Sinking the Pirates - by Dan Liebman

Walking the streets of Manhattan Aug. 9 past the $5 watches, $10 framed prints, and $20 purses, we saw two young men selling compact discs of recently released music.

Judging by the prices, and their low overhead storefront, it was highly possible their inventory did not come from music publishers.

Several years ago, a CNN/USA TODAY/Gallup Poll showed about 17% of adults with Internet access at work, home, or school had downloaded music. That number has surely risen. Countless CDs are being copied on burners. Sites to download music prosper. The movie and video-game industries are seeing similar trends.

So, too, is Thoroughbred racing.

Countless industries are experiencing the pirating of their products, all made possible because of the Internet. Thoroughbred racing has no idea how many people are pirating signals of races and accepting wagers on them.

“Let’s just say it is very substantial,” said Eugene Christiansen, the head of Christiansen Capital Advisors, a research and advisory firm on the leisure and entertainment industry, particularly as it pertains to gaming and wagering.

Tens of millions?

“No, hundreds of millions,” Christiansen said.

While negotiations over the split of handle from advance deposit wagering platforms continue between racetracks and horsemen’s groups—many of the latter using the new Thoroughbred Horsemen’s Group to bargain for them—potentially hundreds of millions of dollars are being wagered with none returned to the industry to help racetracks put on the show and help horsemen through additional purse monies.

The reason the pirates, and also legal off-shore wagering outlets exist, Christiansen said, is because of demand from high-volume players.

“The underlying reason is the consumer price of betting through state-licensed pari-mutuel facilities is substantially higher than cost-conscious players can get elsewhere, so that underlying circumstance is an incentive for low-cost suppliers to stay in the market,” he said. “An indirect by-product is the signal piracy.”

Dysfunction happens, Christiansen said, because, “The industry uses a higher cost when a lower cost is available. That goes against every principle of the way a market operates and is anti-consumer.”

Racetracks and ADWs must charge more because of takeout, purses, and overhead, while off-shore bookmakers and pirates can offer substantial rebates to players.

An interesting aside, said Chris Scherf, executive vice president of the Thoroughbred Racing Association, is that successful players often get cut off by the rebate shops.

“Both in sports betting and horse racing, if you are winning consistently, they quit taking your bets,” Scherf said.

Of more concern to him than piracy, Scherf said, is the impact the offshore bookmakers have had in shifting those wagering on racing to wagering on sports and online poker.

“We have lost business to that,” he said.

Many racetracks now offer rewards programs similar to those used for many years by casinos. These are no different than earning frequent flier miles, rewards from a charge card, or discounts given to loyal shoppers by nearly every major retailer. Racetracks, however, are unable to match the percentage of handle rebated to high-volume players, forcing many of them to begin playing offshore. In fact, many are recruited by the bookmaking shops.

On Aug. 4, regulators from 13 states—hopefully soon to be joined by others—announced they will begin requiring offshore wagering outlets and secondary pari-mutuel operations to be certified by the Association of Racing Commissioners International before they can wager into pools. The target date is Jan. 1, 2010.

It is important for racing authorities to know with whom they are doing business, and this is a giant step forward in that direction.

This action comes after the closing earlier this year of the offshore rebate shop International Racing Group, which was owned by Youbet.com. IRG was closed following a federal and state investigation into its customers and operations alleging possible illegal activities.

Perhaps the industry cannot stop piracy, but it can stop some pirates.

6 Comments

Leave a Comment:

David C

Control of its product should properly be at the top of priorities list for the racing industry.  Certification is worthwhile and should be embraced.  As we know, however, some will choose to deal with resellers regardless of the soundness of arrangement.  As to being made whole on all non-pari-mutuel transactions like bookmaking and Betfair-like exchanges, racing faces an extremely steep hill.  The more successful the industry is at generating increased awareness (via ADW, television, major events, etc.) the more exposure it will face on the pirating front.  The good news is total control is no more realistic for racing than it would be for an NFL attempt to capture a portion of sports wagering proceeds (legal and otherwise).  Racing must find means to grow the (pari-mutuel) model and, like the NFL, create new streams of (non pari-mutuel) revenue.  Let’s face it, if we woke up tomorrow with safer surfaces, tote systems more secure, rules and regulations standardized and outrageous end-user taxes eliminated, the uninitiated still won’t beat down the doors of racetracks.   Removing perceived impediments is only part of the equation; racing must begin to better align its core product to the mainstream.

14 Aug 2008 10:05 AM
C Bea

Part of the problem is that the we've created more and more layers of regulation for the legal operators thus adding to their cost structure. Even this ARCI initiative is another layer. Racetrack due diligence, Commission due diligence, TRPB, ARCI all with a fee and/or time involved in order to be approved. The illegal outlets offer some cost advantage because they don't have the bureaucratic hurdles (and overhead) to overcome.

If there was one approval process and/or certification nationally or internationally efficiencies would be created that may allow legal outlets some room to operate.

With these multiple layers of approval and the horsemen cutting off signals to the domestic ADWs, the Industry is driving players to the off-shores (whether legal or illegal).

14 Aug 2008 3:10 PM
Drib1364

 The statement by Chris Scherf that "successful players often get cut off by the rebate shops" illustrates a dysfunctional racing industry. It is most important to distinquish between rebate shops that funnel their wagers directly into the parimutuel pools (no different than any USA based ADW), and bookmakers that hold bets while paying rebates. Obviuously, the latter are the real poison for the racing industry, and they are the only ones that would get rid of winning players.

18 Aug 2008 10:28 AM
MikeD

As long as off shore outfits give us bigger rebates and better customer service than racetracks and U.S. based ADW's, we will continue to wager our millions with them.

The industry has no one to blame but themselves.

18 Aug 2008 11:21 AM
Timurlenk

Has the word GLOBALIZATION any meaning to our industry?

Face it, we have offshore booking and there is nothing we can do about it...unless we come with an appealing way of "internationalizing" the signals from our tracks and comingle the betting money.

Brainstorming season is open guys.

18 Aug 2008 11:51 AM
J.M.

The industry as a whole is strangling itself. Any piece of the industry could compete with the offshore guys if they either got over and started offering rebates themselves or dropped their commission rates. Players have gotten smarter they know that without a rebate even the best players have ZERO chance of winning. This is due to ridiculous take outs.

Some tracks have been successful in getting influxes of new bettors. At least once of my personal experience one such track was bought up and the new management changed procedures to be more like what they were used to.  Everyone left.

Most of the ownership and controlling powers in this industry and the regulators over it long ago sat on a huge stick and no one has managed to pull it out yet.

09 Nov 2008 1:26 PM

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