Letter to the Editor: Existential Crisis. No Hyperbole

Jerry Brown | courtesy of Jerry Brown

By

There have been several stories recently in the TDN about Computer Assisted Wagering (CAW), and many of them have contained accurate and useful information. But what those articles have failed to do is convey what CAW really is and does, why it matters, and most of all, how dire and urgent the situation they have created is. Hence this letter.

1-First, the basics. Betting handle is the lifeblood of our industry. It directly funds purses, creates all the jobs in our business, and indirectly funds the commercial bloodstock industry—no (or less) purse money to run for, and eventually yearlings will have the market value of show horses, and stud fees will follow them down.

2–The parimutuel pools are a market; horseplayers compete against each other, not the house. CAW is not just someone using a computer to handicap. Yes, there is a handicapping element, and if someone creates a good handicapping model, good for them. But the important part is this—CAW “players” are being given a massive advantage over regular horseplayers. They get electronic access and a last split-second look at the pools, which gives their computers the ability to assess the situation in a microsecond, and automatically make hundreds of targeted and incremental bets, totaling tens of thousands of dollars per “player,” right at the bell. No human can do that, or compete with it.

3–Because CAW is responsible for so much handle, and because many of the CAW “players” have banded together to negotiate, they receive gigantic rebates. So in effect, they are playing into a much lower takeout than the general public, and that, combined with the advantage they have been given, enables them to basically vacuum the pools. And since it's a market, if they're siphoning off money, someone else is losing it. More on that in a moment.

4–In our industry, we publish handle figures, not profit and loss. But remember: CAW “players” get gigantic rebates. That means the industry gets to keep much less of every dollar they bet—roughly speaking, it takes $3 of CAW handle to equal $1 bet in the backyard at Saratoga. So if overall handle stays the same, but CAW handle is replacing non-CAW handle, for purses, and for everyone else in the industry, it's like handle going down. And CAW is now responsible for about one-third of national handle.

5–The overall retail blended takeout on racing is normally about 20%. But with the CAW “players” making money as a group, it means the horseplayers who make up the other two-thirds of the pools are in effect paying the entire takeout. So for them, the takeout is up to roughly an onerous 30%. Now, horseplayers are not like the people who buy expensive yearlings. They generally work for a living, and as a group have a finite amount they can lose over the course of a year, or lifetime. So as the takeout has gone dramatically up, one of three things has to happen:

A) Horseplayers bet the same amount, and tap out faster. That reduces churn on handle, and handle overall goes down.

B) Horseplayers reduce what they bet as they lose more, to make their money last longer. Handle goes down.

C) Horseplayers stop betting or switch to legal sports betting, which has a takeout of between 5-10% (and no learning curve, since most of us grew up with these games, and there are no odds changes after you bet). Handle goes WAY down.

In other words, CAW isn't just disguising the drop in non-CAW handle, it is CAUSING it.

I know many serious, lifelong horseplayers who now only play on big days, or who have quit the game entirely.

6–So here it is; figures courtesy of Pat Cummings:

As CAW handle has gone from about eight percent of the pools to about a third over the last 20 years, non-CAW handle has nosedived. To give you an idea of how short a time period we're talking about, Smarty Jones won the Derby in 2004.

ADJUSTED FOR INFLATION, ORDINARY (NON-CAW) HANDLE IS ABOUT ONE-THIRD OF WHAT IT WAS JUST 20 YEARS AGO.

Do I have your attention now?

Almost all of that drop came before the advent of legal sports betting. And remember, the non-CAW handle is the oxygen-rich blood that nourishes everything. CAW is not just taking money out of the pockets of ordinary horseplayers; it's killing horsemen and the industry as a whole.

This is an existential crisis, without exaggeration. Since only handle figures are published, the picture has been obscured to the public, but we are not talking about a long horizon–I think major cracks will start becoming visible within the next year or so, because the downward spiral is accelerating rapidly now that there's sports betting. And as ordinary handle goes down, CAW will as well–the robots adjust their bet size to the size of the pools, so that they aren't killing their own prices. These guys aren't in our game for fun, like horseplayers are, they're here to suck money out of the pools. And when they no longer can, they will leave.

7-So, what can be done? Finally, some good news: because the industry makes so little from a dollar of CAW, eliminating a portion of their handle will not have anywhere near the same effect as eliminating the same amount of ordinary handle.

The first thing that has to happen is that the unfair advantage has to be taken away from the CAW players. Their special access to the pools has to be shut off with three minutes to post, like NYRA did with their win pool. But it can't be just cosmetic. It has to happen in all pools.

The second thing is to reduce their rebates. If you make twice as much from each dollar bet, even if CAW handle is cut in half, it's a wash. And if those two actions erode their edge to the point where they bet much less, good; that's the idea. We need to knock that third of the pools figure down by quite a bit, to salvage what's left of the non-CAW handle, and hopefully create more.

I'm using “salvage” advisedly, because we are hemorrhaging customers, and once they are gone, it is hard to get them back. Since I wrote the first draft of this letter one of those cracks has appeared. Golden Gate is closing, in an attempt to triage California racing. We need to stop the bleeding. And we need to do it right now.

Jerry Brown is the president of Thoro-Graph, Inc. 

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