Rewarding Innovation

By T.D. Thornton
North American racing has a widely acknowledged economics problem. Its chief funding mechanism, pari-mutuel wagering, is failing after serving the sport well for decades. What was once an efficient method of extruding profits is now an anachronism whose constraints are choking back betting growth.

This decline has caught hardly anyone by surprise, and calls for replacing pari-mutuels are not new. You could fill a book with recent proposals for a more modern betting framework, but a composite fix-it list looks like this: Racing’s takeout structure is unfair and antiquated. Bettors want guaranteed odds at fractional price points, without having to pay an absurd premium to a middleman. Compelling methods of market-based betting such as peer-to-peer and exchange platforms are worth examining. Integrity and transparency are crucial, as is the need to upgrade the technology infrastructure. For any of this to work, the profit model must ensure funding gets reinvested back into the sport in the form of competitive purses.

Horse racing does not have an immediate fix for its wagering woes. I don’t pretend to have the solution either, but here’s an unorthodox idea that might motivate someone from outside the industry to come up with a workable, and perhaps even astonishingly simple, answer: Offer a meaningful cash prize to anyone who can reform the Thoroughbred betting paradigm.

Sometimes, a specialized entity is too close to its own problems to understand them clearly. That was the genesis of the "Longitude Prize," offered by the British government in 1714. The inability to calculate a ship’s exact position on the open sea was hampering trade and endangering lives. Parliament posted a £20,000 reward for anyone who could solve the dilemma. It took nearly 50 years, but an unconventional approach by an unheralded clockmaker stunned sailors and astronomers by disproving the universal belief that longitude could only be established by ancient stars-versus-moon measurements.

A modern version of using a cash bounty to lure bright thinkers was hatched in 2000 by a Canadian gold executive who sank millions into a mine that experts believed was tapped out. Tests proved gold did still exist beneath the massive spread, but the firm had no clue where to start drilling. Against conventional wisdom, the exec horrified colleagues by posting the mine’s ultra-secret geological data online, inviting anyone who wanted to take a shot at the "Goldcorp Challenge" to do so. A $575,000 reward for uncovering hidden gold was promised, and when some of the offbeat analysis from 1,400 worldwide amateurs turned the area into one of the planet’s most productive mines, the firm gladly began paying out prizes within one year.

Asked by U.S. News & World Report what he learned, the mining executive cited two points. First, "when you give, you receive more." Second, "you need to search for the fundamental unquestioned assumption in an industry and then question it. If you do that, you will shift your perspective and generate alternatives that people haven’t thought about."

In January, New York Times economics columnist David Leonhardt wrote about Netflix, the online movie rental firm that launched a $1-million competition last October, open to anyone who could devise an algorithm that outperformed the company’s existing film-ranking analytics by 10%. The online leaderboard now shows 20,000 submissions, with roughly 100 new ideas pouring in each day.

"These are the two essential advantages of prizes," Leonhardt wrote. "They pay for nothing but performance, and they ensure that anyone with a good idea—not just the usual experts—can take a crack at a tough problem."

Not mentioned in the Times article is the brilliant side benefit of the prize model: Running an idea contest with a life-altering cash reward generated a massive windfall of international publicity for both Goldcorp and Netflix.

Before horse racing could institute its own "New Breed of Betting" prize, there would, of course, be the usual squabbling over how much and who should pay for it.

But in an industry where the loss of betting handle to outside entities is now quoted in billions of dollars, footing the bill for a prize that could produce revolutionary long-term change is a gamble worth taking.

T.D. Thornton is the author of Not by a Long Shot: A Season at a Hard-Luck Horse Track, which will be published in April.