Archives for October 2015

My first job out of college was in sales and marketing with the Georgia-Pacific Corporation.  I was located at a distribution complex that had a modern sales office and a vast warehouse full of various sizes of plywood, prefinished decorative paneling, Formica, and other building-material products.  Georgia-Pacific was (and still is) a vertically integrated company with its own forests, production facilities, distribution centers, and trucks.  Customers were retail lumber yards, cabinet shops, and retailers like Sears.  Home Depot and Lowe’s were yet to be founded.

The outside sales force was compensated on salary plus a percentage commission on the dollar amount sold.  Therefore, the built-in incentive was to cut prices and go for as much volume as possible.  On the other hand, the distribution center manager had a different goal:  He wanted the combination of sales volume and profit margin that optimized profitability.  Thus there was an ongoing push and pull between the sales force and the sales manager.  (The sales reps and the sales manager also often differed on whether to extend credit to companies with a poor record of paying on time.)

Takeout on pari-mutuel wagers is conceptually similar.  While racetracks could undoubtedly boost betting handle by dramatically slashing takeout percentages, net betting revenue would decrease if the reduced takeout percentages were not compensated for by sufficiently increased wagering.  If, for example, the takeout were decreased by 25% on exactas, betting on this type of wager would have to expand by 33.3% to break even on net revenue.

Like the sales force reps at Georgia-Pacific, knowledgeable bettors want the lowest takeout possible.  By contrast, as with the Georgia-Pacific sales manager, the racetracks should strive for a takeout that yields the optimum net revenue (i.e., betting handle x takeout percentage).  Yet racetrack executives with pricing authority have not demonstrated a willingness to meaningfully experiment to find the takeout percentage on various types of wagers that is optimum.

That’s perplexing and even calls into question basic competence in marketing.

Copyright © 2015 Horse Racing Business

American horse racing has become increasingly dependent on subsidies from casino revenues to augment purses.  The conventional wisdom is that this dependence is just a temporary fix, and there is indeed hard evidence that the temporary time frame is about over.

The Wall Street Journal ran an article (October 13, 2015, page A6) titled “Casino Glut Adds to Racetracks’ Woes.”  The opening paragraph read:

“Casinos have pumped more than $8 billion into the U. S. horse racing industry in the past, propping up a sport beset by an eroding fan base…  But market congestion from the recent casino-building boom across the East is cutting into some casinos’ revenue, bringing new woes to nearby tracks.”

The Journal article contains a chart that lucidly depicts how casino revenues in West Virginia have been in decline, thereby dramatically eroding purse subsidies.  Delaware is in a similar situation.  Both states are experiencing relatively new casino competition in close-by states.  In addition, in West Virginia the legislature has cut purse subsidies to bridge a budget shortfall.

What is transpiring in Delaware and West Virginia will likely eventually spread to other states, such as Pennsylvania, Maryland, and New York.  (Arguments that horse racing and “wealthy owners” are being subsidized by states at the expense of spending on education and health care are very difficult to counter regardless of the economic-development logic put forth by racing interests.)  If this occurs, the result will be vastly reduced purses and most likely at least a few racetrack closings.

Chris McErlean, vice president of racing for Penn National Gaming, is quoted in the article:  “We want to see racing survive and thrive, but we know in a lot of places the current model isn’t sustainable.”

If this data-based Wall Street Journal article and Mr. McErlean’s candid observation do not demonstrate the imminent need for a much more desirable pari-mutuel product, then nothing will.  A key component to a more enticing product is the takeout percentage on wagering.  Big-spending bettors are not fools and gravitate to plays where they have the best chances of turning a profit.

The view here is that the upper-tier managements at some and perhaps most casino-owned racetracks don’t experiment with takeout percentages to attract new customers and encourage more betting for the simple reason that the powers that be would prefer to see horse racing gone from the product line.

How else to explain their unwillingness to attempt to revive the pari-mutuel product with experimentation on pricing?

Copyright © 2015 Horse Racing Business

I’ll have another post on takeout on Saturday, October 17.

On October 5, 2015, a New York Times article by (racing writer) Joe Drape and Jacqueline Williams reported on the emerging fantasy sports disgrace:

“A major scandal is erupting in the multibillion-dollar industry of fantasy sports, the online and unregulated business in which players assemble their fantasy teams with real athletes. On Monday, the two major fantasy companies were forced to release statements defending their businesses’ integrity after what amounted to allegations of insider trading, that employees were placing bets using information not generally available to the public.”

Only days later, on October 9, an article in the Des Moines Register pertained to shady doings in some state-run lotteries:

“Authorities believe a former Iowa Lottery official convicted in July of rigging a Hot Lotto drawing in 2010 manipulated at least two previous drawings that helped his brother and a longtime friend win more than $1.3 million from lotteries in Wisconsin and Colorado.”

How much these situations will negatively affect revenues of lotteries and sports fantasy games remains to be seen.  Class-action lawsuits are a certainty but how much the publicity will deter lottery and fantasy players is yet to be determined.

Like lotteries and fantasy sports, pari-mutuel wagering on horse racing is vulnerable to attempts to rig the outcome.  Rigging can take the form of actual race fixing (too many recent examples to recount with brevity) or interference with the technical mechanics of a wagering system (e.g., a computer programmer got caught conspiring with two friends to win the 2002 Breeders’ Cup Pick-6).

In referring to the aforementioned lottery scandal, Iowa Lottery CEO Terry Rich said:  “This case is a strong reminder of the need for ongoing vigilance against fraud, not only in the lottery world, but in society as a whole.”

While Mr. Rich is stating the obvious, it is still sound advice for racetracks and advance deposit wagering firms whose offerings depend on integrity.

Copyright © 2015 Horse Racing Business