Takeout Cut Heats Up Simmering Debate

It won't be easy to gauge the results of Keeneland's pari-mutuel takeout reduction, and the decision by the Mid-Atlantic racetracks and New York off-track betting corporations to drop the Kentucky track's signal because of concerns over a drop in revenue.

If anything, the situation has moved the simmering debate over simulcasting economics to the forefront. It should provide fodder for the Oct. 15-17 International Simulcast Conference in Louisville. A question is whether Keeneland has forced the industry's hand and put some tracks in an awkward position: Are they charging patrons too much to wager?

The results of the New York Racing Association's reduction in takeout effective with this year's Saratoga meet are still being debated. The Mid-Atlantic Cooperative, which includes 17 Thoroughbred and Standardbred tracks in a six-state region, said it continues to negotiate with NYRA on rates in light of the summer takeout cut that is in effective at all three of its tracks.

The cooperative includes racetracks in Delaware, Maryland, New Jersey, Pennsylvania, Virginia, and West Virginia. Apparently, the Keeneland signal is available at three West Virginia tracks that do not belong to the cooperative: Mountaineer Race Track and Gaming Resort, and two dog tracks, Tri-State Greyhound Park and Wheeling Downs.

A drop in takeout can be effective in generating additional wagering, but Dr. Richard Thalheimer, a Lexington-based economist, said there's more to the equation. Therefore, it will be tough to judge the merits of Keeneland's reduction in takeout from 18 percent to 16 percent immediately after the fall meet concludes.

There are several factors at play. For instance, the track has changed its wagering menu, and its meet is in session less than a month after the terrorist attacks on the United States, a situation that has altered spending habits in the country. A pretty good chunk of money won't be in play from East Coast betting outlets (the Mid-Atlantic region and New York off-track betting parlors account for about 30 percent of total annual handle in the U.S.). And it is the first fall meet being offered in homes in the Lexington market via the TV Games Network.

Both sides in the battle have valid arguments. Few would question Keeneland's new takeout rate of 16 percent on all wagers as it relates to providing bettors with more value, or the receiving outlets' contention that they will take a revenue hit. Much depends on how much additional handle is generated by lower takeout, and that itself is open to debate in the pari-mutuel industry.

Here is the crux of the receiving tracks' argument. Based on $100,000 in handle, a 20 percent takeout rate would generate $20,000 in revenue. If the host track charges 4 percent, it would earn $4,000 in revenue, which leaves 16 percent, or $16,000, for receiving sites.

If the takeout rate is lowered to 18 percent (a decrease of 10 percent), and handle just happened to increase to $140,000, total revenue would increase to $25,200 (18 percent of $140,000) for a jump of 26 percent.

If the 4 percent host-track fee remains the same, receiving sites would net 14 percent instead of 16 percent under the 20 percent takeout rate.

The host track would see a jump in revenue from $4,000 to $5,600 (4 percent of $140,000) based on the $40,000 increase in handle. That's a 40 percent increase in revenue. The remaining $19,600 in revenue constitutes a 22.5 percent increase, a lower percentage gain for receiving sites. To equalize the revenue gain for host and receiver, the 4 percent host fee would have to be reduced.

That formula is based on an increase in handle. Some track officials argue that lower takeout doesn't always lead to a jump in handle.

One racetrack official acknowledged that receiving sites do receive a larger percentage of revenue than the host site. (In the case of Keeneland, which charges 3 percent, the receiving outlets get 13 percent under the new 16 percent takeout rate.) But he said that's by design.

For instance, a wagering facility that doesn't offer live racing must incur the costs of downloading signals, and also pay general business expenses associated with opening the facility. Meanwhile, the official said the host track, already open for live racing, simply collects the fee.

Based on $10,000 in handle, and a 16 percent takeout rate, a receiving site would earn $1,600 instead of $1,800 under an 18 percent takeout rate. The receiver still must pay the 3 percent host fee ($300 on the $10,000), which would bring revenue to $1,300, a drop of $200 under the lower takeout rate. That would equate to $2,000 for each $100,000, and $20,000 on $1 million.