Letter to the Editor: Bill Nader

In response to Will Players Take a Hike Over Takeout Hike?, T.D. Thornton, 8/15/17

It's a good bet that the recent decision to increase takeout inspired more of a negative reaction than Keeneland management expected. That's not necessarily a bad thing. Keeneland has now received a loud message from its customer base and can re-evaluate the outcome of its policy decision after the fall season in preparation for 2018.

It's also a good bet that nine out of ten bettors have no idea what the takeout percentages are today at Saratoga or Del Mar. The same can be said for three out of five racetrack executives. Takeout is the price people pay to make a pari-mutuel transactions and the information is rarely made readily available. Either way, you feel it in the end when the race is declared official and dividends are paid. If you have a winning ticket, the takeout helps determine how much you win. If you have a losing ticket, takeout is irrelevant.

Keeneland is often held to a higher standard as a not-for-profit industry leader. To almost everyone, Keeneland is friend, not foe – and deservedly so. The Keeneland brand was built on “racing as it was meant to be” and developed into a customer friendly, industry inclusive Kentucky rock. People within the industry can, at times, be critical and cynical, but Keeneland has rarely been a target. Because of this lofty positioning, the recently announced takeout increase was a lightning bolt to the horseplayer. This does not mean that Keeneland should not be run as a business because of its “not-for-profit” status, nor should it be given a free pass.

The Keeneland “competitive” explanation, whether it be the takeout increase will help fund higher purses leading to a better product or the increased takeout rates remain competitive within the industry – well, that raised more than one eyebrow. The better explanation might have been Keeneland raised takeout and hoped that no one would really notice.

Win, place, show takeout was raised from 16 to 17.5 percent. Exotics were raised from 19 to 22 percent, with the Pick 5 unchanged. Somehow the Pick 5 is the chosen one at NYRA tracks and at Keeneland. Wagering menus include Daily Double, Pick 3, Pick 4, Pick 5 and Pick 6, but there seems to be something magic about the number 5 that earns it lower pricing privileges. There is no logical explanation.

Total handle on Thoroughbred racing has remained relatively flat for several years. It peaked at $15.2 billion in 2003 and has lingered below $11 billion for the last seven years. There was a three-year run at $15 billion plus from 2002-2004 followed by three consecutive years at over $14.5 billion. The total handle drop from 2007 to last season is $4 billion. That's a big hit, without any adjustment for the real value of the dollar  and a metric that every stakeholder should find relative to industry health.

The industry has embraced a customer segmentation model that offers big rebates to the high volume customers, lesser rebates to the mid-range players and no rebates to the little guys. Rebates result in adjusted takeouts for each segment and, in most cases, the rebate is distributed by the retailer as opposed to the manufacturer. These adjusted takeouts represent the true takeout to each customer segment. In some ways it makes business sense. But in many ways, the host track or the manufacturer of the content has lost control along the way.

The Jockey Club Round Table at Saratoga included a McKinsey presentation on Better Race Scheduling Using Big Data, a fancy way of saying coordinated post times. The conclusion was if racing's major racetracks did a better job of not tripping over each other, total handle could increase by $150 to $400 million annually. The industry has been talking about this for almost as long as medication reform. This, however, is a much easier fix and something that should be achieved to improve customer satisfaction with any incremental handle an added bonus.

The real discussion needs to be on what I call the “true takeout” – the takeout percentage less the applicable rebate – and its relative impact on purses, liquidity of wagering pools and the overall health of the pari-mutuel markets. Coordinated post times or better race scheduling is something like those cocktail hot dogs they pass around at a party. The true takeout is the beef.

What has happened over the past couple of decades is simulcasting has changed the wagering landscape. Gone forever are the days when people like me started in this industry and it was live racing only, nine races a day. The entire world has changed and Thoroughbred racing is no different than any other industry. Lowering takeouts to increase handle is less effective today because of the influence of rebates and the multiple choices of content result in a pari-mutuel maze as compared to the long-gone days of the single track offering targeted to a live audience. Equally, raising takeouts, for the same reasons, would not have the same level of negative impact on total handle as it would decades ago.

Does anyone say I will bet Santa Anita because of its low takeout (15.43) on Win, Place and Show but not play its Exactas at 22? Not really due in large part to the current business model which rebates to the big customers. Otherwise, there would be a loud, sustained scream. The new Keeneland has marched to the beat of others by raising the price on multiples by 15.8 percent with a 3-point hike from 19 to 22. In almost all cases and it may or may not be true in the Keeneland example, the big customer escapes the pricing increase because the rebate is adjusted upward and the true takeout remains unchanged.

The question for the industry is to take a deep dive to see if this is really working. We know that lower takeout is the purest form of rebate, one in which everyone benefits. But it would work best for the major racetracks in this country to agree on this type of strategic direction and move forward together. There needs to be an injection of liquidity into the pari-mutuel pools to break out of this current trend of going nowhere. There has been no change in total handle from 2011 to 2016. We are stuck at $10.7 billion.

Money from VLTs, historical racing machines and other forms of alternative gaming are funding purses to take the sting out of the handle shortfall. Thoroughbred racing is great sporting entertainment and the pari-mutuel engine is a unique advantage. But the engine is clearly sputtering.

The big guys need the little guys and the industry needs the little guys to bring liquidity and sustainable growth to the customer base and the pari-mutuel pools. This is clearly the problem as the handle trend indicate. There needs to be a unified approach to bring everything back into alignment. The new Keeneland takeout is misguided.

Let's consider this an experiment and allow Keeneland a mulligan or a chance to fully evaluate if this is the right strategic direction. Chances are the results will prove inconclusive. Keeneland tees off again in the spring of 2018 and can choose then which club to hit. As for the industy at large, a full evaluation is also in order. Something has to change.

 

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