IHA Blamed for Flawed Revenue Model

The debate over amendment of the Interstate Horseracing Act continues.

The Interstate Horseracing Act of 1978 is a double-edge sword. And the debate over whether it should be amended continues.

The law, which governs simulcasts across state lines and account wagering, gives horse racing a huge advantage over other forms of gambling in the United States. But some believe the way the law is written has led to a failed business model that is killing the game.

The IHA was part of a discussion on federal regulation Dec. 11 during the University of Arizona Symposium on Racing and Gaming in Tucson. There is strong resistance to involvement in racing by federal authorities, so the pari-mutuel industry is anxious to adopt a plan for self-regulation.

Fred Pope, who operates Pope Advertising in Lexington and has written extensively on issues related to horse industry business, said racing is more closely linked with government than any other sport, and that won’t change. He said the key is a simple business model that would return hundreds of millions of dollars in revenue each year to racetracks and horse owners.

“The IHA resulted in an upside-down business model that’s killing Thoroughbred racing,” Pope said. “The bet-takers are ‘gaming’ the IHA to the point where there is no incentive for the host track to put on the show. The potential closing of Hollywood Park (in California) is the new reality. Correct the IHA, and American racing will be the strongest program in the world.”

The business model to which Pope referred was formed at the advent of full-card simulcasts. Host racetracks charged 3% for their signals, while receiving tracks and other wagering outlets kept about 17% based on a blended pari-mutuel takeout rate of 20%.

It is widely acknowledged in the racing industry that the system is out of whack, but there has been no serious push to change it. The Thoroughbred Horsemen’s Group has taken bold steps to increase the percentage of revenue tracks and horsemen get from advance deposit wagering, but Pope believes percentages for the entire pari-mutuel pool must be revised.

Pope offered the example of state lotteries, which get 15% of total play and pay a 5% commission to outlets that sell tickets. In racing, those that put on the show get 3%, and bet-takers get 15%, he said.

Pope said a revised model could produce $500 million a year for purses. He suggested the IHA be changed to mandate that host tracks and horsemen get 50% of the takeout on interstate wagers; that language granting horsemen in receiving states consent be removed; and that the word "horsemen" be changed to "raceehorse owners."

“We need a business model to grow the live racing product,” Pope said. “Bet-taking has no place in the new economy. The unfair advantage racing has been given by the federal government has never been realized because of the stranglehold bet-takers have on our sport. How we’ve screwed this up over the years is a crying shame.”

Pope said ADW providers—the bet-takers—should merely process transactions, not be “companies trying to "game" the IHA with kickbacks and schemes called source-market fees.” ADW companies have insisted they need the revenue for research and development, and in some cases to pay to keep horse racing on television.

Two major ADW systems—TwinSpires.com and XpressBet.com—are owned by the nation’s two largest racetrack companies, Churchill Downs Inc. and Magna Entertainment Corp., respectively.

American Horse Council president Jay Hickey said amendment of the IHA is problematic given the way things work in Washington, D.C. He said there is the chance for “mischief,” as well as other amendments stemming from previous attempts at legislation to govern insurance for jockeys, equine drugs, and racing surfaces.

“I worry about this for many reasons, but the main reason is when you get into the congressional process, you can’t control it,” Hickey said. “All of these things are good ideas, but do we need them mandated by the federal government? The process could be worse than the cure.”

Hickey said he believes federal legislation isn’t needed to change the pari-mutuel business model.

Rick Masters, an attorney for the Council of State Governments, said compacts authorized by the U.S. constitution have wide applications for regulatory purposes. The compacts, which preserve state rights but accomplish national goals, are used for lotteries, Indian gaming, and the National Racing Compact, which issues licenses.

Officials were unsure, however, if such a compact could be used for a pari-mutuel business model.