Op/Ed: Don't Mess With Handicapping Contests

Giving players–especially newer customers–a chance at winning money is something racing sorely needs for engagement and long-term growth.

As I am sure you've heard, handicapping contests have been in the news lately. Because I'm a horseplayer and not Matlock, I'm not going to dip my toe into the legal wranglings regarding them. But I would like to share an opinion on why I think these contests supply racing with something vitally important for its long-term prospects in the gambling market.

Figure 1

The daily fantasy sports space has been growing, and in 2016 revenues topped $3.2 billion. Just this year, Draft Kings–one of the industry stalwarts–has been publishing some very interesting data on its website: distribution of winnings, aggregate user statistics and beginner user statistics (Figure 1).

What the overall data shows is that these type of contests tend to spread the wealth around. About one third of the entry fees from the top 50% of customers results in about half the winnings.

For beginners, the numbers are stark, but not quite as bad as we may envision in a game such as this. Over the last 30 days, 11% of newbies showed a profit, 27% broke about even, and 62% lost money (Figure 2).

Figure 2

At the end of this user statistics page, we see what Draft Kings is doing to encourage these newbies to become longer-term customers. They link to contests for beginners, offer them leagues with other beginners, and link to their “DFS University” where they can learn and get better.

They aren't spending this time, effort and money altruistically. They make little money on cheap contests for newbies and it's a drag on revenue, if anything. Draft Kings is doing so because cultivating and creating a marketplace where new users have a chance to win (and current users can win enough to approach break even) is vitally important for the health of their game.

This concept is not just theoretical.

Just last month, Suhonen and Saastamoinen of the University of Finland published a study called, “How Do Prior Gains and Losses Affect Subsequent Risk Taking? New Evidence from Individual-Level Horse Race Bets.” They discovered the following:

“We find evidence for (i) the 'house money effect' as bettors take riskier wagers after gains and mostly spend the money they have won; (ii) risk aversion after prior losses, which we label a 'playing safe effect'; and (iii) a preference for breakeven.”

In terms of the gambler, what this means is pretty straightforward: When we win we spend the money we win, chasing more winnings. When we lose we are still confident we can win, but we crave risk averse games to wade back into the betting pool, and we are always striving for break even.

In North American horse racing, the pari-mutuel model alone is a whole different animal, and it does not allow the tenets of the Finnish study to be adhered to. If you are in a slump and want a low-risk contest to play (to stay engaged in the product), you don't find much of it. What you are bombarded with are the enticing allures of hard-to-hit pools–jackpot bets (some with 60% takeout), Pick 5's, Pick 6's, superfectas, or the flashing “Bet the Super High 5 now” message flying across your screen. These are all bankroll killers.

Think about it for a second. At Draft Kings, with contest play, almost four in 10 new users the last 30 days (playing more than 50 contests!) have either won money or broken even. How many brand new horseplayers out of 100 can you say that about?

It wasn't always like this, of course. When racing was much more popular with bettors than it currently is–like in the 1970's–most races had only win wagering, there was one double, two or three races with exacta wagering, and perhaps a 10th race trifecta. It was a whole lot easier, as the above study notes, to churn your winnings, or seek out a way to climb back into profitability through low-risk bets.

I am not here to say racing should go back to the 1970's. High-risk bets (winning a lot while betting a little) are a huge part of the betting sport, and customers vote with their wallets. However, I will submit that the current pari-mutuel system does not take advantage of what some bettors crave to stay engaged in betting the sport.

That's where contests come in and why we see so many who enjoy them; many who are saying the exact same thing–things like, “I can't come close to making money in the pools, and I stopped betting racing, but I can be near break even in contests. Now I wager a little in the pools again, too.” Or, “A few friends and I get together and play a contest and have a blast. It beats playing poker, or doing the yard work on a Saturday afternoon.”

At the Asian Racing Conference back in 2008, the Vice President of Wagering at the Hong Kong Jockey Club presented his findings on a study they completed about customer retention. He said, paraphrasing, “Once we lose a horse racing customer, he or she is almost impossible to entice back, which is why we need to keep them engaged at all costs.”

The pari-mutuel system is not delivering what a vital customer subset needs to stay a customer. Contests help deliver this, and in my view racing needs to look at them from a completely different perspective. It's not about a theoretical smidgen of revenue that's lost to them in the short term that matters. It's what they accomplish in the long-term that's most important.

Dean Towers is a Toronto-based director of a digital marketing firm and a board member of the Horseplayers Association of North America