The future of the horse racing industry continues to be depicted by continuing declines in pari-mutuel handle. Yet upper-echelon racetrack executives carry go on just as they have in the past, as though the patient is just fine and the prognosis is bright. In fact, the prognosis is grim, and people whose livelihoods depend on the racing enterprise—from trainers to grooms to breeders to veterinarians, etc.—are the casualties.
The uncompetitive takeout rates in horse racing are, in my view, the leading cause, by far, of the decline in pari-mutuel handle. Yet racetrack executives appear to be incapable of intellectually addressing the problem. Following are two recent examples.
Immediately before the 2014 Kentucky Derby, Churchill Downs racetrack raised the takeout rates on straight bets and exotic wagers. A spokesman for the track explained that it needed to take this action in order to maintain purse levels. In other words, he was saying that demand for Churchill Downs’ wagering products is inelastic, meaning that pari-mutuel handle is to some degree insensitive to changes in takeout.
To be specific, the simplest mathematical formula for price elasticity of demand = % Change in Quantity Demanded)/% Change in Price. Thus Churchill Downs was acting under the hypothesis that the loss of pari-mutuel handle, expressed as a percentage, would be less than the percentage increase in price. What transpired was the opposite: pari-mutuel handle, excluding Kentucky Derby and Kentucky Oaks betting, declined in a big way. The Churchill Downs pricing doctors violated the first principle of solving difficult problems: do no harm.
Consider another example. In an interview with The Racing Biz, the president and chief executive officer of the Maryland Jockey Club, which runs Laurel and Pimlico, said:
“Every year we look at the takeout. At different times over the past years we’ve tried to change and modify. We try to do a balance between what’s fair and equitable for the horseplayer and still allow us to proceed forward… I would never recommend raising the takeout rates here at all. The balancing act is to provide the best service and be sensitive to the players’ issues — but we still got to make a buck. In a perfect world, if money wasn’t an object, you would lower and lower the takeout rate, but I still have to pay the bills, I still have to pay the salaries, and find money to do that. “
This statement connotes that takeout rates are optimal. The CEO says he would not raise takeout rates and he would not lower them either because he has to “make a buck,” implying that reducing rates would not improve profitability. If he has not experimented by significantly lowering rates over a protracted period of time, he is only conjecturing that the takeout rates are optimal. Moreover, “what’s equitable and fair for the horseplayer” is an empty and patronizing statement. Bettors who no longer wager on horse racing have decided on their own, without the help of the powers that be at Laurel and Pimlico, what is “equitable and fair”…and they have decided in a negative way. That’s how things work in a free-enterprise economy where customers decide whether to buy or not.
The forgoing examples vividly illustrate the endemic problem of economic illiteracy in horse racing regarding takeout rates. Churchill Downs erroneously acts as though demand is inelastic and the Maryland Jockey Club boldly insinuates that it has arrived at optimal rates. The fact is that these two premier racing organizations don’t know and are evidently unwilling or fearful to conduct long-term experiments to determine profit-maximizing rates. The fact is that racetrack executives’ refusal to try new approaches is condemning horse racing to a slow and painful and obvious descent to obscurity.
To my knowledge, no one knows for sure whether markedly reduced takeout rates can reverse the downward trend in pari-mutuel handle. But at least give it a try over, say, a year’s time rather than passively standing by while the sick patient expires in front of your eyes.
Based on past actions, the prospects for change are, sadly, remote.
Copyright © 2014 Horse Racing Business
Perceptions in Horse Racing are as follows, 1-The takeout is so high, nobody can possibly win. 2-The trainers need to give their horses massive amounts of legal/illegal drugs in order to compete, and unlike in Hong Kong, the vet records for those horses treated is top secret. 3-Horsemen’s groups always press for year round racing, no matter how miserably short the fields get. The great Mel Blanc’s tombstone sums it up best, That’s all folks!
The track moguls and horsemen who fight medication reform are getting their way, on the path to nowhere. Absolutely nothing will change their suicidal behavior.
Only 58 horses in 9 races at Los Alamitos today. (Totally unplayable 6.4 horses per race card) Couldn’t the circuit just take a break between S.A. and Dmr instead? Way past sick and tired of the steady diet of short fields in So. Cal. this year.