Fred Pope’s Response to Dean Towers’s Op/Ed
In response to Dean Towers’s Op/Ed, which ran in the Feb. 20 edition of the TDN:
Dean Towers’ Op/Ed about off-track wagering splits was a bit confusing.
When he used the pricing model of the movie industry, where studios receive 50% and theaters receive 50%, I’m concerned TDN readers might think host tracks actually get 50% of the off-track wagering revenue on their races.
No host racetrack in North America receives 50% of the off-track wagering revenue on its races. Not one. If they did, racing might be healthy.
When interstate wagering began, host tracks averaged 3% of the 20% takeout on their races, while the receiving bet takers kept 17%. The host track then split the 3% with its purse account, for only 1.5% of the wager.
Recently, the host tracks average from off-track wagers has inched up to about 5%. Based upon about $10 billion in off-track wagering handle, the 5% amounts to $500 million to be split with purses. That means the bet takers on the other end keep $1.5 billion for just taking the bet. Imagine what a shift to a 50/50 share would mean.
Mike Rogers, president of The Stronach Group, gave a speech to the National HBPA Convention, which was candid and refreshing. They are the largest racetrack operator and also own an ADW, racino and every type of bet taking and gambling operation connected to horse racing. So, he is the guy with all the numbers. The guy with all the numbers says we need to fix the business model and have the host track in control of its distribution and pricing of its product.
That seems a common sense change. But for the people keeping the $1.5 billion from the off-track wagers, such a change would be very bad. People connected to those benefitting from the current model, which includes gamblers getting rebates and discounts, like the current system and shout down anyone proposing change, even though they don’t like the trends in racing.
Mike Rogers did not speak for all racetrack operators. In fact, most of them do not want change. With blinkers on, they want to continue making 15% as bet takers even though ADW’s are now taking more of their off-track customers every day. When the ADW takes their customer, the 15% of the wager for the receiving track and owners’ purse account disappears.
I’ve spent a lot of time over the years on this issue and in the short run, Mr. Rogers’ company probably has a lot more to lose as a major bet taker than they have to gain as the operators of several host racetracks. The only way his change makes sense is if he wants racing to have a long-term future.
When off-track wagering started, racetracks that wanted to take bets on New York and California races created a “buyers’ market”. Instead of the 50/50 split used in the movie business, the buyers joined together and drove the percentage for the host track down to 3% and kept 17% as the bet taker. That extreme pricing model was in place for more than 20 years and did the damage we are living with today.
A buyers’s market is a lot of fun when you want cheap airline tickets and cheap healthcare. But, when the prices paid are less than it cost to operate, what happens is not funny. There is no money for R&D, quality control and maintenance, the basics of a healthy business.
Napster was a very innovative product. Millions of people loved it, because they got free music. Did it bother them that they were stealing someone’s product? Nah, the music producers were rich, weren’t they?
Steve Jobs killed Napster with iTunes before it destroyed the music industry. iTunes established a distribution model that protected the product of music writers and producers. Those buying music bought into doing the right thing.
ADW’s could become the iTunes of racing. They are growing fast and have the margin to pay popular host tracks close to 10% of the wager, then they use the remaining margin for price competition, to net about 5% of the bets they take. The 5% they are giving away is the margin the host tracks and purse accounts need to be healthy.
An iTunes-type solution could be for the ADW’s to get a straight up 5% commission from the host tracks to take bets on their races. That means the host track would get 15% for producing the show. That’s healthy. Lotteries use such a model to pay 5% to the stores would take their bets.
Lotteries are now evolving to direct sales to customers, without middlemen expenses, and host tracks should now be making the same transition. The IHA needs an update.
The major part of off-track wagering is still between racetracks and that is where change is needed immediately. Most tracks would make more as host tracks if they were getting 10%, than they would currently as bet takers, especially with ADW’s cutting into their bet taking operation. Live racing must be their mission.
Host tracks set the takeout rate, which averages about 20% of the wager. The takeout rate should be based upon how much money the track and purse account need to operate and pay owners to participate. Each location is different.
Currently the takeout rate from off-track wagers means very little to the host track, because the majority of the revenue it is kept by the off-track bet takers. So, if the takeout rate goes up or down a few points, it doesn’t significantly impact the revenue of the host track setting the rate. Horseplayers, make no mistake, bet takers want the highest take-out rates possible to boost their margins.
The fastest way to reduce takeout rates is to put the host tracks in control of their product’s distribution and pricing. Forget what they did in the past. When they have a profit incentive to produce races that will win in the off-track market, when they have an incentive to sell and service your account, the game changes for the better, and for bettors.
The buyers’s market in off-track wagering shifted the profit incentive from producing races to taking bets on imported races. That’s when many of the current problems in racing grew unmanageable.
With no incentive to produce good races, bad races multiplied, thus the need for extra medication and lax rules. Customer service for live racing was cut and promotion for live racing attendance was virtually eliminated, both with predictable results.
Low host track revenue led to low purses, higher takeout and then to racinos. Low purses led to less breeding and fewer foals, which led to packaging races without full fields. The cause of this death spiral was a parasitic business model that starved the host. Although it was diagnosed long ago, it was never corrected.
When the host tracks start receiving a fair rate from the off track distribution of their product, then you will immediately see the incentives shift and they will deliver better racing, better service, better maintenance at the host tracks and higher purses for the reduced number of races. Less racing means state racing commissions have more resources to promote and enforce rules.
Everybody in racing and breeding wins when the host track regains control of its product. Will some host tracks mess it up, sure they will, but a real business model for distribution will weed them out and leave a healthy sport.
A real business model in racing will be something new, something business people can understand for the first time, and our massive cash flow will then become attractive for investment and innovation.
There are several “silver bullets” for our industry that solve problems quickly. Fixing the off-track business model is the first one, and it will make all others possible.
– Fred A. Pope