For the seventh consecutive year, total wagering on American Thoroughbred racing will fall short of the $11 billion mark. Most in the industry shrug this off, spinning the story of this key economic indicator into a false positive—a flat line to a downward spiral that began in 2005 when a three-year run of more than $15 billion came to a near screeching halt. Horse racing features some of the brightest financial minds from Wall Street as owners and trustees of its sport, making it all the more shocking how nonchalant the attitude seems to be about the one number that defines the health of the overall industry.
Total wagering is called handle in North America and turnover elsewhere, but we can simply call it the key driver to all stakeholders who derive a livelihood from the sport. It is the key component to investment in purses and the funding for operating and capital investment. Every person who wants the sport to succeed—the horse owner, breeder, shareholder, track executive and employee, the stable worker, vendors, and racing fan seeking a good customer and wagering experience—are all better off if total handle is healthy. But, the seven-year flat-line trend tells us that we are not. Adjusted for inflation, total handle would need to be at $19 billion to match the $14.7 billion from 2007.
The easy way out is to look for reasons. There are 27% fewer races today as compared to 2007, average field size has declined from 8.18 to 7.8 starters, and major players such as New York City OTB and Hollywood Park have faded away. But the major tracks are still in play, and purses benefit from the supplement provided by alternative gaming. So, the time has come for the industry to stop making excuses and work on a plan to change direction and stimulate business.
Earlier this month, I spoke on a panel at the University of Arizona Race Track Industry Program's Global Symposium on Racing on the topic of handle stagnation and made recommendations of corrective steps to consider. I did not come away with a good feeling that something good might happen. So, here, in writing, I am taking one more swing of the bat.
The major racetracks should come together and agree on a takeout reduction to stimulate wagering investment. No single racetrack or racing association can do this in isolation. There needs to be a concerted effort and a shared vision. This is point No. 1. The big tracks know who they are and they need to work together on a plan.
The prime category for takeout reduction should be in the single-race (vertical) bet types, specifically win, place, show, and exacta, in an effort to create churn to allow the betting dollar to turn over with greater frequency. This will create a better return to purses and to the bottom line. Over the last 10 years, there has been a steady shift from single-race to multi-race (horizontal) bet types such as Pick 3, 4, and 5, where the takeout is applied only one time and the payment to the industry (purses and tracks) is minimized as the wagering dollars can be tied up over multiple races. There is nothing wrong with multi-race bet types. Customer preference and wagering experience is the trump card and this is acknowledged and accepted.
The key is rebuilding the foundation by bringing greater liquidity and churn to the single-race pools through a strategic initiative to lower takeout as it relates to field size. Win, place, show, and exacta wagering has to become more attractive. The major tracks can come together and agree, for example, that on field sizes of six or less, takeout on these bet types is 14%. Fields of seven and eight, takeout is 15%. Fields of nine or higher, takeout is 17%. The totalizator companies have the flexibility to do this. The burden of taking this leap of faith, this industry bet on its own future, should not rest on one track. It needs to be a shared vision.
My experience in Hong Kong, as the executive director of racing at the Hong Kong Jockey Club, has led many to ask what we can learn from that powerhouse jurisdiction that we can apply here. Here are a couple of things to mull over. Average wagering in Hong Kong is a world best $180 million per race day (in U.S. dollars). Win, place, quinella and quinella place account for $153 million of that total or 85% in single-race bet types. These are the most conservative bet types and they create churn, allowing the dollars to turn over. Also, the payouts (called dividends in Hong Kong) are to the nickel for all amounts up to HK$1,000 (approximately US$130). Hong Kong takes it one step further by rounding both up and down on breakage to be incredibly fair to the bettor.
Steven Crist, the former Daily Racing Form executive and columnist, led the charge to pay to the dime in New York years ago and we should now take it a step further and pay to the nickel for all payouts less than $20. We should also consider rounding both up and down on breakage, though I realize this may be too big a mountain to climb. As economist Marshall Gramm correctly stated during the University of Arizona Symposium panel discussion, breakage is a contributing factor of takeout. By reducing breakage, we are reducing takeout and making takeout sensitive bet types such as win, place, and show more appealing.
Over the past several years, the industry has reduced effective takeout to higher volume customer segments in the form of rebates. This can continue. But with any reduction in takeout, all parties must agree to a pro rata adjustment. This includes payments to purses, state governments, and rebates to big bettors. Everyone must buy in. Big bettors will jump on board as greater liquidity in these pools is to their benefit and a pro rata reduction is fair and equitable. State governments and horsemen should not resist as it is a concerted effort to restore health by stimulating investment in our pair-mutuel pools.
Recently, Keeneland experimented with an increase in takeout during this year's 17-day fall meeting. Comparing year-on-year, Keenleland ran one additional race and field size was slightly higher at 9.2 as opposed to 9.1. Attendance was down 2.2%, on-track handle was down 1.1%, and off-track handle was down 9.6% for an overall decline in betting of 8.4%. It may be possible that Keeneland retained more net income but it is short sighted. As an industry leader with a longstanding reputation of excellence, Keeneland, NYRA, and others should come together and work on a strategic alliance that sets uniformed takeouts as part of a mission and vision policy that can create churn and change for the long-term benefit of an industry in an ever-increasing competitive landscape.
Back to those people who look for the easy way out and want to discount my reference to Hong Kong by saying the Chinese population have a greater propensity to gamble, making the comparison irrelevant. Horse racing outperforms the lottery in Hong Kong by a margin of 17 to 1. For this to happen in our country, Thoroughbred racing would need to be a $180-billion business.
Recent trends tell us that lower minimum investments in bet types such as the Pick 5 can lead to higher handle. We should learn from that and lower the minimum Pick 6 threshold from the current $2 in New York and California to either $0.50 or $1 with the understanding that the fractional investment is met with a fractional payout. If, for example, there is one winning unit for a net pool of $100,000, the 50-cent ticket would be paid $25,000 and the balance would be carried over.
The NTRA scored a significant victory in meaningful tax reform when the IRS agreed to consider a bettor's entire investment in the determination of the reporting or withholding amount for tax purposes. This was a step forward and it will help, but the real change lies in the hands of the industry itself.
The time has come for the brightest minds in the industry to call a timeout and huddle together for a shared and sustainable solution through a stimulus package that embraces lower takeout and greater churn on single-race, takeout sensitive bet types. Otherwise, the total sales of pari-mutuel bets on Thoroughbred racing will soon be halved when compared to the levels once enjoyed in 2002-2007. The current playbook isn't working.
