ADW Model: Who's Right, Who's Wrong?
by Tom LaMarra
Date Posted: 9/30/2008 5:01:02 PM
Last Updated: 10/1/2008 1:54:42 PM

Support for reform of the revenue model for advance deposit wagering continues to increase, but as evidenced Sept. 30 during the International Simulcast Conference, it’s looking more and more like a long-term project.

Drew Couto, president of the Thoroughbred Owners of California and vice president of the Thoroughbred Horsemen’s Group, said keeping the current structure whereby horsemen and racetracks “trade 70% dollars for 40% dollars” amounts to a “recipe for disaster.”

Chris Scherf, executive vice president of the Thoroughbred Racing Associations, a racetrack trade group, said turning the negotiation process over to horsemen could threaten tracks and disrupt a competitive marketplace.

“It’s a recipe for disaster,” Scherf said.

And Dan Perini, an attorney for ADW provider Youbet.com, said the THG model—horsemen, tracks, and ADW providers each would get one-third of pari-mutuel takeout—would eat into company revenue, and in some cases, “the ADW provider would be left with nothing.”

Couto made a numbers-heavy presentation designed to educate attendees at the conference, held in St. Petersburg, Fla. He set the table by outlining ADW models used by TVG and TrackNet Media Group, whose partners are Churchill Downs Inc. and Magna Entertainment Group.

The basic TVG model, based on a 20% blended takeout rate (20 cents per $1 wagered), pays 3.5% in host fee, retains 6.5% in hub fees, and pays the remainder in statewide source-market fees.

Under the TrackNet Media model, 6% is paid in host fees, 7% is retained by the provider, and 7% is paid in source-market fees when wagers are made within 25 miles of a racetrack. No source-market fees are paid on bets made outside the 25-mile radius.

Couto said under the latter scenario, the ADW provider retains 14%. And 65% of handle is generated outside source markets, he said.

“Their retention is much greater on two-thirds (of the handle),” Couto said. “This is the trade of a 70% dollar for a 40% dollar. It needs to be revised, or we’re all going to be history.”

Couto also provided California figures that track the growth of ADW in the state. In 2002, the first year of ADW, providers earned $7.3 million in revenue and paid 5.6% in hub fees. In 2007, revenue increased to $21 million, but hub fees were 5.3%. Couto’s point was ADW companies can make money when they get less than 6% of pari-mutuel takeout.

“There is enough incentive, enough reward, and enough to cover expenses for these companies at one-third retention of revenue,” Couto said.

Perini disagreed. He banged the drum for ADWs, saying the goal should be to increase the wagering pie, not slice up the existing pie. The attorney called for horsemen in California to support reinstituting an experiment whereby all ADW providers had access to all content; the first go around, ADW revenue share jumped from $9.5 million to $12 million, even with eight fewer racing dates at Santa Anita Park.

As for Perini’s contention Youbet.com would make no money under the one-third-per-party revenue plan, Couto said ADWs would get credit for paying source-market fees and thus would earn money. Perini said he wasn’t aware of that provision.

"What I’ve heard is diametrically opposed to what has been stated here today,” Perini said. “This is not the place to negotiate a complicated business model.”

Scherf, speaking for the TRA, said tracks “totally support” an increase in revenue and acknowledge horsemen’s rights under the Interstate Horseracing Act of 1978. However, he said there are anti-trust concerns as well as potential problems in imposing a set fee structure for all tracks.

“All signals are not created equal,” Scherf said. “The Saratoga signal is different from the signal at Podunk Downs. We are redoing the split of revenue on something we acknowledge is 88% of our business. To turn that over to horsemen—I don’t see how that can be done. It’s going to weaken racetracks’ negotiating position, and I don’t believe it’s a noble venture.”

THG president Bob Reeves, who attended the conference, said the THG pursuit is noble and would end up helping the tracks because “the cause is survival of live horse racing.”

A few track executives who were on hand expressed concerns about the THG. Beulah Park general manager Mike Weiss said he believes the THG is dictating terms, not negotiating, while Tampa Bay Downs general manager Peter Berube said he has been told the model doesn’t work.

"I don’t prescribe to the THG position,” Berube said. “I think they’re unreasonable.”

Things appear to be heating up as the next round of racetracks open for fall and winter meets. Officials indicated negotiations could be interesting for tracks such as Churchill Downs, Fair Grounds, Hollywood Park, Oaklawn Park, Santa Anita, and Tampa Bay. The THG now has 19 member horsemen’s associations that account for signals from more than 60 tracks in the United States.



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