gambling Game of Skill A First Step
-by Andy Asaro

Those of us who love the game often say that horse racing is the greatest gambling game of skill ever created. But in 2015, gambling on horse racing - when compared to other games of skill that are thriving -  is becoming one of the worst games for customers and non-rebated gamblers who are charged retail takeout rates.  This is due, in part, to prohibitive pricing (high takeouts), difficult multi-leg hard to hit exotics, the proliferation of jackpot bets, and the complexity of analyzing the data from past performances.  This has caused even the most experienced gamblers to have a much more difficult time just breaking even. 

When most of us learned the game and fell in love with racing we had a choice of wagering to Win, Place, or Show, along with two exactas per day with maybe one Daily Double.  In the late 1970's it was much easier to make it through the learning curve, simply because we cashed more tickets.  We became life-long customers by enjoying the great experience of solving the puzzle that is each race, and of cashing tickets at a rate that at the very least gave us the impression that we had a good chance to win.

The Industry has reached a point where it must "sink or swim" based on a model without alternative gaming revenue like slot revenue, or instant racing, or online poker.  It is evident that there will come a day when those revenues will decrease or go away completely.  Because California racing does not receive alternative gaming revenues I believe that California is ground zero in the fight for the future of Horse Racing. California racing must proceed on a sustainable model based on earning revenues directly and indirectly from gambling on horse racing alone. I would argue that an optimal pricing experiment is significantly more important in California precisely because there is no alternative gaming revenue. 

The best way to begin an optimal takeout experiment in California is to eliminate breakage on Win, Place, and Show (currently 15.43% takeout) AND to lower exacta takeout to 16%.  I believe that this experiment makes sense for a couple of reasons:

For decades, "breakage" for most experienced horseplayers has been synonymous with "stealing".  A simple change to eliminate breakage on WPS bets by paying to the penny will be one of the most talked about stories of 2016.

Horseplayers everywhere will not only applaud the change, they will support the first jurisdiction to eliminate breakage on Win, Place, and Show with their gambling dollars.  

The objection to eliminating breakage is that there are worthy causes who need the revenue from breakage.  The best example of a worthy cause is financial assistance for backstretch workers and their families. By eliminating breakage on WPS, revenue that was once derived from breakage will now need to be shifted to revenue derived from takeout. 

Second, California racing must shift from a prohibitive 22.68% takeout on exactas to an industry low 16% takeout.  We know from prior analysis that handle would have to increase approximately 30% to be revenue neutral.  Over time it is my view that handle will increase in two horse exotics by more than 30%, and the goodwill lost from past moves in California (e.g. the 2010 takeout hike) will serve California well long-term.  

These are the risks that need to be taken if California intends to be a viable industry three, five, or ten years from now. 

The most common objections for these specific recommendations are that they will cannibalize other wagers and total revenue will drop.  It is true that your current customers will shift some of their play to these lower takeout and easier to hit higher churn wagers, but at an optimal takeout rate like 16% exacta churn can be like a snowball going downhill.  And, when you hit an attractive price point, academic gambling research (including studies commissioned in California as far back as the late 1980's) shows handle and revenue will grow for an extended period of time.  That is the sensible way to increase handle, revenues, and market share that is already being cannibalized by the competition. For California racing to succeed it must be first to make these changes. 

It is imperative that at the same time these recommendations are put into place the industry must begin to change the way it currently promotes horse racing.  People love to gamble and they love gambling games of skill. There must be concerted efforts from organizations like America's Best Racing and the Jockey Club to promote Win, Place, and Show wagers, along with other low takeout and high churn wagers.  Selling horse racing as a great gambling game of skill and allowing people to experience the excitement and fun of higher churn, lower takeout wagers, will without a doubt increase interest from new players the industry needs. 

Together, with a strong industry push and a two-pronged attack that encompasses fair pricing and aggressive marketing, we believe this strategy will be a winning one.

Optimal Takeout (Defined)

The price point that drives total wagering handle upward to where total long term revenue becomes maximized for tracks, horsemen, and governments.

Note: Selling Horse Racing as a Gambling Game of Skill A First Step was written by Andy Asaro. For those of you who might not know Andy is a horseplayer advocate and proud HANA member who lives in southern California. Andy is passionate about California Racing and in my opinion has some solid ideas about how Track Management, The CHRB, and the TOC can get on the same page and get California Racing off the path of the status quo and onto a path to success.

After reading what Andy has written, I decided two things. First, I agree with just about every word, and second. that I would run his recommendations here on the HANA Blog.

Jeff Platt, HANA President