What Is Breakage?
Breakage is what the track makes due to the rounding down of what a horse should actually pay versus what the track ends up paying to the winners.
Most jurisdictions allow tracks to "break" to the dime (Canada and New York state break to the nickel). In other words, after the track applies their track takeout to the total money bet, they round down what they pay to the bettor to the nearest 20 cent interval per $2 wager. In Canada and New York state, the payoff is rounded down to the nearest 10 cent interval per $2 wager.
Here is an example how it works:
There is a four horse race. $100,999 in the pool. Number 1 has exactly 21,000 bet on him, number 2 has 18,500, number 3 has 23,500 bet on him, while number 4 has 37,999 bet on him. Takeout is 16%, and number 1 wins.
$100,999 times .84 (1.00 minus 16% takeout)=$84,839.16 to be divided to the winning tickets. There are 10,500 winning $2 ticket. This means that each horse should pay $8.07992, but of course, it only pays $8.00 The track just made 839.16 in free money (breakage). In fact, they charged takeout on their own money (the $999 that wasn't going back to the customer if number 1 won the race).
Now lets look at the cumulative effect it had on the players with the winning tickets:
Simply take the 84000 and divide by 100,999 which equals .83169, subtract that total from 1 and the takeout in this case was 16.83% instead of the published 16%.
The higher the cashed ticket, the less significant is the effect on the real track takeout the player is up against. Show bettors will see a much higher real takeout than win player, and much much higher than exotics players.
Here is an extreme case:
Lets say you were betting some hick harness track that has very little money in its pools. You like a longshot, and you decided to take a shot and bet $200 to win. Your bet $200, but no one else bet the horse to show. The total pool is $299. Your horse wins, but it turns out you were the only person who bet the horse.
Track takeout is 20%, so your payoff should be $2.392 (299 times .8), but because the track breaks to the dime, your horse only pays $2.20 to win.
The track makes an extra $19.20 in breakage. And it cut your potential profit by 49%. Interestingly, the effect on track takeout isn't as high as you might think. Instead of 20% it works out to be 26.42% in this case (220 divided by 299). Goes to show how high takeouts cost us lots and lots of money in the long run.
Overall cost to bettors:
When breaking to the dime, breakage has an equal chance of being zero, one cent, two cents...10 cents...14 cents.....18 cents, 19 cents. So adding all the numbers up from zero to 19 and dividing by 20 yields a 9.5 cent average. This means that over enough time, you donated 9 and a half cents for every $2 ticket cashed. If you bet $20 tickets, on average you get back 95 cents less per bet cashed thanks to breakage.
In Canada and New York state, breakage only costs the player 4.5 cents per every $2 bet cashed on average.
I spoke to a former racing exec who told me that he factored in .5% of the total expected handle to come from breakage, when making his yearly budget. This means that Canadian tracks and New York tracks expect to make .25% from the total handle, thanks to breakage. Again, the effect on the player will vary widely depending on whether you play exotics or mainly you are a WPS bettor. The more bets you cash, the more it will cost you. If your average win mutuel at a certain track is around 9 bucks, and the published track takeout is 16% for that track, thanks to breakage, the real takeout is closer to 17%.
One has to ask, that in the computer age we live in, why don't bettors get back what we are supposed to get back from the tracks and ADWs? Anyone who has cashed a 20 cent superfecta at HPI knows that their accounts often have odd pennies in it thanks to a super that, for example, paid $1,546.35 for a buck (for 20 cents you wind up with $309.27 put into your account). So the technology is there to give us what we are entitled, we just don't get what is entitled to us.
Track Thieves makes a great case for eliminating breakage.
See also About Horse Racing's page on breakage.
FORT ERIE UPDATE
H/T Jen's Thorough-Blog
Nordic's Press Release:
Nordic Gaming Corporation / Elad Canada, the owner and operator of the Fort Erie Race Track, has been working with both the Town of Fort Erie and the Province of Ontario, as well as other stakeholders, for the past several years to move forward with a proposal to revitalize the Town of Fort Erie as a major tourist destination and in so doing, generate sufficient population to operate a profitable racetrack.
More recently, Elad has been working with the Town of Fort Erie , in addition to the Province and other stakeholders, to ensure that live racing would continue in Fort Erie for the 2009 racing season. It was within this context that a proposal was made by the local Economic Development and Tourism Corporation (EDTC) to work with the Province to purchase the Fort Erie Race Track.
On Friday, February 20, 2009 the EDTC presented Elad with a very lengthy offer that contained a myriad of conditions that from both an economic and performance perspective were non achievable and unacceptable. In addition, the only condition that Elad had previously placed on an offer, which would have ensured live racing for 2009, was not fully satisfied. While Elad was prepared to continue negotiating with the EDTC to arrive at an agreement on both the shortfall and the conditions that the EDTC attached to the offer that it presented on Friday afternoon, on Monday, February 23, 2009, Elad Canada was informed by email that in fact, the EDTC was withdrawing its offer to purchase the Race Track.
While it is unfortunate that there will be no agreement to purchase between the EDTC and Elad, Elad and Nordic continue to believe in the importance of the Fort Erie Race Track both to the local community and the Province as a whole. In that regard, the Company will continue to work diligently to try and find a commercially viable solution to ensure the Race Track’s long-term survival.
Nordic was only being offered $2.25 million, one million short of what they say they needed to break even. The EDTC offer fell short on Nordic's extortion demands.
Meanwhile, someone is lying (my guess is that it is Nordic):
"EDTC general manager Jim Thibert said his agency did not withdraw its offer to buy the track for $35 million."
The offer obviously came up short as Thibert said the fundamentals of the new offer were the same that were proposed about a month ago:
"except for the value of the offer and who was carrying the mortgage."
Basically, Nordic does not want to go into their pockets for one dime, and will not sell Fort Erie for anything close to what it is worth.
Update: Crystal Beach Strand is stating that it is Thibert who is "saving face" aka lying. They report that allegedly the government said no to using the remains (around $1.5 million) of the money that was allocated for the feasibility study of the laughable $300 million expansion project.
And now Nordic seems to be in the driver's seat as Liberal MPP Kim Craitor is hinting that even if the track were to close, the slots may wind up staying open.
This is a coup for Nordic, as they can reap the estimated $4 million in profits from the slots and not have to operate their losing side of the business (horse racing).
Nordic will have security guard expenses, still have to pay property taxes, but all in all, will be profitable.
It seems that the only solution right now to save Fort Erie for 2009 is that the OLG gets pressured to give Nordic a bigger cut from the slot revenues.
Hopefully, Smitherman, McGuinty, Tory, Hudak, and Craitor can get together and make this happen.