Sunday, July 26, 2009

Racing's Pricing Problems

Merely shrinking thoroughbred racing, as I proposed in my last post, would not, in itself, be enough to sustain the health of the industry, especially when racing is faced with a malevolent mix of (1) tough competition from casinos for the gambling dollar, (2) shorter attention spans in Generations X, Y, Z and whatever else followed us baby boomers, (3) decreasing discretionary income for most Americans, and (4) the continuing blots on our image from drugs, breakdowns and the neglect of horses (a special thanks to Ernie Paragallo for keeping that one in the news).

But there are some things we could fix, especially in the area of pricing. A more coordinated industry, and one that has racing as its primary focus (as contrasted, say, to Churchill Downs Inc.'s apparent focus on online bet-taking) could take some important steps that would attract more fans to live racing, increase handle, both on-track and off, and provide a fair division of revenue as between the track owners and the content providers, i.e., owners, trainers and jockeys.

1. Why Aren't Race Tracks More Like Casinos?

One of racing fans' persistent complaints is the nickel-and-diming by track management for admission, reserved seats and parking, combined with the outrageous prices for very ordinary food. Most casinos, in contrast, offer free admission, often with a refund of some part of public transportation costs for those arriving other than by car. I can take a bus from NYC to Atlantic City for $35 round trip, then have the casino hand me $25 in cash when I arrive. Try that at your local race track; actually, I have; the Long island Railroad charges me $12 for a round trip from Penn Station to Belmont, and I've never seen a NYRA staffer waiting at the station to hand me $5 or $10 back, even in the form of a betting voucher. Parking at most casinos is free, though a few might charge $5, often refunded if you're a regular. And if you're playing at a casino, the drinks are free -- well, a $1 tip is expected, but that's a lot cheaper than the $6-plus beers at most race tracks. True, the restaurants in most casinos are no bargain if you're paying in cash, but again, if you're a regular, you'll be accumulating "comp" points that you can use to lessen the damage by paying all or part of your restaurant bill.

I find it hard to believe that race tracks actually make money by charging for parking, once the cost of paying the parking lot attendants is figured in. And whatever pittance the tracks do make would be far offset by increased handle from those fans who resent the charge and don't bother to go. Similarly, free admission seems an obvious winner; every additional fan attracted by the freebie will certainly contribute more in betting handle than whatever he/she would have paid at the gate. Even if general admission is only a couple of bucks, that's enough of a deterrent to keep a lot of people away. And if you want to have a clubhouse that exudes higher class, why not do that by having a dress code (in Kentucky, anyway, that could be "church or business attire," a phrase one doesn't often encounter on the coasts), rather than a fancy admission price. Rich -- and not-so-rich -- horse owners get into the track for free, but guys on Social Security who want to hang out with friends and make the occasional $2 bet have to pay -- what's wrong with that picture?

A good example of the power of low-cost options is Churchill Downs' recent experience with Friday-night racing. Offering discounted admission for seniors and Twin Spires card holders, Churchill drew crowds that are huge by today's standards, on the order of 30,000. After a first-time disaster, when there weren't enough concession stands to handle the crowd, Churchill apologized, drafting everyone up to CEO Bob Evans to pour $1 beers, and apparently gained back lots of good will. True, Louisville is a particularly horse-centered town, but even so, good promotion and cheap prices showed what can be done.

As a trendy new book points out, "free" is a powerful price. Google has grown to be one of the largest companies in the world by offering its principal products for free, then cashing in on advertising. Other businesses give some things away cheaply or for free and make money by selling other things (razors and razor blades, printers and toner). That's what racing should be doing. Free admission and free parking are no-brainers. Cheap soft drinks, water and beer are equally obvious. Want people to bet? Give them a usable program for $1. If they want more, they can move to the Daily Racing Form, BRISnet or the Sheets. Make the track experience cheap and easy. How hard can that be?

And, while you're at it, why not a customer rewards program as robust as that of the casinos? Offer everyone who walks in the door a "player's card," then use it to track their bets, with proportionate rewards, not just the minor rebates on betting that some tracks now offer, but also discounts on food and drink, preference for seats for the big days, etc. And use the information from the players' cards to direct targeted advertising, just as the casinos do. That builds brand loyalty at hardly any additional expense.

2. Takeout - The Big Bad Price

Everyone who's taken Economics 101 knows that, in theory, a lower price leads to higher volume. So, in theory, lowering takeout should mean that handle will increase. But, again applying those not-so-useful rules from Econ. 101, any business needs to determine where in that supply-demand equation it can make the most profit. If a track with a average 20% takout does $100,000 in handle (let's leave out simulcast handle for now -- that's a whole different problem, discussed below), it makes $20,000. To make the same $20,000 at 10% takeout, it needs to double the handle to $200,000. Will that happen, or will the growth in handle lag behind the decline in takeout? Despite the earnest claims of the Horseplayers Association of North America, there's just not enough evidence to know for sure where the ideal price point is. HANA's rankings give their highest grades (B+ -- evidently no track meets their demanding standards for an A) to Keeneland and Churchill, which charge 16% on win-place-show bets and 19% on all multiple and exotic wagers. At the other end of the scale, with F grades, are Assinoibia and Suffolk, with takeout rates of 26-29%; Frank Brunetti's Hialeah, in its dying days, went even higher. Every casino game has lower takeout than that, ranging from about 10% on penny slot machines down to 1-2% on blackjack and some other table games. In poker, the casino game that most closely resembles parimutuel betting, because one is playing against other bettors, rather than against the house, the takeout, whether in the form of a "rake" from each hand or a seat-rental charge, ranges from perhaps 10% in low-stakes games down to as little as 0.5% in the high-stakes games in Las Vegas. When the "comps" earned by players are added back in, it's possible to play certain games at certain casinos for what amounts to a microscopic take.

Racing couldn't survive with a takeout that low, but I'd love to see some serious experiments at major tracks with real takeout reductions. Laurel tried a 14% takeout on its Pick 4 for a while, and NYRA reduces the Pick 6 takeout to 16% on days when there's no carryover, but there's no good scientific evidence that I'm aware of as to what really works. I recall that when Steve Crist was working for NYRA, he managed to get some trakeout reductiuons through, and they did not in fact result in proportionately greater on-track handle, but the NYRA of that day, run by Kenny Noe with little regard for the fans, did little to promote its pricing structure. It remains to be seen whether a major reduction, say to 10%, as HANA suggests, would work. Let's give it a try.

3. The Simulcast Pricing Problem

Tracks sell their simulcast signals to other tracks, OTBs, casinos, and, most importantly, internet-based wagering sites. The tracks don't get the full takeout on bets placed through these other outlets; they get anywhere from 3-8% of the bet, the remainder of the takeout remains with the off-track operator. In some cases, that operator may share it with big bettors, granting substantial rebates.

Overall, some 90% of US handle is now wagered off-track, so the vast majority of the takeout on bets goes not to the host track and its thoroughbred owners, but to the parasites, oops, to the folks who operate the off-track systems. Last year, the Thoroughbred Horsemen's Group (THG), an alliance of numerous state horsemen's associations, advocated sharing the takeout evenly, one-third to the host track, one-third to purses for the horse owners, and one-third to the off-track bet taker. The entrenched interests, notably including Churchill Downs Inc., which sees its future in online betting and slot machines, put up a huge fight, seriously damaging the livelihood of many horsemen at Calder and Churchill. Those disputes were ultimately settled, but we're nowhere near the one-third sharing level yet.

From a horseman's point of view, one-third of everything for purses would be a LOT better than the current regime of, say, 7% of on-track betting and perhaps 2.5% of off-track betting. Even if takeout was cut from the current average of about 20% to 10%, we could live with it, and pay our training bills at least as well as we can now, if we could get one-third of the total. And I think the tracks could live with it as well; they'd get more money for operations than they do now.

The losers would, of course, be the off-track bet-takers, and to some degree the "whales," or large bettors who feed off them, insisting on immense rebates. Internal studies that I've seen (but, alas, am not allowed to quote) suggest that the "whales" may account for about 15% of total US racing handle. Instead of basing our whole simulcast pricing model on being able to accommodate the top 15%, why not introduce across-the-board rebate systems that reward all players, in proportion to the volume of their play. The current system, like Republican tax cuts, over-rewards the tiny sliver of those at the top of the (betting) heap, while hurting all those lower down.

4. Owners, Trainers and Jockeys

No business that fails to pay its talent a living wage deserves to be a success, and talent that organizes, whether it's through Actors Equity or the Major League Baseball Players Association, does better than talent that doesn't. The starting minimum salary in major league baseball this year is $400,000 (thank you, Marvin Miller, who should have been inducted into the Hall of Fame years ago). That covers nearly 1,000 players. Even in ballet, a field that no one would think of as a way to get rich, principal dancers for the NYC Ballet earn in the mid-$200,000s. If the top 1,000 jockeys, trainers and horse owners made a few hundred thousand each, I think we'd all be deliriously happy. But the reality in racing is far different. Even at the major tracks -- New York, Kentucky and Southern California -- most trainers and jockeys make only a modest income. Perhaps 50 jockeys nationwide make a mid-six-figure income, and perhaps 100 trainers. And thoroughbred owners, as a group, make in purses less than half of what it costs us to care for our horses. Sure, there are a few outstandingly successful trainers and jockeys who make seven-figure incomes, but very few. There are lots more who, but for their love of horses, would be making far more off the track. Some of them could even pay their mortgages.

Some small steps have been taken to compensate jockeys a little better. With New York owners and trainers taking the lead, the base rate for riding at NYRA tracks was incrteased to $100 last year, a long-overdue step for men and women who risk their lives on the track. Many other tracks have followed suit.With better purses, more could be done.

Trainers have been able to increase their day rates a little (the going rate in New York is now $85-90 a day), but the current economy is leading a lot of small-scale owners, the guys who run trucking companies or are contractors, say, and who get together with their friends to buy a few horses, to drop out or cut back. That may not hurt Todd Pletcher or Steve Asmussen, but it sure hurts Leah Gyarmati, Mike Miceli and Mitch Friedman, just to name some of the people I see in the mornings at Belmont. Those small-scale trainers, and hundreds more like them, are in an impossibly precarious position at the moment. Some relief could come through cost-cutting measures, especially by finding a better way to deal with workers compensation, but the ultimate solution is to return more money to the talent, by way of bigger purses.

Finally, the horse owners need to see at least the hope of meeting our costs. And the only way to do that, as well, is with bigger purses. NYRA, to its credit, has made some innovative changes for the Saratoga meet, increasing purses based on field size, especially in longer races, and rewarding those who keep their horses in a race that's rained off the turf. That's a start, but we still need more.

Together with the ideas that I floated in my previous post, these pricing suggestions could help restore racing to something approaching fiscal stability. The only issue now is, how do we get there?

Anyone want the job of racing czar?


Steve Munday said...

Steve, I nominate you. You have a more coherent understanding of the issues afflicting racing than I've heard from industry leaders. Then again, I believe most (not all though) industry leaders know more than we give them credit. However, "fixing" these problems requires a new way of thinking and cooperation with others to the potential detriment of their organizational self-interest. Take Past Performances for example: the industry should make it as easy as possible for a customer to make a bet. If you were to buy a box of cake mix, would Betty Crocker charge you 50 cents for the instructions on the box? I firmly believe that a company offering "basic" PPs for free would eventually make more money selling their "premium" PPs. I would bet money on it.

Fred said...

Lots and lots of excellent points made, but it also carries a slight slant towards horsemen (no problem there, I understand you are in that area of the business).

Horsemen always want bigger purses because they're in business and they need more money. Well, so do racetracks. The slanted simulcast rates towards those receiving the bets needs to be addressed for sure, but to just blanket-cover the whole mess and say horsemen need more is a bit shortsighted.

Running a racetrack is an extremely labor-intensive business, way more intensive than any barn on the backside. From tractor drivers to ambulance operators to valets to attendants, hosts, cooks, wait staff, ticket sellers, program sellers all the way through. That's a big bottom line hit which is not easily attainable.

The sad reality is that execution of these ideas is the challenge. We need a series of track operators to step-up, take the bull by the horns and make a difference.

Cangamble said...

I don't know if you are familiar with the Cummings Report, regarding takeout. But you should have a look at it.

As for the one third one third one third proposal, it would kill racing at this time. It would work if takeout was reduced to 12-14% across the board on average, but now with a 21% average takeout, it would be a dagger to the heart.

It isn't just the whales who would be affected, but all those who receive rebates.

I'm hardly a whale, averaging around $300-$500,000 in betting a year, but I can tell you that my betting increased around 300-400% because of an average rebate of around 7% (I bet mostly exotics).

I know many similar bettors like me, who are non whales.

If racing adopts that plan, I might finally just bet football instead.

The way it is now, I play 5 tracks a day, some tracks I wouldn't even have looked at if wasn't for rebates.

Whoet's Picks said...

Frank Stonach(MAGNA) tried to be Racing Czar, look what it did to him.

Good ideas, my friend, but the losers running these tracks can't see the reason to quit soaking there fans,

I always think on KY DERBY day, off-site tracks, that they should let everyone in for free,
have dollar beers,
no admission, free parking.

LOL, they should do this everyday,
if you are a place taking wagers and can't make money from the handle, you are in the wrong business.


That how you make money running a wagering Horse Racing Establishment.

All that other stuff just pisses off your customers, THE BETTORS,
No bettors, no horse racing

Valerie said...

I nominate Steve Zorn! :)

Excellent, excellent piece of writing.

DENNIS said...

You cannot even get racing entities in the same jurisdictions to agree; forget across the country. It can take 6 months to a year to get even a small improvement past CEO's and board members to the engineers and programmers. Believe me, I am going through this right now with Youbet. EXCEPT, in Youbet's case, the vice president scheduled an hour with a tech for me to prove my case. After I did, the tech wrote up a proposal. The VP took it to the board who sent it to their engineers for a design proposal to fix the software problems. That proposal has been funded and will soon enter the testing phase of which I will be one key member. This has taken about 9 months and should be completed and online in 2 to 3 months.

The racing industry has been aware of their "problems" for decades and still procrastinate. Doping, cheating, past-posting, tote problems, excessive take/breakage, over charging in areas that should be free, outdated tote/pari-mutual system, etc...

IMHO, Stronach and MEC are showing us racing's future. Most tracks will close as the economy and their own actions drive away fans. When only 3 or 4 tracks are left, they will then be able to escape from the local government mentality and taxation to develop a single body that can then direct all who want to survive to adopt the changes needed.

Complete strict enforcement of no drugs or cheating allowed. Lifetime country-wide bans enforced. NO second chances. Fixed odds or wager exchanges with 5% max takeout on winnings only. No takeout on losses or wagers by winners, just the winnings. Churn will be huge and so will the profits. Tracks should be allowed to acquire full casino licenses as well with the same profit/taxation agreements as other casinos. Not the BS theft by local governments using the tracks future as hostages to steal any and all profit.

Services and handicapping tools will be free or very low cost. Food and drink reasonable.

8 out of 10 tracks must close before the government and management of those left will see that they must stop raping the race fan. There are not too many of us baby boomers left and those who are not dying are quitting. I did. I play poker now and play in 3 or 4 contests a year. 34 years of handicapping and then gave it up cold in 2002 after the pic-6 scandal. See nothing today that tells me I made a wrong choice. Keep my hand in and help where I can, like with this and Youbet. Nothing that costs me money or creates regrets.

Nature will fill the vacuum...

George said...

Steve, As always well thought out posts. I have beaten on these same drums over and over as well but I have finally quit pounding on the skins as I have come to the conclusion the situation is hopeless. Free is definitely better for business; business in general absolutely has to be pared down in scope; much more of the money generated at a track has to be returned to the track/ horsemen of that jurisdiction, for the sport to be healthy. I have never been in favor of rebates of any kind to anybody, however, I realize that is unrealistic and if Cangamble (I wish I had his monetary woes) is true to his word (and representative of that class of gambler)it would result in a preciptous downturn of revenue. Yet, I'm not sure it would hurt the industry as quickly as the ADW's. And I think the ADW's are THE Biggest problem. The money being skimmed out of the industry is the problem. Perhaps one way out of this conundrum is a law mandating that each jurisdiction has to be the sole conduit for wagering in their area. For example, for NYRA tracks all betting would have to go through them. They would then give a percentage back to the bet taker, perhaps 2.5-7% and keep the remainder. This would keep the takeout where it was meant to go:to the jurisdiction being wagered on. In turn this would create competition between the circuits because the better and/or more contentious the racing the more handle it would (presumably) attract. But, this would also create a problem with the whales because they would be forced to have several separate accounts -one for each circuit wagered upon- to receive rebates. Yet, somehow I think most whales probably have more than one outlet already. But at least NYRA, for example, can then give the whales rebates they see fit and still keep the difference. I'm certain the whales don't care where their stimulus plan comes from. This would create a certain "bump" for business while in no way spearing the whale. And,of course, this system would have absolutely no effect for the $2 bettor betting trough any ADW. Yet, in effect it would cause the ADW's to live on what they believe the tracks/horsemen should be able to live on now; a nice reversal. If they don't find it profitable enough, so be it, NYRA or CDI or whomever will always be around to pick up the slack. Of course here in NY we still have the absolutely doubly broken system of wagering with OTB vs. NYRA, so how is anything ever going to work? Too much money for too many people for doing nothing.

An added non-sequitor here: While we may be down reportedly somewhere between 15-20% in the U.S. this year the problem may be much worse over seas. While in Ireland in June I had a lunch with a member of a prominent Bookmaking family and I was told they were down close to 50% compared to last year. I don't know if that is representative of the entire industry over there but it's a bit scary nonetheless.
I hope you keep pounding away and something good results do occur. As for me, I've had enough. I am worn out by the futility of it all and can't do just handicapping pieces any more.