California Takeout Increase Falls Short

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Since California lawmakers approved a takeout hike effective for the 2011 racing season, the price increase on horseplayers has failed to deliver projected purse increases and has been followed by reduced handle and race days.

After an initial small bump in purses that fell well short of predicted increases, purses have declined the past two years in California as the 2016 total is down 5.75% from 2014 total purses. (For comparison's sake, these purse totals do not include Breeders' Cup purses in years the event has been conducted in California.)

A look at California's experience is topical as Keeneland plans to increase its takeout beginning with its October meet in a move it hopes will improve its purses. But does increasing takeout improve purses long-term? A look at California's experience in recent years suggests its similar price increases came up short of initial projections and the purse increases that initially did occur, have given way to decreases.

Declining California Thoroughbred racing purses most assuredly deserved attention in 2010 because for a second straight year they saw double-digit percentage declines. Total purses checked in at just $132.5 million in 2010, which was down 26% from 2007. Unlike some of the states it's competing with, California's racetracks do not have access to revenue from gaming for purses.

Lawmakers addressed the declining purses by increasing takeout on wagers involving two betting interests (such as an exacta or double) from 20.68% to 22.68%. Takeout wagers involving three or more wagering interests (trifecta, superfecta, pick three, pick four) were increased from 20.68% to 23.68%.

All of the money from the increased takeout would be committed to purses. But such moves do not account for the impact on the gambling product as players react to the increased prices. Some chose to boycott or reduce play. Even players not aware of the increased pricing, will see their winnings reduced and will not have as much money to churn back into pools.

Beyond that, these increases have come at a time that lower-takeout gaming has proliferated, making pari-mutuel gambling less competitive against ventures that include not only slot machines, but gambling similar to pari-mutuel gaming in Daily Fantasy sports, poker, and sports gambling.

Horse racing needs enough money from takeout to deliver the sport, but it has to balance that with the impact of increased pricing on its gambling product.

As for California's experience, a state Assembly analysis at the time takeout was increased estimated the increased rake would generate an additional $70 million in purses for 2011. Keith Brackpool, the California Horse Racing Board chairman at the time, was more conservative, saying the increase would generate an additional $30 million.

The additional purse money would fall well short of both estimates. The high-water mark to date being the $146.3 million paid in 2014, which was up less than $14 million from 2010 and failed to match the $148.9 million in purses of 2009.

Facing higher prices, customers initially boycotted. Price increases also reduce churn-money won by horseplayers that they then bet back into racing. Those factors saw handle fall 9.8% in the first year of the increased rake. Handle has never bounced back; the 2016 handle on California Thoroughbred races is down 11.3% compared with 2010 (Breeders' Cup handle is not counted). That rate is more than twice the handle decline U.S. racing has seen in those years, down 5.2%.

California offered 3,792 races in 2016; that number is down 13.8% since 2010. Overall during that stretch, the number of U.S. races has declined 18.8%.

Besides declining handle, another reason the price increase has not generated the projected handle is racing's business model has changed with the continued emergence of advance-deposit wagering.

Because a higher portion of the handle is being pushed through ADWs, more wagers are subject to ADW fees. The percentage of money committed to purses from total handle on California racing, all breeds, has declined from 5.14% in fiscal year 2012-the first full fiscal year after the takeout increase-to 4.88% in FY2016.

In FY2011, ADW handle through the licensed California ADW companies accounted for 21.1% of wagering on state tracks. That percentage ballooned to 30.4% in FY2016. As ADW expands, unless the model changes, that expansion will only further reduce the amount of money committed to tracks and purses.

Handle on California Thoroughbred races

Year       Handle  Percentage Change

2016      $1,942,004,596  -4.2%

2015      $2,027,399,114 1.5%

2014      $1,997,791,306 -3%

2013      $2,060,451,855  5.1%

2012      $1,960,739,706 -0.1%

2011      $1,975,062,441  -9.8%

2010      $2,190,160,458  -14.3%

2009      $2,555,428,576  -17.4%

2008      $3,095,038,694  -7.3%

2007      $3,339,954,260 


California Purses
Year       Purses   Percentage change
2016      137,914,213       -4.4%
2015      144,285,157       -1.4%
2014      146,337,195       +1%
2013      144,843,718       --
2012      145,039,513       +3.2%
2011      140,521,016       +6%
2010      132,541,382       -11%
2009      148,932,359       -13.3%
2008      171,903,569       -4.1%
2007      179,231,621       --
Notes: For easier comparison year to year, these charts do not include Breeders' Cup handle or purses in years event was conducted in California. Handle figures provided by CHRIMS; purse information provided by The Jockey Club.



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