Terminator 6: Death Watch

It is official the takeout increase bill has been signed, California Gov. Arnold Schwarzenegger showed he either doesn't understand basic economics, or he set his common sense aside to appease a group that doesn't understand basic economics.

The takeout hike will most probably go into effect the day after Christmas this year. Although the WPS takeout remains relatively low at 15.43%, daily double and exactor takeout will rise to 22.68%, placing Hollywood Park, Santa Anita, Golden Gate, and Del Mar in a tie for those betting types at around 57th out of 69 tracks according to HANA's up to date takeout data. Triactors and other exotics will go up 3% (which is really 15%) to 23.68%.

HANA reports on the takeout increase here.

Again, I understand the Horsemen who went along with this increase. Why? Because the entire 3% will go into purses. If handle were to remain stagnant, which it won't, monies available for purses would go up 15%. So handle could drop significantly, and the Horsemen will still end up ahead.

Here is an example (using many guesstimates). For every million bet, lets say $300,000 is wagered on WPS, $300,000 on doubles and exactors and $400,000 on all other wagers. Also lets assume that California exports its signal for 5% and 50% of handle is generated from exporting. Also, I believe the Horsemen get 50% of takeout revenues to fund purses.

Using these numbers, prior to the takeout hike, for every million bet, Horsemen receive around $58,000. Assuming signal fees increase on exotics (see Understanding Signal Fees), under the new arrangement, Horsemen will receive around $67,000 per every $1 million.

All source handle would need to drop off 13.5% in order for Horsemen to be worse off.

Any drop in handle up to 13.5% will be absorbed entirely by the racetracks. Which makes me shake my head here at the track owners who have put a huge "Kick Me" sign on their backs by going along with this.

I also doubt very much that the signal fees will go up that much. I can't see Twinspires and other major ADWs or tracks going for such an increase. If signal fees only go up by half the increase on exotics, it will be closer to a 10% decrease that will cause purse accounts to have less collective money.

Handle will drop. The question is how fast, and by how much?

The total effect of takeout increases or decreases normally take time to assess. If a hike occurs, Horseplayers receive less on each bet than they did before. They last less, they go home quicker, they come back less often. Some quit, some find a new hobby or a new game. These players will expose friends and family to horse racing as well. In other words, negative growth is created. Horseplayers collectively won't bet more and reload more just so they could have the same action as before (I believe that there are actually people who were in on this decision that assume Horseplayers do react this way).

I just want to note, that the opposite occurs if a takeout decrease happens.

There are other factors out there. Thanks to HANA and the internet in general, the public is much more aware of track takeout than ever before. There are some really pissed off Horseplayers out there over the action by California, and many of them vow to quit betting California racing. I believe them. I know it would be much harder for someone in California to boycott their own state's product because of familiarity, but for those outside of California, it isn't hard at all.

Personally I stopped playing California the day the bill was signed. Though I will play on Breeder's Cup days. Just keeping it honest. I want horse racing to grow, I love the game, but this move by California racing just really upsets me, and it just tightens the noose around horse racing's neck right now.

And finally, there is one major factor. An estimated 15% of all handle is generated from computer program bettors or sophisticated value players. Not only will increasing the takeout, create less value situations for these players, but increasing the signal fee, even it is half of what the takeout increase will be, will also come into play as to whether an astute rebate player makes a bet or not.

Despite, the flawed argument that bigger purses will lead to bigger field sizes in California (it is flawed because horse racing is experiencing negative growth thanks to not recognizing that the Horseplayer is the customer, and new owners generally get started on a smaller scale, many are Horseplayers first, and the day rates in California are just way too high regardless of the purses), I will predict that within 6 months of the takeout increase, California handle will drop 15-20% regardless of what happens anywhere else.

I originally stated that no good could come out of this in a previous post. Perhaps I jumped the gun a little. Portland Meadows has announced that they are dropping their takeout on Pick 4's from 22% to 14%. Delaware has also decreased their on track takeout on exactors from 19% to 10%.

THE TIME IS RIPE

This is a great time for a track with enough brains and guts to take advantage of the California takeout rate hike by lowering their takeout rates and attracting to begin with, the disgruntled soon to be ex California bettors.

I'd like to think that NYRA, Tampa Bay Downs, and even Woodbine could benefit immensely if they were to do the right thing within the next month or two.


Finally, takeout increases no matter where they originate hurt the game's total growth potential. They kill off the player, albeit slowly and provide zero potential for growth. A player at Hawthorne, for example, receiving $2 less for a $100 exactor he hit at Santa Anita won't feel it immediately, but slowly but surely it takes away his incentive to believe the game is beatable, and besides either coming home with less money than before, or churning one less race because of it, the player eventually becomes more disillusioned though he doesn't really know why.

If that is hard to believe, ask a slots operator what happens to the bottom line if hold is increased by a couple of points.

QUOTE OF THE WEEK:

“(If there isn’t growth in handle), we could end up with two-bit racing and virtual racing. The competition is smart, and it is giving the customer what the customer wants. Racing is still giving the customer what racing wants.”

UPDATE: About the movie Terminator 6. The year is 2029, and there has been no horse racing in California for 12 years. The Terminator's assignment is to go back in time and destroy Arnold Schwarzenegger the day before he signs the takeout hike.