Thursday, March 6, 2008

What Racing Does to Bettors

I am amazed at the action on the site today regarding McLeod and Jane Holmes' comments about online gambling. It is a hot story, especially to people who live this every day by betting, and frankly, think they are both way off base.

I got to thinking, how can we explain in terms racing understands, what racing-pricing puts us through, and why customers are heading to the door. Since both are smart people, and Mr. McLeod certainly understands the stock market, I thought I would try that.

So here goes.

Joe Trader decides he wants to play the stock market. He puts $1000 in his stocktrade account. He begins to play.

He buys 500 shares of ACME at $1 a share. He sells it later that day for $1.20 a share. Nice day, huh? He made 20% on his stock trade. I bet he likes stock trading.

So, he bought 500 shares at $1 a share for $500 and he sold his 500 shares for $1.20 and he realized $600. Profit is $100.

But hold on. To make the trade he is charged a takeout of 25%, just like a triactor.

Now he has to pay $125 (25% of the $500 he spent) so his $100 profit is now a $25 loss.

Then he decides to make another trade. He does the same thing. This time he buys a stock for $10 and sells it for $10.10. Not a very good trade but still profitable.

But he owes a 25% commission for making the trade. So he loses money again.

He says to himself "I made two solid trades where I made money and sold a stock for more than I bought it for, yet I am broke!"

Joe Trader: Welcome to Racing's Business Model. This is how we are charged every time we make a $1 bet.

Now Ms. Holmes and Mr McLeod, do you understand? How would you like to buy a stock for $10, sell it later that day for $12 and lose money? Does that explain well enough to you why people go offshore? Does that explain that if you shut out offshore (just like we have seen in the US) handle does not go up?

Etrade, and Ameritrade and all the rest have exploded stock trading by offering $9.99 trades. If I spend $100,000 on a stock, I get charged $10. If I spend $10,000 on a bet to show, you charge me $1600.

What would happen if the above was true and our stock exchanges worked like racing? You are correct, our economy would implode because no one would be stupid enough to pay 20% of everything in commission. They would never make money.

That racing has imploded should be no surprise to these people - no surprise at all. When will they change their business model and realize their prices are too high?

10 comments:

Phil J. said...

So I've stuck with watching/playing Woodbine for the last few weeks. I've done ok. No great shakes, but enough to keep me coming back. I'm slowly learning the tendencies of the driving colony, which has helped.

I can't recall what stance you had on the race shape question I posed a few weeks ago. The one thing I have noticed, is that the colony as a whole drivers much more aggresive in the series finals than the rest of the races. Tonights trotting final that Windsun Lane won for example. They went to the first 1/2 in 26.3.

Monday nights pacing final that Saftic won, Jamieson and Waples were ding donging along through the 1st half. Jamieson had made two moves before the 1/2 mile pole.

Perhaps that has as much to do with the better horses than it does the drivers intentions, but it is noticeable. One knock against that theory is the Opens, whether they be for trotters or for pacers often end up being run more towards the norm than the series finals, in my opinion.

Pull the Pocket said...

Hey Phil,

I think you have got a good idea so far. Pretty accurate.

Purses are huge so week to week you tend to see a little less action. When some cash is on the line, they go, with the 3/8's pole move that is a staple of modern racing. They move a little later than the M, but not that much.

When they switch to Mohawk you will find the racing a little better I think. THe camera angles for simulcast are better as well, and the stretch is longer.

Anyhow, keep plugging and good luck.

PS: I accidently deleted Cangamble's response in this topic! Sorry CG!

Cangamble said...

I thought you did. I've done that before.
Let me reiterate:)
Reading a racing exec attempting to justify protecting their side of the industry when they charge their average client collectively 20-23% takeouts is like a crack dealer trying to justify their industry.

Carol said...

I don't disagree with you about the downside of the "takeout" financial model but how are tracks supposed to [a] make money to pay salaries and support the facility, [b] have a source for purse money?
In the pari-mutuel format, the take out is the only way. The track never "wins" money like a casino does. It needs to get its cut off the top. Many tracks have already given up parking and/or admission fees to attract players.
What would everyone propose?
Lower takeouts have been tried and are still being tried at various locales on a general basis or for specific wagers [ie 16 percent take out on superfectas at the Big M]. Not sure the evidence shows this helps business much.
The tracks with slots money to fuel their purses are in the best position to test the premise of lower take outs since they have another source of income.
But it is difficult to compete with offshore services whose entire overhead is a few phones and computers.

Carol said...
This comment has been removed by the author.
Cangamble said...

Carol, when was the last time a track dropped their entire takeout.
That is the point me and PTP are trying to make.
If Joe Gambler cashes 120 instead of 105 a day, chances are he will bet back more.
In the end, Joe Gambler will lose just as much if not more during any lengthy period. He will have more fun doing it too. He may give you all his gambling action too.
When we say lower the takeout, we almost certainly know that if it is done across the board on every type of bet at the track, betting will increase dramatically.
At a 22% average takeout I'm likely to bet 40k over the course of a year at the track, and probably less now that I've discovered the power of rebates.
If the take was put at 12%, most probably I'd be betting at least 300k at that track in a year. (Assuming 200-220 race dates).

Which amount is better for the track and purses?

Carol said...

Cangamble
I can't get past your first sentence: "when was the last time a track dropped their entire takeout."
How exactly is a track supposed to stay in business if it drops its entire takeout?
This is pari-mutuel racing.
While you can argue a reduction in the take out will result in more wagering, more churn, tracks are still at a huge disadvantage with the rebates that offshore types can offer.
A number of tracks are offering rebates [ie the BigM Club at the Meadowlands] but there are plenty of folks at the track on their cell phones making their wagers with the off shore services. The whales [high end players] are smart enough to take the best deal. The tracks cannot match them.

Carol said...

I'm not sure why I got myself involved with this discussion because this is not my strength. But I did "chat" with a person for whom I have a great deal of respect and is very savvy about this stuff... here's a portion of what he wrote me:

"As for slashing takeouts across the board I am not sure if racing could take the economic shock and the way purses are in some places it is based on gross, not net, so horsemen would still get same % off top and tracks get less. A takeout cut is like a tax break but it takes a long time to cycle through the system - plus, if you cut your takeout and a player wins (and gets a few more $$ back) he does not necessarily reinvest it back into your races - he might bet [another track]. That is the problem with racing today is the plethora of opportunities. NYRA had a very successful takeout reduction in the early 1970s. The reason it worked is little competition and people reinvested the winnings back into the NYRA races. When they did their takeout changes about 5-6 years ago they have not been able to recover from the lost revenue."

Pull the Pocket said...

That's correct in many respects, Carol.

It is what I mentioned above in there being two segments of customers. If your customers have an account, like njbets.com or hpi.com, the takeout realizations are fully boosted there - the money is churned within that account. That is why offshore places like pinnacle do well - it stays in the account.

As far as across the board cuts at all levels, leakage is a problem. For example, some guy gets $100 more back for a bet and goes and spends it at the slots.

The business model of deposit wagering companies, and offshore dealers is just that - they give you sign up bonuses and good rakes, because they want to keep you churning the bet right in their system.

Racing has not seemed to grasp this way of doing business, hence the wagering spiral, and price sensitive players going somewhere else, or to some other game of skill.

ptp

Cangamble said...

Carol, when I said dropped their entire takeout, I meant across the board cuts on every type of wager.
If you have an account set up with HPI or whatever, leakage isn't a problem. I'm sure HPI even realizes that the pathetic rewards they give their customers are reinvested very quickly and rarely taken out to be spent elsewhere.
Most of the betting I suspect comes from account betting.
Also, regarding competition. How do you rationalize charging your own customers 20%+ but selling your signal to other tracks for 4% (guess)? It would be like a Walmart in Fort Erie selling to their customers for full price, yet selling to people who come in from Buffalo for one fifth the price.

The fact that much of your betting comes in from other hubs at 4% to you, proves racetracks can compete because they are willing to take 4% instead of 0% in many instances.

Pinnacle btw recently cut their rebates. If track takes were cut to around 12-15% for everything, Pinnacle would lose almost all their clients because they would have to cut even more. And the tracks would pick up many of them.