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Commentary: A tote system for everyone

Posted: Monday, March 21, 2011 3:54 PM

FRED A. POPE

by Fred Pope

Thoroughbred stalwart Ted Bassett’s leadership in establishing Equibase ensured the performance data in our sport is protected from the whims of a private company. It wasn’t that Daily Racing Form was doing a bad job. It was the paper’s ownership changes that made reasonable people decide racing had to own its own data.

The problem today

We have a similar problem with our pari-mutuel wagering system. The totalizator network consists of three private companies that do not seem to work well with each other. One example is in instances of past posting, when bets continue to be taken after a race starts.

Questions about the integrity of the wager make gamblers wary and regulators bold. The tracks say past posting may be fixed in a couple years. But even if that problem is solved, the downward trend in racing handle gives tote companies little incentive to invest in new technology.

In addition to the tote issue, the increase in money bet with advance-deposit wagering (ADW) companies is a growing problem. ADW companies are phone- and computer-based operations that take off-track bets. ADWs are very profitable for their owner because they make more on a wager than does the host track putting on the show. ADWs bypass betting at tracks and the result is that half or more of such wagering revenues leaves the sport. Allowing distribution costs of more than 50% is bad business.

The fixed costs of racing are met on-track. The off-track distribution of racing is digital. With $2-billion in off-track revenue from ­$10-billion wagered, there is no justification for distribution costs to exceed 10% of revenue. The difference between 50% and 10% is the difference between a sport with a past versus one with a future.

Technology can be cruel. It made the role of telephone operators obsolete. Jobs disappeared and equipment was rendered useless. But the lesson for us is this: Customers received more accurate, more secure, and faster service.

Off-track bet-taking through brick-and-mortar companies and with ADWs has served a role in racing’s distribution history, but now there is a game-changing opportunity. If you have been waiting for a bit of good news in racing, this is it. Technology is available for racing customers to bet directly into a central wagering system and all the revenue stays in the sport.

Instead of allowing private interests to exploit weaknesses in our distribution structure, racing can use its enormous cash flow not only to solve these problems but also to create something that equals more than the sum of its parts.

The solution

Racing can create an integrated, tote/wagering system that combines all the necessary functions required by bettors: past-performance data from Equibase, a state-of-the-art tote, and bet-taking, all into one seamless enterprise. It would be like a utility that nobody owns but everyone uses.

This new utility can restore integrity of wagers, enhance customer experience, and bring new fans into the sport through a platform for games and social media. Plus, all of these integrated functions can be funded by a small percentage of each wager.

With direct wagering into a national wagering hub, the host track for the first time since off-track wagering began would receive full reward for its races. If they package and present great racing, like Monmouth Park did last year, the sky is the limit. This new utility could have provided Monmouth Park, and its purse account, the revenue necessary to make last year’s high purses sustainable.

That was the original intent of the 1978 Interstate Horseracing Act (IHA), to expand the wagering distribution of the host event’s races. Now, advancements in technology can finally allow us to fulfill that original intent.

This new utility is very friendly to track operators. By relieving them of the costs currently incurred for taking pari-mutuel wagers, every track would benefit from the economies of scale.

Who would manage it?

The logical structure is for a new wagering trust to be managed by the Jockey Club, where Equibase resides.

Nobody wants a national Jockey Club deciding who can and cannot race horses in America. That’s why our Jockey Club had to stop. However, we do need a structure for the sport’s common needs. With good safeguards on operating expenses, the Jockey Club is preferable to a government body or other alternatives. Its members understand the need for integrity in wagering.

The job of heading up this new enterprise would be one of the most attractive jobs in technology and marketing. While it would be on par with the top lottery jobs, it calls for innovative, Silicon Valley-type expertise and should attract individuals from companies like Google and Amazon who see the great opportunity and incentive.

Lotteries cannot provide informational services to determine the outcome of their winning numbers. A new racing hub can. Lotteries cannot interact with customers before and after the wagering event. A new racing hub can.

Strategy

When government gives exclusive advantages of legal sports wagering, interstate and Internet wagering, those gifts come with regulations to protect the wagering public. We need to be a bit smarter about how we approach government.

I recommend a strategy that separates the business issue of the integrity of the wager from the more divisive issues involved in integrity of the sport.

This new wagering utility can protect the betting public at the national level. In fact, that is the only way to protect the wagering public.

On the other hand, the integrity of the sport is a local concern for the host track and racing participants and it should continue at the state level, with national coordination.

We should agree on the business issue of integrity of the wager. Let’s put that problem to bed and you might be surprised how returning the tracks to profitability and increasing purses can change the conversation on other issues.

Balance

Racetrack operators have not been able to count on their partners, the racehorse owners, to do much more than stay out of the way. That is not much of a partnership and the results for the sport are evident.

Racehorse owners, as the equal partners in racing, need to provide the balance that has been missing in our sport.

When going to Congress, the partners in racing—racetrack operators and racehorse owners—need to present a business plan for wagering on the sport that creates a national wagering trust. The plan should tell how the wagering public will be better protected and how the new utility will allow the sport to be improved and grow to the benefit of hundreds of thousands of jobs. It should outline how it would be tax neutral and not require government funds.

After racing’s partners present their case, Congress may allow off-track bet takers the opportunity to say why they deserve the money from racing instead of the partners in the sport who employ hundreds of thousands of voters. That should not take long.

Summary

We need a new, state-of-the-art tote system to provide integrity of the wager. By creating a new wagering trust, each host would receive all the revenue from wagering on its races, have full distribution of its product, and, maybe one day, global distribution. That’s what racing needs.

With direct wagering into the wagering utility, smaller tracks can be innovative and compete nationally. If Tampa Bay Downs packages and markets the most popular racing, it could enjoy the highest profits and purses in the country. The utility, by providing data services and unencumbered national distribution, levels the playing field and takes advantages away from the larger markets.

What will a national wagering system cost? Nothing. The central system will be self-funding from wagers. It will not require government funds of any kind, just approval to let the sport control its own distribution.

We can have a smooth transition, similar to the Equibase experience, once the resolve in the industry is established. The current tote companies and other valuable, existing operations could be purchased by the new wagering trust.

Who is going to be against this? The individuals and companies invested in off-track bet-taking will be against it. The profits ADWs have realized have been too good to be true, because they take too much of the revenue from the sport. Perhaps the new utility will offer the ADWs less revenue and they will continue. Or they may have the opportunity to sell their business to the new utility.

Horseplayers will enjoy a level field in off-track wagering, one with improved integrity and enhanced services.

Racetrack operators will see their expenses for tote service, video production, and off-track wagering risks disappear. Each track will receive maximum return from wagers on their races and get their money fast.

For racehorse owners, the utility will ensure purse accounts receive half of all wagering revenue, which will be a dramatic increase from today.

You do not need to understand the ins and outs of wagering and the details in this proposal to understand the sport needs to take control of the integrity of its wagers with a new wagering utility.

If you are the kind of person who wants to change the direction of racing, then please pick up the phone and call your peers and don’t stop calling until the Jockey Club members know the industry wants this job done.

If you get the call, please take it.

Benefits of a wagering trust

• A new wagering system will provide integrity of the wager, security for our customers’ information, and more capability to withstand cyber threats. A new system will deliver enhanced services that engage our current fans and create new fans.

• Host tracks and purse accounts would be relieved of off-track settlement. They would no longer have the risk of an off-track bet taker, like bankrupt New York City Off-Track Betting Corp., failing to pay millions to host tracks and purses.

• By ensuring the integrity of wagers at the national level, the new utility allows state racing commissions to reduce their costs and focus resources on integrity among the participants. Each state would continue to set takeout and tax rates.

• Track operators and horsemen’s groups would no longer spar over approval of off-track distribution deals. There would be no need for approval, because off-track wagering would be through the new utility and return all revenue to the track and purse ¬account.

• The current tote companies and valuable, existing operations could be purchased by the new wagering trust and their employees retained during the transition to the new ¬utility.

• Track operators would no longer directly pay the costs of tote service. The national utility can be funded with a small percentage of each wager. The tracks would continue to be responsible for costs of on-track wagering through tellers and machines. Loyalty programs and incentives for the track’s customers can be coded into the new utility.

• The new wagering system can relieve the track operator of costs for producing video coverage of the races. Then the video can be standardized and integrated into the new system, to provide past-performance video, media access, and enhanced customer service after the races.

Fred A. Pope is president of The Pope Advertising Agency in Lexington, and creator of the National Thoroughbred Association. His e-mail address is fpope@popead.com