Takeout Just One Symptom of the Disease

It's a critical, fundamental element of pari-mutuel horse racing that never gets its just due.

We hear repeatedly from those who call the shots in the industry that growth and long-term sustainability of racing is predicated not only on developing fans, but cultivating bettors. Given the fact hardly anything is done to examine the pari-mutuel model on an industry-wide scale, much of the talk rings hollow.

The latest development–a hike in pari-mutuel takeout rates at Churchill Downs to the maximum allowed by Kentucky statute–is just one symptom of a disease that goes untreated. The reasons run the gamut: A simulcast revenue model in need of an overhaul; short-sightedness on the part of racetracks and horsemen's groups; a culture that hates transparency; corporate bottom lines; and the apparent belief that only those that bet millions through rebate shops are price-sensitive.

Feel free to add more to that list, but let's address a few of them.

The simulcast revenue model is late-1980s; that alone should explain the issue. The host tracks get 3% for their signals, and the importers keep the rest of the takeout. The host percentage may be double or more now for the most desired signals, but it's still not nearly enough.

Think about it. This model was devised in the 1980s and exists today despite a precipitous drop in wagering. The much-maligned National Uniform Medication Program has made more progress in one year than the industry has made addressing a fundamental flaw in almost 30 years.

Short-sightedness is married to short-term gain--and in the case of Churchill it remains to be seen whether there will be any gain. If the takeout hike is in fact needed to maintain, not grow, purses, that appears to be an admission of an anticipated decline in handle for the upcoming meet.

Churchill made sure to mention its increase in takeout rates is tied to a need for purse revenue from casino gambling. Does that mean takeout rates would drop if casinos are approved by the Kentucky legislature? It hasn't happened in Pennsylvania, where the takeout rate for a trifecta bet can be as high as a frightening 35% and was before slot machines were authorized in 2004.

As for transparency, we now have technology to track important things like the Equine Injury Database, rulings, scheduling of races and post times, keeping track of retired racehorses, and now there's a push for a database of racehorse veterinary records. Yet the industry has no public database for daily pari-mutuel handle–which, don't forget, is the public's money and is regulated by state agencies.

Wouldn't it be great to have a database in which members of the public could enter a racetrack name and see how much was wagered from every outlet every day? Is there no technology for this, or does the industry shudder at the thought of showing its hand?

It says quite a bit that the regularly updated list of takeout rates at each track is maintained by the Horseplayers Association of North America and not even linked to on websites of major industry organizations that oversee the business.

Corporate bottom lines are just that. If I hear the term "shareholder value" one more time I may become ill.

At last year's International Simulcast Conference someone affiliated with a major rebate operation made the comment that even a one-half-of-1% reduction in takeout rates could make or break a rebate business. There wasn't, of course, any talk about profits when takeout rates are increased.

I'm no math whiz, so correct me if I'm wrong. In the case of Churchill, if its host fee remains the same, a rebate shop and its customers get to keep the extra 3 percentage points when the exacta takeout goes from 19% to 22%.

If you operate a rebate shop or are a large importer of simulcast signals, higher takeout is money. That may explain why racetracks, rebate shops, and advance deposit wagering services don't complain about 30% trifecta rakes: If they pay the sender 3% for the signal, there's 27 cents per dollar to play with before taxes.

Yes, the new rates at Churchill are comparable to those at other major tracks. Objection to any hike in takeout rates, however, is fuel on the fire for those who believe current rates are counterproductive to growth of the business. And it's very hard to argue with that position in an environment in which about $4 billion in wagering a year has been lost.

The McKinsey report of a few years ago outlined a strategy for fan growth but oddly ignored a discussion on takeout rates. Was that by design, or a reflection of an industry that believes wagering isn't affected by the amount of money taken from each bet?

How can racing market and promote itself if it believes a majority of its current and future patrons are idiots? And how can an industry be rebuilt and grow when it sits on a diseased foundation?

11 Comments

Leave a Comment:

Dan Kelliher

Tom you need to update your facts. There aren't too many tracks getting 3% for their signal anymore. Certainly not from the ADWs who now pay the highest rates in the industry.

16 Apr 2014 3:04 PM
JerseyTom

From what I've been told there are tracks that still get 3%, and some less; the blog acknowledges increases for many over the years. Of course, this information is not transparent, so we don't know exactly what tracks get from each outlet. I would be happy to publish it if it was made available.

16 Apr 2014 3:26 PM
Rammer

The biggest problem today is all of this in-fighting going on between local tracks, between tracks and their state governments, etc. It's a real turnoff to us loyal bettors. Some simulcast companies have great rebate programs, and HTV is one. HRTV and Xpressbet is the worst. You have to bet something like $15,000 to get a lousy $10 voucher! Mr. Stronach is probably behind it. Another turnoff is how the State of New York restricts tri betting to races with a minimum number of horses in the race. It's the Decade of Greed and the bettors will always get screwed in the end...

16 Apr 2014 4:14 PM
BadSaddle

Tom, On the need for transparency, what's your over/under on how many KyDerby contenders heed Phipps great call to release all vet records 14 days prior? 4? 16? Do you see contenders dropping out to avoid releasing them?

16 Apr 2014 8:20 PM
ouch

Horseplayers have always been hosed. From a $7.50 racing form, IRS forms after 30% has already been taken out for a $600 tri. Young people play blackjack .After cashing in you get a comp for dinner and a show.

17 Apr 2014 10:16 AM
punter22

@Rammer, who is HTV? Do you have a web link?

17 Apr 2014 12:10 PM
Salvatore Carcia

I cannot find a industry database that gives an annual summary of the national blended takeout rate across the country. I think HANA does it by track only. That is a good thing for bettors. But, knowing it for the whole industry could be instructional.

18 Apr 2014 12:22 AM
D1

Tom always enjoy your articles. Hate the new tak out rates at Churchill but what are my real options?

18 Apr 2014 8:29 AM
plodderman

Parx is the biggest scam in racing. The takeout there is so high. To be honest, I have no idea what the takepout is, but ALL the payoffs seem lower. Especially the trifectas.

19 Apr 2014 1:43 PM
Old Ned

I became a dedicated fan and horseplayer at an early age, then spent much of my working life as a racetrack executive. I'm retired now, but still firmly hooked on "the game".

I enjoyed my career in management, but must admit to many frustrations over the industry's frequent displays of arrogance, ignorance lack of sophistication regarding business policy and practice. The prime example, in my view, has been the failure of most tracks and other racing organizations to understand modern marketing philosophy -- which demands, above all else, a clear understanding of the needs of consumers and requires that the "product" be designed to meet those needs effectively and efficiently.

The industry was, of course, quick to begin using "marketing" terminology to show how progressive it was but in practice "marketing racing" usually meant "promoting racing" in traditional ways. The common belief was (and still is, it seems) that the beauty and glory of the sport is racing's greatest strength. Once people are exposed to that, the theory goes, they'll be captivated and progress swiftly to being fans, track attenders and bettors.

With this kind of stagnant thinking entrenched as a guiding force, it's not surprising that changing market structure and motivation, and the possible decline in the saleability of the traditional racing product, don't appear to be of much concern to many industry decision-makers.

We can be grateful that a few big new marketing ideas have managed to surface and gain traction in the industry. New types of "exotic" wagering is one, simulcasting another. But, for the most part, these are product changes which were embraced because they appeared to promise immediate revenue increases and wouldn't cause much disruption of racing traditions, not because they were positive responses to important consumer demands.

Pricing is always a key marketing component. But in racing the price of wagering, takeout, is another issue often not addressed in a reasoned, analytical way. If we reduce takeout, industry leaders ask each other and various "experts", will people wager more, attend the races in larger numbers or with greater frequency? And above all, will we make more money? Well, some studies were done (many years ago now) which purported to show that if takeout is reduced wagering will go up so much that there will definitely be a net gain in revenue. Or…if not…at least more people will begin to patronize tracks after wagering "prices" are lowered. But many tracks which gave it a try discovered the results were not as promised and they quietly discontinued the "takeout experiment". And in some cases they discovered that judicious INCREASES in takeout were much more likely to produce immediate revenue increases.

In any case, it doesn't really matter what we in racing think about takeout, what's important is how the market reacts to it. And for a large part of the market, takeout is either unknown, misunderstood, or otherwise irrelevant as a "price" factor. The basic money issues to most horseplayers are the visible costs of patronage (transportation, admission, wagering tools, food and drink) and most importantly betting winnings and losses. Initially at least, takeout affects only one of these items: winnings. The higher the takeout the less paid out on a winning bet. If your bet loses, it's the total amount wagered that's lost, so the specific effects of takeout are invisible. If your bet wins, you're happy and it's unlikely thoughts of takeout enter your mind.

Sure, takeout levels are critical to those mega-players who approach the game strictly as a business rather than as a recreational pursuit. And it might be relevant to some other big-money players, although I think it's unlikely that many of them really think much about takeout. Winning trumps takeout concerns any time, for most players.

If you're an average small-time player like the vast majority, and want to buy multiple combinations on the same betting type (a Superfecta, for example), a reduction in the minimum bet (say to 10¢) is likely to be a much more welcome change that a reduction in takeout (whatever that is…). Some tracks boast about their low takeout on special exotic wagers like the Pick 5, which have become very popular, but would they be anywhere near as popular if the minimum bet was $2 rather than 50¢? Of course not.

Pricing policy is not a simple matter in most businesses, and racing is no different. The goal must be, first, to understand how pricing impact customers and, then, to make the specific decisions in all pricing areas which will produce optimum results for both producers and consumers. It isn't easy, and lower takeout rates is never going to be the simple answer.

21 Apr 2014 5:47 PM
wjfraz

The average fan probably doesn't care for the takeout.  A more common sense approach to gaining a larger fan base would be to make the tracks user friendly.  In this I mean, the cost of food, parking, admission, racing forms, programs, etc., are way too high.  Anyone with half a brain knows that the majority of people "donate" their money as the odds are stacked against them.  Vegas used to comp to get patrons; racing should do the same.  Admission, parking, programs and forms should be given to anyone who shows up.  Food should be reasonable.  Why would anyone pay $5 for a hot dog or a drink when they can bring them in cheaper?  A complete rethinking is in order.

17 Jun 2014 7:42 AM

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