Signaling Trouble
Photo:
Ray Paulick
Editor-in-Chief
Handle up. Purses down. That was the North American trend for both the second and third quarters of 2003. The good news, of course, is the fact more dollars are being wagered through the pari-mutuel system. Handle increased 2.5% in the second quarter and 3.4% in the third quarter. The bad news is a smaller percentage of those dollars are finding their way back to the industry's largest stakeholders: Thoroughbred owners. Purses declined 1% in the second quarter and fell 4.2% in the third quarter.

Year-end results from 2002 were similar: handle increased 3.2%, but purses were virtually unchanged, edging upward just 0.6%.

Early last year, The Blood-Horse looked into the percentage of pari-mutuel handle directed into purses over a 12-year period, from 1989, when simulcasting was still in its infancy, to 2000, when it had become a relatively mature revenue stream. The conclusion? The percentage of handle going to purses has dropped substantially.

In 1989, 7.5% of all pari-mutuel wagers on Thoroughbred racing went toward purses. Annual handle was approximately $9.3 billion, and purses based on that handle totaled $696 million. By 2000, handle increased 52.9% to $14.2 billion. Over that same period, purses increased 45.7% to just over $1 billion, but a great deal of the increase came from slot machines and VLTs. Stripping away the revenue derived from those non-pari-mutuel handle sources, it was estimated purses increased just 16.5% from 1989 to 2000.

Over those years, the percentage of pari-mutuel handle going toward purses declined from 7.5% to 5.7%, and there is nothing to indicate the trend will reverse anytime soon.

The economics of simulcasting are, in a word, backwards. Most receiving sites are able to buy a product for three cents and sell it for 20 cents--a huge markup. If a racetrack or off-track betting parlor takes bets on a race from another track, it sends three cents of every dollar wagered back to where the live race occurred. If takeout is 20%, that remote site is entitled to up to 17 cents, which in most cases is divided equally with horsemen at that location. But a growing number of simulcast receivers are located where there is no live racing and no horsemen with whom to divide revenue.

Buy for three cents, sell for 20. That's a pretty good business.

Some premier tracks are able to sell their live product for more than three cents on the dollar, especially to those simulcast receivers who do not support live racing. Many of these operations have grown substantially by offering rebates of up to 10% to horseplayers who wager large amounts of money. But even with simulcast fees of double the standard three cents on the dollar, the percentage going to horsemen is still below what it would be if the receiver were a track putting half of its revenue into purses.

When simulcasting began, track operators and horsemen looked at this new revenue stream as "found" money, one reason the price of the signal is so low. In an age of telephone and Internet betting and rebates for large players, however, the price of the signal must be reexamined. Too much money is being lost to simulcast businesses that are not affiliated with live racing, and that lost money is creating an economic squeeze on both purses to owners and revenues to racetracks.

Because of antitrust questions, the industry must stay away from implications of price-fixing when it comes to simulcasting fees. But it makes sense for an organization such as the National Thoroughbred Racing Association to put together a study group to examine the evolution of simulcast pricing and determine how simulcasting can best be used to guarantee a healthy future for the industry's racetracks--both large and small--and Thoroughbred owners.

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