Can More Be Less?
by Ray Paulick
Date Posted: 11/12/2002 10:17:55 AM
Last Updated: 11/12/2002 4:30:53 PM

Ray Paulick
Editor-in-Chief

Some track officials and horsemen have begun to question the wisdom of their relationships with offshore and U.S.-based wagering companies that attract some of the game's biggest players through rebates of 10% or more on wagers.

These companies legally obtain simulcast signals from major racing centers, including tracks operated by the New York Racing Association, Churchill Downs, and Magna Entertainment, though they pay a higher fee--sometimes double the standard 3% rate charged to most tracks for simulcasting.

But aside from some software and telecommunications equipment, the rebaters have little invested in their businesses. There are no "bricks and mortar" expenditures, giving them a much higher profit margin on betting than any racetrack can claim.

This scenario has been explained here before, but the issue is important enough to revisit. If, for example, a player with an offshore rebate account bets $10,000 daily in trifecta, pick three, and pick four wagers on NYRA races, over the course of a year he will have wagered approximately $2.6 million. If the offshore outlet pays 7% for that premium signal, it keeps 18% of the 25% takeout. With that kind of margin, the operator can afford to pay a 10% rebate to the bettor and retain 8% for himself--more than the track and horsemen who are putting on the show.

Industry officials estimate the rebaters currently are handling $1 billion per year in wagers through North America's pari-mutuel system, a number that is said to be growing quickly. If that's true--and the average price of a signal is 5%, the average rebate is 10%, and the blended takeout rate is 22%--rebate companies are showing a profit of $170 million. Horsemen and tracks share a piddling $50 million.

For the sake of comparison, for every $1 billion wagered on-track, horsemen and tracks share approximately $200 million.

Why, then, do racetracks and horsemen's groups continue to do business with companies that appear to be picking their pockets?

Churn, or volume betting, for starters. Many track officials are convinced rebate bettors are greatly increasing the amount they wager every day because of what they receive in rebates. These same officials think some players would walk away from horse racing if the rebates didn't exist. "They're not horseplayers," one said, "they're numbers guys taking advantage of an opportunity." In other words, the revenue generated from rebaters is looked upon as "found money."

Yet track managers know when they lose a major on-track or account wagering player to a rebate shop, so only a fool would suggest the rebaters are not poaching from a track's customer base.

Under the scenario mentioned above, horsemen and tracks share $50 million from $1 billion in wagers made through a rebate shop. If the rebaters were shut down and handle from those same players fell by 50% to $500 million, the horsemen and tracks would share $100 million if those bets were made on-track. If the fallout meant a 75% drop in handle to $250 million, horsemen and tracks would share the same $50 million they do with $1 billion in rebate handle today.

Because of antitrust issues, this is not something that can be dealt with collectively by tracks or horseman's groups. If individual state organizations representing owners got together and said to the rebaters, "We'll sell you the signal for 10%," they could be in violation of the Sherman Act. The same goes for a national organization representing tracks.

Instead, individual tracks and horsemen's organizations should evaluate their relationships with rebaters and ask themselves who is really benefiting. More importantly, they should lobby their legislators and regulators for flexible pricing policies that would allow them to compete.

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