Takeout – The Price Isn’t Right – Part 2

In the previous installment, I argued that the takeout on bets in thoroughbred racing is too high, both for current players and for other bettors who do not now find racing to be a profitable betting opportunity. In this update, I want to examine why tracks and racing associations are so reluctant to lower takeout. In the next installment, I propose a solution that could lead the industry to finding the optimal price for its product.

Tracks (or frequently, state racing associations owning several tracks, like NYRA) do not want to lower takeout because they believe they will lose revenue doing so. Frequently, they are right. Allow me to explain.

Takeout accounts for most of the direct racing-related revenue that a track earns. The track, however, does not capture all that revenue – it is split among multiple parties, but two are the most important: track operators and bet-takers. The track operator usually must split its revenue share according to certain terms: purses get 25% of revenue, the state gets 5% in taxes, the track keeps 70%. Consider then two scenarios (for simplicity sake, assume takeout is 20% on every bet):

  1. A $1 bet is placed at the track – as the bet-taker, the track gets $0.20, dedicates $0.05 to purses, sends a penny to the state, and keeps $0.14.
  2. A $1 bet is placed at an OTB/ADW – the bet taker now gets $0.12, the track gets $0.08, purses get $0.02 of that, the state still needs its penny, and the track gets $0.05 (and these may be generous terms for simulcasting – I do not have the agreements in front of me.)

As an aside, this dichotomy is frequently explored by Fred Pope in what appear to be quarterly opinion pieces. I’ve linked to a Paulick Report index of his articles. His argument boils down to that this structure is what is hurting racing, not the overall price level. I agree that the revenue sharing is genuinely an artifact of the early days of simulcasting, when new bet-takers needed to be compensated for large capital investments that have long since been recouped. I think Pope mistakes a secondary pricing issue (structure), however, for a primary one (level), since vertically-integrated racing firms like CDI, Magna, and (to some extent) NYRA have largely obviated the structure issue by owning their own ADWs.

Arithmetic explains the rest. In the last installment, I laid out that handle necessarily goes up when takeout goes down because incremental winnings get re-bet. But how much so – in this case, my 20% handle world gets a takeout decrease to 19% – yay. Handle on all pools is $100,000/race, on-track bets only.

  1. After first race, winners collect $1000 more than they normally would have and bet all incremental winnings in race 2.
  2. Handle race 2 is $101K – winners win $101 more than usual….and so on
  3. At the end of the day, handle is up 1.01%
  4. Racing-related revenue is down 4.04%, as the 1% takeout decrease

In this world, horseplayers did not bet more into more-profitable pools nor did new money come in. This is essentially the tracks’ stance: if horseplayers do not change their behavior (i.e. bet more), then the math-driven increase in churn and handle is simply not going to cut it.

In other words, incremental handle decreases are not going to improve track revenues. (This is especially true when you take the bet-taker’s share into account; if the track has to take a $0.01/bet decrease on every dollar, that can mean a 20% decrease in operating revenue from simulcasting.) There is, however, a takeout rate at which thoroughbred handicapping becomes cost competitive with sports betting and poker. At this rate, whales – large handle bettors – should become interested in betting into racing’s pari-mutuel pools. At this takeout level, we should see a step-function increase in handle and track revenues.

What is this takeout rate? I don’t know, obviously, but I imagine it is closer to 10% (the sports betting rate) than 20% (approx. the racing rate). It’s not hard to imagine track officials are frightened to cut racing revenues by 40-60% to find out. A wrong guess can put their livelihoods in jeopardy – who wants to be that guy? Plus, it’s hard – the negotiations would be extensive with horsemen, ADWs, and state commissions, each of whom would be difficult to convince that their revenue would not go down. Instead, we get small, low-risk changes like 15% Pick 5s that won’t be taking money out of any pools, or money out of any pockets.

Price discovery is not a risk-free proposition, but it need not be as scary or difficult a proposition as the industry is making it out to be. I’ll propose a solution with my next 750 words.

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One thought on “Takeout – The Price Isn’t Right – Part 2

  1. Pingback: Racing as Entertainment – Part 3 | Up the Track

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