28 January 2011

Did The TOC Pull A Fast One?

It may not have been the intention of the Thoroughbred Owners Of California (the TOC) to have pulled a fast one on the California racetracks, but the consequences sure makes them look like geniuses while California track ownership and management are looking like pretty bad right now.

The track owners and the Horsemen may have actually believed that bettors would be attracted to the move to dirt at Santa Anita, and that bigger purses would attract more horses and create larger fields which would increase handle attracting new money, more than enough to make up for the lost money in reduced churn (a bigger chunk of the existing pie, though their action will reduce the pie even more).

The reality is that it still costs too much to own a horse in California despite the purse hike, and not very many outfits are bringing horses to compete there.

Trainers charge relatively too much and vets don't help things either.

It is speculated on that trainers who charge high prices look for the smallest field they can find so as to keep their win percentages high enough in order to justify their prices (you can't have a 10% win percentage and have too many owners pay $125 in day rate). This culture doesn't change overnight.

The wild card is that there has been player push back, speeding up the effects of raising takeout. No one was anticipating this.

Despite handle being off, the Horsemen are ahead of the game and here is why the TOC is in no hurry to rescind the recent takeout hike:

In a nutshell, the takeout increase has caused blended rates in California to go from around 18.5% to 20.5%. However, the entire increase now goes to the Horsemen.
Out of State signal fees could range from 3% to brick and mortar locations to much more when it comes to what ADWs pay. It was admitted that California racetracks could not get the full increase from out of state bet takers, but only a little more than half. Still, if the average signal fee was 6% last year, it means that they are now getting 7%, but when you look at it closer, it means that purses now get 4% on average instead of 3% of every dollar bet on their product from out of state. using this example, which means an increase of 33% over last year (again, I'm not sure of the exact numbers, but this is probably very close).

Domestically, from in-state bets, they now receive anywhere between 25-33% more over last year on average. Tracks, meanwhile receive the exact same percentage on every wager, if everything that has been made public is true.

In layman's terms, this means that for every thousand dollars bet last year, the track and horsemen may have received $50 each on average (again, this is an educated guess). However, now horsemen receive about $65 on every $1000 wagered, while tracks still get $50.

If handle is down 15% because of a combination of the Players Boycott and less churning created by higher takeouts, it means that in relative terms, tracks are now receiving $42.50 on every thousand bet, while Horsemen are still receiving $55.25 per every thousand bet (in adjusted dollars). So even with a 15% drop in handle, something devastating for the track, Horsemen purse accounts will be up by 10%.

Now, if you go a step further, the California racetracks could have been actually up this year if not for the boycott and reduced churn. Gulfstream Park and Fair Grounds early success this year may mean that handle might be on the way to recovery. So California track owners are not only down whatever they are down this year, but down what other tracks are up as well.

Unless handle drops at least 25% gross over last year, the TOC is unlikely to be motivated to rescind the takeout hike, unless the tracks are hurt so much that they are forced to cut back dates even more (they are currently running only four days versus five at Santa Anita right now), or even worse, threaten to close down. The tracks may have to run only 3 days a week (to cut expenses down), less races (more per day), and a hope for fuller fields to attract more betting per race.

Both Del Mar and Hollywood Park have a foot in the grave (well at least a big toe) to begin with.

How can this mess be fixed immediately?

The TOC has to be persuaded to look into the crystal ball. It is inevitable that things will be a lot worse for horsemen, and whatever tracks remain standing in California a year or two out. There is zero evidence to show that higher takeout leads to more money bottom line for Horsemen and tracks.

The tracks have now changed percentages on net takeout, and the TOC would be ill-advised to not consider this when negotiating. The cut on net profits need to be readdressed. If the TOC and tracks are reasonable, the Horsemen should now aim to receive between 55-60% of net takeout received on the California product.

This change would be good going forward. As there would now be motivation to make the most net takeout money, which means that the track is free to seek optimal takeout rates.

If blended rates don't come back down to at least where they were in California, California racing is at risk of losing Horseplayers who will never return. Most Horseplayers who are boycotting are not interested in anything but a return to the old rates before they will consider betting another race there.

C'mon guys and Bo, I want the game to grow. Get together and make it happen.


Woodbine's blended takeout rate is approximately just over 21%. 1.3% goes towards taxes. That leaves $200 on every $1000 bet to be split between horsemen and tracks. However, Horsemen get an additional 2% on all bets (4% on triactors), which means that on every $1000 bet on track, Woodbine gets $89 while Horsemen get around $111 on average.

If Woodbine drops takeout, the Horsemen get even more of a percentage on net takeout. The HBPA and Woodbine should get together and try to help grow the game, by changing this deal and make it a percentage of net takeout, not a percentage of what is bet. A 55-45% split in favor of the Horsemen on wagers made through Woodbine would not change things one bit, except it gives Woodbine the ability to experiment with lower takeouts.

Of course, if Woodbine could find another way to fund the 2-4% the Horsemen gets, they would be free to experiment with lower takeouts as well.


Not very many people knew that Fort Erie was even in trouble until early this week, when it came to racing in 2011. They supposedly were good to go for 3 years, but they were not able to make payments for the increased payment to Nordic ($650,000 this year and next, compared to $100,000 last year) and the new HST on time. And they obviously didn't make enough last year to overcome the concern that they could actually come up short this year, and they realized that there is a question of who pays for the shortfall if it happens?

Details are not out, but it looks like a deal was carved out that does not place the indemnify the EDTC (the current managers of the track).

Still, if they think there is a hope in hell to grow a business with a 26.2% track takeout on exactors and doubles, whoever is guaranteeing the losses is guaranteed to be out money.

It starts at the 17 minute mark. You might learn a thing or two.


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Anonymous said...

If racing ever has a Commissioner they better consider you for the job!

Cangamble said...

I'd only take the job if the position had teeth. I'm no figurehead.

Anonymous said...

Not sure they pulled a fast one CG - everyone (namely racetracks and state) must have understood that their own revenue would fall with handle under fixed % takes. They agreed to do it under the assumption that the increased % take to purses would benefit everyone - which implies they all believe in the "long run" fix of higher purses, bigger fields, higher handle and the idea that handle wouldn't fall sufficiently to offset the higher % to purses in purse revenue. In short - total lower revenue was sacrificed for higher revenue to purses. That was the premise I think. Just not clear that other stakeholders understood how much handle would decline by in the short or long run relative to their projections. Question: how much do local government revenues have to fall by before someone figures out that's not optimal (given ownership of SA by what is still described as a real estate development company basically)? Local government support of the track at SA is - one would think - crucial to its log-run survival.

In any case, the issue you identify is absolutely the right one: even if total revenue to racing, handle, custom, and customers decline under a takeout increase, if there are incentives to do it by a major stakeholder - it will happen anyway. What a ridiculous mess of poorly designed incentives.