ADW Fee Cap Impacting Illinois Racing

Average daily ADW handle has declined 35.7% since the fee cap took effect.

A 5% cap imposed by the Illinois Racing Board on advance deposit wagering fees charged by out-of-state racetracks to send their signals to customers in Illinois has led to a significant downturn in wagering from those sources.

The fee cap, approved by the state legislature, went into effect July 12. Since that time, Illinois ADW customers have seen a significant drop in the number of tracks on which they can wager through and, the two platforms approved by the IRB.

According to the website, among the signals that have been cut off from Illinois ADW customers are Calder, Del Mar, and Saratoga, consistently among the most popular tracks on which to wager this time of the year. The signals are not being provided because the tracks are among those that charge higher rates, usually 8%-9% for their signals.

IRB figures through Aug. 3 indicate average daily ADW wagering has plunged 35.7% from $316,532 a day to $203,394 since the fee cap took effect.

The legislation, which states the IRB must set an ADW cap but doesn't mandate an amount, had the support of Hawthorne Race Course, two Standardbred tracks—Balmoral Park and Maywood—and the Illinois Harness Horsemen’s Association. Arlington Park and the Illinois Thoroughbred Horsemen’s Association were opposed to the bill. The cap was established with the support of a majority of Illinois licensees and Illinois horsemen, the IRB said.

"The exact same cap has existed in Illinois for almost 30 years on interstate fees paid by Illinois offtrack wagering facilities to out-of-state tracks for their simulcasts," according to the IRB website. "These interstate fees come largely from revenue that would otherwise be paid to Illinois horsemen in the form of purses on Illinois races. The purpose of the cap on interstate fees is to preserve and promote the interests of Illinois horsemen and Illinois racing relative to other states."

The IRB and other supporters of the cap note that California has a 3.5% cap on its ADW fees, but has not had imported signals halted as a result.

Arlington president Roy Arnold said the cap on ADW fees, which previously were left to negotiation among the tracks, horsemen’s groups, and ADW providers, is "unfortunate and shortsighted."

The timing, Arnold said, could not be worse as the entire racing industry is facing contraction and the loss of customers. While the cap may meet one of its objectives of sending more customers back to Illinois’ offtrack betting locations rather than making their wagers through the ADW systems, Arnold said overall it will result in a drop-off of horse racing bettors.

"The only way it makes sense is if the OTBs pick up 100% of the handle they were making at the ADW channel" before the fee was imposed, Arnold said, and that is unlikely to happen.

Considering the pressures being put upon all racing jurisdictions, Arnold said he understands the action of the legislature and IRB to impose the cap. But he said it is a form of protectionism that could be harmful if other states elect to go the same route.

The overall effect could be even more contraction within an already shrinking pari-mutuel wagering marketplace, Arnold said.

"I understand why various jurisdictions are pursuing what can only be termed protectionist," he said. "But it is absolutely the most counterproductive thing we can do."

While some tracks can only charge an ADW fee of up to 5%, tracks with the most desired signals because of the strength of their racing programs can charge premium prices, which are negatively impacted by caps such as the one in Illinois.

If the IRB had to impose an ADW cap as mandated by the new state law, Arnold recommended the cap be whatever fee is agreed to by the parties to the agreement—tracks, horsemen, and ADW providers. That, he said, is the best solution for everyone involved, including the ADW customers.

"Everybody wants content at the lowest possible cost, but if everybody did that we would see a continued contraction of content," Arnold said.

Arnold said the fact California has a cap on ADW fees is insufficient reason to impose one in Illinois or any other state. He noted California was the first to authorize ADW providers, and in doing so the state established the same rate that is charged for simulcast signals. If anything, California should lift or raise its cap rather than other states following its lead, he said.

"California does need to take action," Arnold said. "We should not follow California’s bad policy and impose it here."

Arnold said there is a common misperception among many within the racing industry that higher signal fees benefit mainly the ADW providers. In fact, according to Arnold, the converse is true, and that when caps are imposed, the lower fees result in the ADW providers getting a higher rate, and that the brunt of the decreases are felt by the tracks and horsemen.

"Any time a state imposes an ADW cap, the only winner is the ADW company," Arnold said. Both Arlington and ADW provider are owned by Churchill Downs Inc.

Illinois THA president Mike Campbell said the "single issue that is fueling the war of the signal prices" is the 3.5% California fee cap. "It is causing this reaction throughout the industry," Campbell said. "Our problem here in Illinois is that this is the shot across the bow. It could potentially be a lethal blow."

Campbell agreed with Arnold that market forces should dictate the fee charged for a signal to an ADW provider, with some tracks and their horsemen getting higher fees than others.

"Why would a horsemen’s group have a premium product and turn around and sell it for a lesser price?" he said. "All (horsemen) get is commission from handle. If those commissions are minimized, we can’t sustain ourselves."

Campbell said it is even more counterproductive for Hawthorne and the Standardbred industry in Illinois to favor caps at a time when there is potential to grow purses in the state. He said prospects for alternative gaming in Illinois are brighter than ever, and gaming revenue could elevate purses and the quality of racing at all Illinois tracks, including the harness operations.

"If we get slots in Illinois, with the purse money generated they could have a signal that (harness tracks) could charge 8% for in a very short period of time," Campbell said.

Meanwhile, as the controversy continues to swirl, the IRB said it "will continue to monitor and adjust the cap as the interests of Illinois racing warrants."