HORSE RACING’S SUSPECT PROFIT MODEL

Two facts about horse racing in North America are not in dispute.  First, pari-mutuel wagering is in a long-term decline; with the exception of 2006, handle has decreased every year since 2003.  Handle fell from $15.2 billion in 2003 to $10.9 billion in 2013, not accounting for inflation, and has not improved in 2014.  Second, racetracks have resisted significantly lowering takeout rates, over a protracted period of time, to make the pari-mutuel wagering product more competitive with gaming, and in some cases have inexplicably raised takeout rates in the face of weakening handle.

Assume for purposes of analysis that racetrack executives are correct in their implicit assessment that reducing takeout rates won’t provide enough of a catalyst to handle to boost profitability.  If this is the case, then a key component of horse racing’s business model dooms the entire industry.

What ails horse racing is the profit model component of the business model.   Many people erroneously use the term business model interchangeably with profit model.  In fact, an industry or company’s profit model is only one aspect of its business model, along with its value proposition and various systems, such as the unrivaled distribution model that makes Wal-Mart a winner.  Likewise, advanced deposit wagering is part of horse racing’s business model.

North American horse racing is a niche sport, but one with a value proposition that appeals to millions of people, as evidenced by the number who watch the Triple Crown races and the amount of money bet.  While pari-mutuel wagering is ebbing, it is still a nearly $11 billion business annually and this amount exceeds annual ticket sales for American movie theatres.  Moreover, horse racing’s convenient delivery system provides a competitive advantage in that it is the only legal form of gambling on the Internet in the United States.

Nonetheless, the trend in pari-mutuel wagering is negative.  One hypothesis is that racing’s profit model is unfixable.  It is conceivable that pari-mutuel wagering can’t compete because of its inordinate brick-and-mortar overhead, as opposed to slots, for example, similar to how conventional bookstores have been eviscerated by Amazon and music retailers were killed off by iTunes.

Whether racetracks can alter their profit model, via takeout rate reductions, and thereby make themselves more competitive and more profitable is impossible to know definitively unless track executives are willing to experiment to find out.  If they don’t experiment, the prognosis is continuing declines in handle.

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In a future article, I will focus on what a vastly downsized North American horse racing industry might look like.

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