By Dan Ross
Last week, the Thoroughbred Owners of California (TOC) announced a roughly $15-million, two-year “purse enhancement” program as part of an agreement with TVG, the Del Mar Thoroughbred Club and The Stronach Group's 1/ST Racing.
The reason for the new program is simple: an unprecedented betting shift toward ADW platforms over the past 11 months has hit the California purse account hard. Not just the purse account. This shift has similarly clobbered several key industry programs that rely heavily on wagering made at brick and mortar venues.
The Southern California Stabling & Vanning Racing Committee recently announced a set of stopgap funding measures to grapple with a $2-million deficit and maintain the stabling status quo in the southern portion of the state during 2021, for example.
Other impacted programs include the jockey's insurance fund and the California Retirement Management Account (CARMA), the umbrella organization overseeing the fate of California's retired racehorses.
Public details of the new ADW agreement were light on the ground, however. And so, TDN spoke Wednesday morning with TOC president and CEO Greg Avioli about the new purse program and the ongoing economic pressures that an ADW-centric wagering model in California is having on the industry.
DR: Beyond what's been made public already, what specifics can you share of this new “purse enhancement” program?
GA: Details will be coming out in the next 30 days. At this point in time, we're getting input from the racetracks, the trainers and the breeders as to where everyone sees the greatest needs. And then, ultimately, the decision as to exactly where the purses will go will be made by the TOC racing committee, which is chaired by Gary Fenton.
While the exact amount of 2022 purse contributions will not be known until later in 2021, this year's purse contributions will total approximately $7.75 million with the majority coming from TVG, which has over 80% of the market share in the state.
DR: Is this a set amount based on projections, or are these attached to fee changes? And how does any redrawn hub fee structure compare to hub fees historically?
GA: The agreement we have reached with 1/ST Racing and TVG and NYRA is to maintain the 5% hub fee–as was the case in recent years–but then separately have purse supplements paid into California purses.
For the other ADWs–for Game Play Network and WatchandWager–we have actually reached an agreement filed with the CHRB for a 4.1% rate. And we have filed arbitration with Churchill [Downs] for a 4.1% rate.
That 5% rate will stay in effect for 2021 for the entities I mentioned [1/ST Racing, TVG and NYRA]. These aren't projected amounts based on the future–it was a business negotiation to where we got to the final amounts.
I can send you the final amounts of wagering for each of the ADWs from California residents for 2020, and what you'll see when you do the math is it is effectively, approximately, 0.9% of the total handle received from TVG and total handle received from 1/ST Racing. That will basically add up to the $7.75 million [estimated for each year].
I want to emphasize, and it's important, that it was not a reduction in the hub fee for either TVG, NYRA or 1/ST Racing.
In answer to your question about how any redrawn hub fee structure compares to hub fees historically, the fees that I mentioned with the three that we reached a deal with were basically fees paid in lieu of arbitration.
DR: What will the “baseball arbitration” process with TwinSpires moving forward look like?
GA: Baseball arbitration is something that I learned in law school in the 1980s, so that shows how old I am.
This came from the arbitration for baseball players, when they became eligible for free agency. This is process where a baseball agent would say, 'I want $250,000,' and the team would say, 'We want to pay you $200,000.' And they would sit in front of an arbitrator, and the arbitrator had to pick one. No middle ground.
For reasons I'm not aware of, that is what the legislature decided would be the case for arbitration in horse racing in California under [business code] section 19604.
It is a baseball arbitration, and the ADW has to enter an agreement with the racetrack. In this case, it was Santa Anita. TwinSpires entered the agreement with 5%. We responded, 'We think that's too high, the rate should be 4.1%.'
Now it goes to an arbitrator, and we're in the process of trying to reach an agreement on who the arbitrator will be. If we're unable to reach that agreement, there's a process for that to be appointed. And then it's in expedited arbitration, which the statute calls for being done in six weeks.
During that period of time, the 5% rate that TwinSpires has agreed to with Santa Anita will maintain in effect–they [TwinSpires] will take wagers from California residents, and accept 5%. And then if the arbitrator determines to go with the 4.1% rate suggested by the TOC, then that will be a retroactive disgorgement of that 0.9% dating back to Jan. 1.
DR: How sustainable is this new ADW-heavy wagering model in California? What do we know of the retention rate, for example, of new TVG customers garnered over the last 12 months?
GA: It needs to be sustainable because it is the new reality.
We're going to have to find a way to make the business work with the vast majority of wagers now coming online. People like to refer to the book industry–the Barnes & Noble story–but look at the car industry right now as well. Every industry is moving to online commerce, and we are absolutely no different to anyone else in that regard.
The opportunity we have here–and again, I wasn't around when they created this law–but one of the things I would definitely have tried to change when they passed this law is to make sure the racetrack and the horsemen had access to the customer data.
Unfortunately, that's not how it's set up. The customers are all owned, and the data is all controlled, by the ADWs. No one can sit here today and tell you how many ADW residents there are–how many customers, residents of California, [use] ADWs.
But if you talk to people in the business and get arm's-length estimates, it seems to me there's probably about a quarter-of-a-million active customers–200,000-300,000 would be a good number in California.
And of those 200,000-300,000, there's obviously an 80/20 rule–the vast majority is probably bet by less than 50,000 of them. But you're talking over $1 billion wagered.
We believe the future that will occur by the end of this year, you're going to start to see these merged wallets, where the sports books will be offering wagering on horse racing to their sports book customers. And the market in California, estimated for sports wagering, is at least a $3-billion market annually. The number of customers, you're probably looking at, at least three million.
So, if you follow the math, you're going to have a 10-times opportunity for customers who have never really been presented with racing to have racing on a sports betting website that they're going to every day or every week. Therein lies the opportunity to expand our customer base by 10 times by the launch and expansion of sports wagering.
But it's expanding horse racing wagering to be offered as part of sports wagering not just in California, but in Pennsylvania and New Jersey and Illinois–all the states that allow sports wagering to have their customers be able to wager on horse racing, including California, one of the top signals.
Part two of that strategy, we need to run more races. We need to get back to Thursday racing at Santa Anita for four days a week. Daytime racing is a wonderful opportunity for horse racing because there's just limited other products for people to wager on.
If you talk to the ADWs or the sports wagering companies, they'll all tell you they've all been amazed at the volume of wagering on tennis worldwide, and the reason they wager on tennis, there's five or more professional tours offering a product almost every day of the week.
We have content–we have to get more content out there at a time when that content is needed. And again, if that's Wednesday at Del Mar, or Thursday at Santa Anita, that's going to be part of the strategy.
DR: How do we get more content?
GA: It's a multi-factorial equation. We believe it begins with more purses. As someone was just telling me yesterday, at the end of the day, California is a purse driven market. If we have competitive purses, owners and trainers are going to run their horses.
We're on target to have purses go back up over $100 million this year, which is definitely a step back in the right direction, and that's not counting the Breeders' Cup. If you count the Breeders' Cup, obviously it's another $20-plus million on top of it.
Then you get to the age-old question of how you get more participation from the horses that we have–our horse population that we have is creeping back up, closer to 2,800 in the last few months. Of course, some of that has to do with Golden Gate. But we need to get our horse population back up over 3,000.
Then we have to have a shared vision with the trainers that they understand the value to them as a group, and as an industry, doing what we can to increase field size. There's a lot of factors that go into running horses, but the benefit we have in California is that we pay full-time, year-round stabling and training costs, which no other jurisdiction does.
We sent a memo out–I believe your publication reported on it–notifying the trainers that the system that has funded this is under tremendous strain, and that we're going to have to come up with a new system. Hopefully, as part of people understanding where we are, we can have a better, more open and active relationship with the trainers as well.
We are all in this together, and I think it's really been a lack of communication and a lack of time–people taking the time to understand the challenges, and how we work our way out of this. I'm very optimistic right now.
DR: Are we writing the right races for our inventory? Is that something else we could be looking at?
GA: Again, that's a multi-factorial question. I think the new racing secretary at Santa Anita has done a great job. David Jerkens at Del Mar is considered one of the best racing secretaries in the county.
I think they do a damn good job at running the right races. But again, it's all about communication. It's all about understanding what you have on your backside and understanding the thought process of the trainers.
And so, the more back-and-forth everyday communication you have between the racing department and the trainers, the better races you're going to write, and again, I see this as going in a positive direction in California.
DR: Purses are only one part of the puzzle. There are a variety of key industry programs funded heavily from brick and mortar wagering. What's being done to restructure funding on those programs?
GA: I can't say there's anything being done broadly to restructure these programs. Each one is its own complex ecosystem. We've talked about stabling and vanning–I've actually got a call in just a few minutes with the trainers to know what they want to see, what options they want to have, where they want to train.
We have two auxiliary stabling facilities right now–do we keep them both? If we keep them both, how do we get more horses, because they're both 50% occupied. Lots and lots of questions that we're going to have to figure out.
Workers' compensation, we started to address that one by lowering the expenses, hired a full-time safety director last year. Much tighter protocols than we've had in the past for trainers who have multiple violations or multiple claims. Their rates go up if they have too many claims or are removed from the program.
Jockey insurance, funded from uncashed pari-mutuel tickets, has basically two to three years of reserves left, will basically need a completely new funding formula. That's probably going to be legislative.
Each one of these things is going to have to have its own solution.
Note: After the interview, Avioli followed up with several more details surrounding the new “purse enhancement” agreement:
- According to the California CHRIMS database, 2020 ADW wagering handle indicates that the combined wagers processed by TVG and FanDuel TVG (roughly $649 million), 1/ST Racing/Xpressbet (roughly $196 million) and NYRA Bets (roughly $27 million) totalled some $872 million.
- 0.9% of the aggregate contribution from these three ADW entities comes out to approximately $7.8 million.