Racing needs to adopt a lottery pricing model for payments to bet takers

Racehorse owners lost the opportunity to race for $285-million in purses last year. And they lost a total of about $1-billion worth of opportunity the last five years. It is all because of the way betting is priced today and the way the game has changed over the last several decades. The system needs to change.

In the past 15 years, off-track betting has grown from 3% of the Thoroughbred handle in North America to more than 84%.

During that same period, the percentage of handle going toward purses has fallen every year, from 8% in 1985 to about 6% in 2000.

The gross loss of 2% of $14.25-billion in handle amounts to $285-million in lost purses.

To put that into perspective, the loss is more than total purses for all stakes in North America ($247-million) last year.

How was so much money lost to purses? Because of the way off-track betting is priced. Bets taken on track, where the races occur, deliver about 8% to purses, depending on the individual state takeout, taxes, etc. Bets taken off track provide just over 1% to purses at the host track. As can be seen in the growth of off-track betting from 1985 to 2000 (Figure 1), the majority of bets are now off-track and there is a corresponding decline in the percentage of handle to purses (Figure 2).

Clouding the issue is the fact that some of the off-track betting outlets are racetracks. In those cases, the receiving track pays just over 1% to purses at the host track, and keeps 8% to 10% for purses at its track. Or, in some cases, this windfall is used by the outlet for rebates to gamblers.

Small-market receiving tracks, and their local horsemen's associations, obviously favor the current pricing system because they make five to six times more on bets made into their system than what they pay back to the host tracks.

It has been argued that this system over the years washes out, with some tracks gaining and other tracks losing.

The problem with that argument is that all of the off-track bet takers such as Las Vegas casinos, independent OTBs, Native American casinos, and off-shore operators pay only 1% to purses to the host track and pocket the rest.

Regardless of which side you might favor, small tracks or large tracks, one thing is clear: $285-million in purses was lost by the industry last year.

Since the percentage of off-track handle will likely climb above 84% this year, the purse loss will rise to more than $300-million in 2001. That is more than the sales receipts ($292-million) for the 3,313 yearlings sold at the 2000 Keeneland September sale.

It is hard to imagine why this situation has been kept in place by owners' and horsemen's associations when more than a billion dollars in purses for owners—and thus $100-million to trainers—has probably been lost in the past five years.

As bad as this is now, it will likely get worse when more telephone and Internet bet-taking profit centers come into existence.

New profit centers

The federal government recently legalized telephone, cable, and Internet betting on horse racing. We must maximize revenues from this system of distribution, because others are planning to take advantage of and abuse the old system and the way it is priced.

As the distribution of racing moves to a global base, we have to ensure technology does not destroy the contribution racehorse owners make to the enterprise. We must change the pricing to these off-track bet takers.

Currently, there are about 600 off-track bet-taking outlets, and most are making some contribution to purses. Soon, there could be millions of home and mobile bettors who may—or may not—contribute to purses. New companies are setting up telephone betting systems to profit from the current bargain on racing's product.

Some racetracks also have set up new profit centers. By operating the profit center separate from the track, they can make little or no payment to purse accounts.

Racing's most important asset

Other than horses and riders, the most important asset for racing is the pari-mutuel pool. Today, the majority of off-track betting is in the form of exotic bets, such as exactas, trifectas, and pick sixes.

The rise in popularity of exotic bets goes hand in hand with increased takeout rates on exotic bets. Straight win/place/show bets have a takeout rate of about 15%, while the takeout on exotic bets usually ranges from 20% to 25%. This provides bet takers further profits under the current system, but delivers nothing additional to the host track purses.

Given the 15-year period of growth in exotic bets and increased takeout rates, the percentage of handle going into purses should have risen well above the 8% level in 1985, instead of declining each year to 6% or less in 2000.

Technology will soon give practically all bettors the ability to bet into the host track's pari-mutuel pools. Bookmakers, on shore and off, make money on straight bets, because all but the very largest cannot assume paying off exotic winning bets of 100-, 500-, or 1,000-to-1. They cannot compete for customers with the track's pari-mutuel pools.

Direct distribution, with small commission fees to bet takers, will also eliminate the rebates and illegal off-shore operators, because there will be no margin to support them. Anyone wanting to accept bets into Thoroughbred racing's pari-mutuel pools needs to do so under contract and receive 5% for taking the bet.

Lottery model for bet takers

What is a fair and equitable rate to pay bet takers for placing bets into Thoroughbred racing's pari-mutuel pools?

Lotteries across the nation have settled on 5% commission for retailers taking the bet. Some states pay a little more, some less, but 5% is the working average. The demands of selling lottery tickets are not dissimilar to selling pari-mutuel tickets. It requires about the same effort and technology.

While the current simulcast pricing system may have served its purpose in getting tracks to adopt simulcasting, it is time for change.

Source market fees

Television Games Network's source market fees are a public relations success. But, they are an outgrowth of the current simulcast agreements, which rebate the lion's share of the bet to the home state of the bettor, not to the host track and racehorse owners putting on the show.

TVG's first payment was to Kentucky for $1.5-million. Kentucky has a small population but has quality, year-round racing. If Kentucky were paying 5% to bet takers, and keeping the lion's share of the handle of $100-million, Kentucky would receive $15-million to $16-million for purses.

Kentucky would never receive as much from source market fees as it would from fair pricing to off-track betting. The same can be said for Florida, California, Maryland, Illinois, and New York. The same cannot be said for Nevada, Connecticut, and other non-racing states that may soon be able to be bet with TVG. (Who gets the source market fees for the non-racing states?)

While TVG may defend its source market fees for political purposes, it is not how business normally operates. In the real world, business returns the lion's share to the central body producing the product or the show. A new method of distribution should be set up, taking politics out of it.

New pricing plan

How would a new pricing model, such as that used by lotteries, work? Let's use TVG as an example. A bettor would make a bet into TVG's system and TVG would funnel the bet into the host track's pari-mutuel pool. TVG would receive a 5% commission on the total bet. If TVG takes $1-billion in bets, it would receive $50-million in commissions from the host tracks. The host tracks would net between $150-million to $160-million. (Under current pricing, the host tracks would only net $25-million to $30-million.)

What has to happen at the host tracks for this plan to be implemented? The racetrack owner and racehorse owners' representatives at the host track would have to agree to it. That's about all it would take to start the new lottery-modeled pricing to bet takers.

Magna Entertainment Corp., owner of Santa Anita Park, Gulfstream Park, and a handful of other tracks, could do the same, and perhaps even faster by starting direct distribution from its racetracks and paying the 5% commission to its account bet-taking subsidiary, Call-A-Bet.

Under lottery-style pricing to bet takers, Magna would see its track income and purses rise dramatically, assuring both the quantity and quality of horses racing at its facilities. As a result, Magna would have higher quality racing products for distribution to bet takers around the world.

Conclusion

Thoroughbred racing made a mistake when initially coming up with pricing for its off-track distribution and it has cost racehorse owners more that a billion dollars in purses. Now, new channels of distribution are available and the old system must be changed to be fair and take into consideration modern business models, like that used by lotteries.

Lotteries have established a payment of 5% to bet takers. Each track organization and owners'/horsemen's association will need to set its own rate to avoid restricting commerce; 5% could be a maximum. If the industry wanted to ease the transition for small-market receiving tracks, the host track could pay an additional 5% into a trust for purses at the receiving track. The trust would assure the purse money stays in the industry.

This type of change will assure Thoroughbred racing will be distributed to its current and new customers in a fair, modern method to benefit the game and its participants. Existing and new bettors would see no difference, unless they have been getting rebates at the expense of purses.

While purses are publicly reported, we do not know the losses to host racetracks these past 15 years. You could estimate a similar amount of loss as for purses, but other factors such as simulcast expenses could be involved.

We all know how resistant the Thoroughbred industry is to change. If you are a racehorse owner, trainer, or jockey, it is to your direct benefit to bring about this change in distribution. A first step should be to contact your owners'/horsemen's representatives for the tracks where you race.

Second, contact the board of the National Thoroughbred Racing Association. Half of the board members are there representing horsemen. Hopefully the racetrack representatives will also see the benefits.

Third, call fellow-owner Frank Stronach of Magna Entertainment. By leading the way, he might correct this problem single-handedly.

This change will not happen because it needs to be done. It will happen only if racehorse owners make it happen at the host racetracks.