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 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.

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