Archives for March 2011

PRICING THE FUTURE BY ALAN F. BALCH

Alan F. Balch is the Executive Director of California Thoroughbred Trainers.

(Reproduced by permission from the latest issue of North American Trainer, the quarterly magazine for the training and development of the Thoroughbred. For additional information about the publication, please visit www.trainermagazine.com/america.)

Just why is it that our sport, which is dependent upon the objectivity and precision of the photo-finish camera, seems not only to tolerate but to stimulate the most exaggerated, unclear, and irresponsible talking and thinking imaginable?

There are a few choice, provocative, and impolite words I could use to describe that fuzzy talking and thinking, but I’ll refrain. One has a certain bovine tinge. I have always preferred equines, myself.

Before I get any deeper into this metaphor, I’ll just introduce a fundamental topic that’s been on our minds in California lately: prices and pricing.

The whole racing world knows that takeout on two-legged exotic bets has been raised in California as of January 1 by two percentage points from what it was previously, and on three-or-more-legged exotics by three points. That makes the takeout on those bets now 22.68% and 23.68% respectively – increases of 9.7% and 14.5%, from the previous takeout on both types of exotics, which was 20.68%. (“Only” two and three points more in the takeout, we are relentlessly reminded as by our grammar school arithmetic teachers, are really a lot more.) 

These were literally overnight price increases – which is to say that the takeout was at the lower level on December 31, and suddenly the higher levels on January 1. A great hue and cry went up in anticipation of these price increases when the legislation mandating them was enacted in September, and an even louder wailing has been reverberating in racing’s house since New Year’s Day. The fact that higher purses are the intended recipient of the funding from the price increases has not appeared to mollify those who object, even though higher purses should (theoretically, at least) result in better field sizes than we would otherwise be seeing, and therefore improved wagering opportunities. In short, better quality justifies a higher price. Anywhere. In anything. Or so it is said.

Who is objecting? Some of our customers, that’s who. Quite probably many of them. Racing fans who live in California and like California racing, and those who may live outside California but like to bet on our racing and don’t like the higher takeout.

About the only good thing I can see in this controversy is that a bright light is now shining on a subject that has bothered me for nearly 40 years. Bets on the races are still priced as though we are in the Stone Age. Everywhere, not just in California.

Name me one other product category (or any brand) that has its essential offering priced according to immutable law, regardless of market forces, and has that simplistic price enforced by a regulator? I suppose there still are other such regulated industries out there somewhere, besides racing, that you might name – but I don’t know what they are. If they exist, they’re probably in the same trouble that racing is. As Milton Friedman, the Nobel Laureate economist , once said, “Any price the government sets is wrong.” Or, more famously, “If you put the government in charge of the Sahara Desert, in five years there would be a shortage of sand.”

Where did “takeout” even come from? It is a creature of state government regulation over pari-mutuel betting, of course, dating in almost all American states back to The Great Depression. After all, contemporary racing in the United States was widely enabled and regulated as a stimulus to the agricultural and greater economy in the 1930s, particularly in California. Probably because of the primitive calculators and totalizators of the time, straight, place, and show bets all had the same takeout for ease in figuring prices.

When exotic bets were introduced – hard to fathom now how popular the Daily Double once was, and that it is now “exotic” in name only! – the takeout for such bets could be higher because of the higher expected payoffs.

Since the gaming market in those days was local or regional, and competition mostly illegal or across some border and therefore extremely inconvenient (to put it politely), machine guns and alligator-filled moats couldn’t keep the customers away.  We used to say.

This competitive situation was changing forty and even fifty years ago in most places, and ever more rapidly since then. But as Professor Friedman would have predicted, governments could not and did not respond fast enough; managements and horsemen have likewise appeared to be paralyzed in their reactions to market forces. Governments are not markets! And it’s all so understandable: people in racing had little if any experience in truly competitive markets, and therefore no practice in responding to real market forces. Those of us who were advocating enormous changes in our business model and pricing structures decades ago, as well as research and development to combat competition from other forms of gaming, were often laughed out of the room. Or worse. Anyone in management who didn’t really love horses or the sport is long since gone, shaking his or her head.

So, what to do? Embrace the possibility of truly flexible takeout … which is to say modern, competitive pricing applied to betting on the races. Only a Neanderthal thinks everyone should pay the same price for something no matter how much of it they buy, whenever they buy it, and whatever the quality is! (And those are only a few pricing criteria.)

First, recognize the problem for what it is – fundamental. Second, brainstorm and explore the theoretical and practical opportunities (given the present need of enabling legislation) for flexible takeout. Third, recognize the impact of local, regional, national, and international competition for the gaming, sports, and entertainment dollar, and then use a sophisticated understanding of it to unsparingly inform all potential pricing scenarios.

Let’s stop yelling at each other, and get together to improve our pricing in a collegial fashion. We just might be able to fix the problem if we stop wasting our time fixing the blame. The entrepreneurs originally responsible for the concept of takeout as it is still largely imposed upon our sport and our markets have been laughing at us from their clouds for quite some time now.

INTERVIEW QUESTIONS FOR THE BREEDERS’ CUP CEO CANDIDATES AND THEIR REFERENCES

Following are the questions that I would ask if I were interviewing pre-screened candidates for the vacant position of Chief Executive Officer of the Breeders’ Cup, followed by the most pertinent questions I would ask of candidates’ references. I would request that the candidate (and his/her references) elaborate in some detail.

1. Why do have an interest in becoming CEO of the Breeders’ Cup?

2. Sketch out in broad terms how you would go about working with a large board of strong-willed individuals, who are all successful in their own right?

3. How many times have you attended a horse racing card in the past two years? Have you been to any Breeders’ Cups in person or watched on television?

4. Are your thoughts mostly favorable or unfavorable on the Breeders’ Cup two-day format, versus the original one-day program?

5. Would you lean toward establishing a permanent site for the Breeders’ Cup or moving it around among several racetracks?

6. Do you have any suggestions for strengthening the Breeders’ Cup ties with Europe?

7. What would be the major pros and cons of moving the Breeders’ Cup feature races to television primetime, perhaps on a Friday night, to avoid the bulk of college football games?

8. What do you see as the advantages and disadvantages of presenting the Breeders’ Cup on ESPN as opposed to network TV?

9. What are the two or three main issues that horse racing must successfully address to move forward as a sport and business? Please address this question first from the standpoint of the racetracks and ADWs and then from the perspective of the bloodstock side of the industry.

10. In the background material we sent you, there is a section on funding. What are your impressions of how the Breeders’ Cup is financed? What do you see as the long-term implications of declining stud fees?

11. Which of these two compensation concepts would you prefer if you were the Breeders’ Cup CEO? (a) A total compensation package consisting of a relatively low base salary but laden with performance incentives based on agreed upon metrics; or (b) A total compensation package with a relatively high base salary with some incentives. To be more specific, in the first instance, a CEO might be able to earn, say, up to three times his/her base salary in incentives, whereas in the second instance, the incentives could amount to about one-fourth of the base salary.

The main questions to explore with a candidate’s references:

1. How well do you believe he or she would deal with intense public scrutiny and often cutting criticism from many sources?

2. Is he or she an honest and ethical individual?

3. Does he or she have strong interpersonal skills and the ability to communicate effectively?

4. How well does he or she grasp financial matters like cash flow and budgets?

5. Is he or she a sound strategic thinker?

Copyright © 2011 Horse Racing Business

BCS and BC on ESPN

The drama surrounding Zenyatta’s valiant attempt to win a second straight Breeders’ Cup Classic in 2010 nearly tripled the television ratings over 2009.  While this was a highly favorable outcome, the television ratings for the recently completed college football bowls indicate that the Breeders’ Cup could have done better on network television.

For the first time, the college football Bowl Championship Series (BCS) in 2011 was telecast exclusively on cable channel ESPN.  The Breeders’ Cup made the same move in 2006 by opting to telecast the Saturday feature races on ESPN rather than on NBC. 

The result of the BCS migration to cable was dismal.  The ratings for four of the five BCS games nosedived as compared to last year.  Ratings for the Rose Bowl, the Orange Bowl, and the Fiesta Bowl plummeted by 14 percent, 22 percent, and 30 percent, respectively.  The BCS bowl game to determine the national champion drew the largest audience in the history of cable television.  In spite of that, the game’s 15.3 rating was down by 11 percent from 2010 and ranked ninth out of 13 BCS title games.

The Breeders’ Cup experience with leaving network television for cable TV closely parallels what occurred in college football.  The Breeders’ Cup was telecast on network television from 1984 until 2006, when it was switched to a combination of ABC and ESPN.  The centerpiece, the Breeders’ Cup Classic, is on ESPN.

Ratings for the 2006 ESPN telecast dropped nearly 50 percent from NBC’s 2005 telecast.  NBC’s lowest rating ever for the Breeders’ Cup was in 2004; yet that telecast had a higher rating than four of the five years that ESPN has done the telecast.  Only the ESPN telecast in 2010 starring the charismatic Zenyatta topped NBC’s bottom rating.

The limits of cable television vis-à-vis network television are easily discerned:  approximately 16 million households in the United States do not subscribe to cable television and this equates to five percent of viewers.

ESPN is a dedicated sports channel and this focus provides it with the ability to cross sell by promoting niche events like the Breeders’ Cup on non-racing sports programming.  However, as both college football and the Breeders’ Cup have found, the downside is the exclusion of millions of television households. The TV ratings for the 2010 Breeders’ Cup Classic would undoubtedly have been higher had the event been on network television, especially with Zenyatta’s ability to attract viewers who do not normally follow horse racing.

An important inference from the BCS and Breeders’ Cup cable TV decision is that the Triple Crown races should remain on network television.  These are U. S. racing’s global showcases and need to be available to the widest possible audience.  The Kentucky Derby in particular is suited to network primetime.

Copyright © 2011 Horse Racing Business

Originally published in the Blood-Horse.  Used with permission.