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?

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