Takeout – The Price Isn’t Right – Part 3

In the previous articles in the series, I established that the pari-mutuel takeout is both too high and almost impossible to reduce given the belief that player behavior does not increase enough to offset even marginal changes in takeout. For horse racing to get its share of the much larger gambling market, pari-mutuel betting needs to be cost competitive with sportsbooks and poker rooms – the two major venues where there is no house edge besides the price of the bet. Yet the price discovery needed to find that optimal takeout is a risky and difficult proposition, putting tens of thousands of track revenue dollars at stake daily.

 My solution is take the idea of volume discounting and applying it in a novel way to pari-mutuel pools. This idea would put no level of current revenues, either handled or taken out, at risk. It would require no changes to the current betting experience, nor increase ongoing costs for tracks or bet takers. It would share the benefits of increased handle among all interests: tracks, purses, bet-takers and horseplayers. It’s an idea simply explained. It will probably never work.

 Handle-Tiered Takeout – A Proposal

 Summary:  Handle-tiered takeout (HTT) would, for a given pari-mutuel pool, have two takeout rates: the current rate, and a low marginal rate to be applied to all handle above a certain level (baseline handle). For example, if a win pool with a $100K baseline handle has a total handle of $150K, the track will take out 20% of $100K and 5% on $50K (incremental handle). The total take out would be $22.5K, for an average takeout of 15%.

 Baseline handle would be indexed to historical pool averages by type of bet and race – say last year’s exacta pools for maiden special weight at Santa Anita averaged $230K, then SA could set its baseline handle target to $230K, or $250K. Should pool sizes with HTT grow above that, then the new money should truly be considered incremental. With proper promotion of the marginal rates to attract higher levels of play, pools should resettle at new higher totals, with a lower average takeout. This new average takeout would be considered optimal for this particular bet. Total handle is up, total revenue is up (for tracks, purses, and bet-takers) average takeout is down, and payouts are up. The market has determined the price is right.

 Execution: The major investment required to make this change would be in the tote system in the way that final payouts are determined. Now, the tote software simply multiplies handle by a single rate, divides by winning bets, and rounds down. The proposed process would have two multiplications instead of one:

(Handle * Takeout)/Winners –> Round Down –>Payout

-becomes-

(Base Handle * Base Takeout + Incremental Handle * Marginal Takeout) –> Round Down –> Payout

Now, I understand tote software is complex and doing a lot on what is certainly an aging infrastructure. I don’t know how easy this change is, as what’s easy in Excel or a SQL Database for me will be much more complicated in tens of thousands of lines of code in the tote software. The effort would require months of time and hundreds of thousands in investment.

 The second obstacle will be to get all the players to agree on the concept, the right marginal takeout, and how to divide the incremental revenue. What HTT will do is diminish the upside from increased handle. Many in the industry retain hope that handle levels will return to those seen in the glory days of their national gambling monopoly, higher takeouts mattering little when it was the only game in town. There needs to be widespread recognition that those days are gone and are not coming back. The industry must make moves to be competitive – this idea has the least risk associated with it.

 Accomplishing the duel tasks of reprogramming the tote calculations and getting agreement amongst the major players in the industry is why I think it will take a major, vertically-integrated firm to push for this change. There are two candidates to do so – Churchill Downs, Inc., and Magna Entertainment Corp – as they respectively own the two major North American tote firms, United Tote and AmTote. They each own an ADW (Twinspires, XpressBet) and are partners in HRTV. More importantly, they own tracks in multiple jurisdictions including Churchill Downs and Santa Anita and Gulfstream. Would either company take the chance to make the change? I don’t know – I only know it’d be easier for them than anyone else.

 I’d especially make the argument for CDI. Make the changes at United Tote in the background, without impacting any current operations. (Base takeout and marginal takeout need only be the same to replicate status quo). Pick a single track, say the Fairgrounds in New Orleans, that has a well-defined meet in a jurisdiction (Louisiana) that is smaller and perhaps more flexible than a New York, Florida, or California. Theoretically, TwinSpires and track management will be on board. Get a horseplayers group like HANA bought in. Promote the low potential takeout as much as possible. On every single Brisnet chart of a race, show what the new average takeouts are. Collect a ton of data.

Obstacles and Objections: No plan is without its flaws. Even a simple one like this has probably been considered dozens of times and shelved, with the thought that it was either too hard or unnecessary at the time. The main objections I can think about are below:
  • The tote companies will not implement the change themselves because it doesn’t fit their business case, i.e. it won’t make them more money. Agree that some players in the industry will have to fund. Best case scenario is CDI or Magna who can self fund the changes.
  • HTT adds complexity where there was simplicity before. True, but takeout rates are by pool today anyway, and there are few horseplayers who could name off the top of their head the takeout in the pools they are betting on. Part of the idea is to increase awareness of takeout by highlighting it in the final charts of races.
  • Horseplayers are a difficult group to get to act collectively. Without a “first dollar” takeout decrease, the plan will not succeed. Valid objection – but given a reasonable unwillingness to experiment with direct price decreases, this at least provides a no downside option.
  • HTT will have to be heavily promoted in order to work, marketing money that could not be spent elsewhere. No disagreement, but there’s a difference between marketing to a one-time increase, or spotlighting a particular race or racehorse, then raising awareness broadly. The impact of promoting a price is that, as long as the price remains low, the benefit should be permanent.

Final Thoughts: What I’ve proposed is only a solution, not the solution. If the central issue for the gambling side of racing is the price discovery effort for the optimal takeout rate, this is a low-risk idea. I believe that takeout needs to be lower to get new and bigger players into our racing pools, but I do not know how low. I think we can find out.

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One thought on “Takeout – The Price Isn’t Right – Part 3

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

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