26 August 2012

Transitional Report: Too Vague To Help The Industry Right Now

On Friday, the much anticipated Horse Racing Industry Transition Panel Interim Report finally was released. I skimmed through it on Friday, and read it again in much more detail this morning.

It is encouraging that the panel is very fact driven, though they are still missing a few pieces of the puzzle which I'll get to later on.

I think a lot of their realizations and conclusions regarding the industry's apathetic attitude towards growing a customer base and that slots revenues were earned without any meaningful earmarks are completely right on the money.

I do take exception with what I believe is a faulty premise, which is being used as the reason why they think the slots program shouldn't be reinstated, and that is that the revenues that went to the industry from slots were public funds (hence a subsidy). They also state that the main reason tracks and horsemen were given 20% was to stabilize the industry. That is only one third of the real reasons. The other two were that slots would cannibalize horse racing (one could argue that because of slots the ability of the industry to attract new Horseplayers over the last 14 years was hindered tremendously as well) and that racetracks would be an acceptable location for slot machines. Referendums on gambling almost always wind up against casinos and the government knew they could smoothly start making money without public uproar by locating slots at tracks. In fact, right now the OLG still believes that tracks are the most acceptable locations for slots as they are negotiating rent deals with many racetracks.

The problem I have with calling these funds public monies is that it is after tax dollars that are being lost by patrons. The OLG even called the money that went to tracks and horsemen "commissions" (see page six here). Much like variety and gas store owners get a commission for selling lottery tickets. Did you know that over $200 million is paid out in commissions to those who sell tickets in Ontario each year? And to throw another curve ball at the panel: Do store owners have prerequisites on how to spend their commissions? Are those dollars received public monies too?

The panel is wrong when stating racing would die out completely if the government sticks to only handing out $50 million over the next three years. Ontario could sustain one thoroughbred track and a couple of harness tracks, whether it is Woodbine, Mohawk, and Western Fair, or if Woodbine decides to exit, Fort Erie, Western Fair and either Rideau Carleton or Flamboro Downs. Wagering, if focused on three tracks would be significant enough to carry three Ontario racetracks, and one would expect to see full fields and lengthy schedules. However, 20-30,000 jobs would be gone, and that is horrible public policy even by the worst dictatorship government.

I'm with the panel, $50 million is not nearly enough to give horse racing an opportunity to become self sufficient and save most of the full time jobs.

I think the panel underestimated economic impact because money that goes to horsemen, track employees, etc. go into the local economies and could make the difference whether places like hardware shops and restaurants make a profit or not.

Another thing the panel missed the boat on is that most owners lose money. Less tracks, less horses, less race dates means less owners. Owners do get the majority of purse monies, but by the time they pay the jockey, trainer and vet, they wind up going into their own pocket. This is actually another funding source that the panel overlooked. It is important because much of this mad money might be invested offshore or in investments that have low multiplier effects associated with them. If someone earns 40k a year, all the after tax money is going into the local economy for the most part, but for someone making $150k a year, well that money could get locked into long term investments or again, go outside of Ontario.

Another problem with the report is that it states the SAR program should end, but that another source of subsidy needs to be established, or even a "new" partnership when it comes to sports betting should come about. What makes being a partner in sports betting any different that being a partner is slots? Slots can't be your partner, but a sports book can? Sounds like something Jackie Mason could do a skit about.

And another thing that irks me is that the panel failed to discuss the OLG's plan to privatize going forward and compare it to the SAR program. Are the profits that the new operators going to make "public funds?" Will they have to be accountable to the government regarding these profits? I think not. It appears that public funds will now become casino operator profits. Should this be a major focal point as to whether the slots at racetracks program should end? We obviously cannot trust the government (very faulty, as Dwight Duncan insists there are only 5,000 industry jobs) or OLG numbers, as much as changed since they were put together in March (ie a slam dunk casino in Toronto).

The panel also doesn't realize that the HIP program, the way it is set up now, it detrimental to growing a customer base. Reason being, it is a percentage of the handle currently. It needs to be a percentage of the takeout commission instead. The reason why takeout decreases aren't tested in Ontario is because of the current set up, and in order for horse racing to compete with other forms of gambling and experience customer base growth, takeout rates need to drop, probably significantly.

Unfortunately, although there is a compelling argument to reverse the slots at racetrack program decision, and reimplement it with much needed earmarks, the government is unlikely to reverse things now. The problem right now is that even though there are probably very good legal reasons to go after the government, and some are still being pursued like MPP Lisa McLeod taking the case to the Auditor General, or the Ombudsman's possible recommendations when they come out, the horse racing industry can't afford to wait any longer. The industry needs to work with the government in order to have even a slight chance at transitioning. But getting the industry to work together with the government will most probably more difficult than herding cats in 15 separate locations around the world at the exact same time.

The report that came out should have at least hinted at how many dollars would be needed to sustain the industry. In light of the financial vagueness, I see no point in having the September Sales for either harness or thoroughbreds. The right thing to do is to move the sales to November or December.

Next piece will be on where to go from here.

Check out Pull The Pocket's take on the Interim Report.

Also check out A View From The Grandstand's take.


Greg K said...

The problem of getting the tracks to cooperate is mostly attributed to them being entirely different entities between themselves. Some need a profit, some are not for profit while at the same time even the horsemen groups are divided as COSA and OHHA mainly. These two groups only really show interest in the tracks they represent.

In addition the problem with dramatically dropping the takeout rates is that what you'll only succeed in doing is lowering your revenues. While focusing on the customer sounds good in principle in practicality there simply is to much competing for the entertainment dollar. In addition much of the advertising or new wagering iniatives are stopped by the CPMA. While dropping the takeouts would be great when there is a customer interest I am more in line with your previous post about there needing to be visible winners.

Greg K said...

One thing I was considering as a possible new revenue source for the industry is a sort of "track tax" placed on many of the expenditures the owners incur. According to the Equine Canada report there were 11600 owner units that pay on average 279,000 dollars amounting to 3.2billion in expenditures. If a 5% tax was incurred on those expenditures it would be about equal to the slot revenues. It would allow the industry to be self inclusive instead of relying on outside revenue sources to determine its growth.

Cangamble said...

Greg, I disagree on takeout. Lowering the takeout lowers the revenue on the bet, but it keeps the player in the game longer, and they will more than likely lose more throughout the year, and also expose friends and coworkers to the game as well. Are you saying that increasing takeout from 25-35% will increase revenues? I hope not.

Greg K said...

What I am trying to say is that at a certain number of patrons there is an acceptable takeout rate. It is a ratio in terms of overall profits. Increasing the takeout may in fact increase revenues but it has to be considered in terms of preserving your customer base in ratio with your revenue increase. As your takeout goes up obviously you eliminate customers, the question more is how much?

Cangamble said...

I can tell you for a fact that increasing takeout from 20% decreases both revenues and customers. Optimal takeout (where the track makes the most total net revenues is most likely somewhere between 12-15% and maybe even lower.

Greg K said...

So you're saying that the tracks are literally leaving money on the table?

I'd be surprised to find proof of that. Not to say you're wrong or anything I don't have data to proove it either way. Do you have data you could link to proove the optimum takeout?

I'm know enough people in COSA well enough that if you have proovable data there would be no rational reason why I couldn't have them make a strong case for a lower takeout.

Cangamble said...

Empirical evidence doesn't exist because tracks maintain high takeout rates. However, check this out for starters.
Racetracks are excluding many potentials players and yes, they are leaving money on the table. If a trainer charged $100 a day in harness racing would they make more or less money than if they charge $70 a day bottom line? Not enough people would pay $100 a day, and those who do wouldn't be in a hurry to buy more horses and have bigger stables. Same concept with takeout. Horse racing needs more players and visible winners so that there will be more money on the table for purses. You can only hit the existing customers so much before they either die out, quit or cut back considerably.

I know what isn't the right takeout, and that is the industry average of 21%. It is lower, how much, well it is time for the industry to finally find out.

tommy said...

Greg, lowering takeout will increase revenues big time. its the only way horse racing will get some of there big bettors back. farmer A sells his eggs for $5 a dozen, farmer B sells his for $3. it costs $1 for both farmers to get there eggs to market. which farmer will make more money.

Greg K said...

Tommy if farmer A has 30% of the market and farmer B has 70% of the market they are making the same revenue. That is essentially what I'm saying. Even though farmer B has 2.3 times the business farmer A has they would have the same profits.

What I was asking for is data on how the customers to takeout rate compares to net profits. As Cangamble said though it doesn't exist readily because the tracks haven't tried dramatic takeout drops.

tommy said...

farmer A will starve

Greg K said...

The worst part about it though Cangamble is that even if the tracks do know their proper takeot rate they rarely publish anything. This latest fiasco with the Liberals has proven that. Trying to find out Woodbine's operating costs for example, has proven difficult.

tommy said...

also,of all the biggest horse bettors i know, 2 of 20 play at the track.

Unknown said...

Nice article, The worst about it though Cangamble is that even if the paths do know their appropriate takeot cost they hardly ever post anything. This newest catastrophe with the Liberals has confirmed that. Trying to discover out Woodbine's managing costs for example, has confirmed challenging. The problem of getting the routes to communicate individually is mostly acknowledged to them being entirely different organizations between them selves. Some need a earnings, some are not for earnings while simultaneously even the horsemen categories are separated as COSA and OHHA mainly. These two categories only actually display attention in the paths they signify. Market Report