Henderson, We Have a Problem

It was announced that Ellis Park in Henderson, Kentucky is back on for Wednesday. A last hour compromise was agreed upon by Ellis and the KHBPA. With it, close to 6% of ADW handle will be going to purses. It appears that Ellis is charging ADW’s up to 8% signal fees for the right to broadcast Ellis races.

This is a huge problem and a dangerous precedent to set. I will tell you why handles can be expected to fall at Ellis and elsewhere.

An ADW normally pays about 5% (which is about what the current free market dictates) for the right to broadcast a signal and sell it to their customers. It is like a web-affiliate bookseller selling a book and keeping a commission. Then the ADW pays expenses, keeps a small amount of generated handle for themselves, and returns the rest to the player in a few ways:

1) Player Rewards – Xbox’s, maybe a hat, maybe a free coffee at a track. We all have received these perks.

2) Soft Innovations and Customer-centric Benefits – An improved betting interface, R and D (like Twin Spires TV), free handicapping information (like Ian Meyers’ paddock reports at Premier Turf Club, his deal with Woodsideassociates.com, or partnerships with Thorograph at betfair), free past performances, free video.

3) Cash Rewards Through Rebating – Churn baby churn.

If ADW’s are charged a higher than market fee things like free rewards, hats and shirts; or the interesting innovations we have seen like race replays, and conditional wagering and paddock reports can all be cut. This hurts us in attracting new fans to our Internet platform, as well it alienates our existing customers (ask Vegas how they'd do without comps or adding a concert as an attraction). The most important point however to us as a business: It effectively increases takeouts. If 3% more is charged for a signal, 0.5% might be absorbed by the ADW. Where does the other 2.5% come from? Yes, the customers pocket - the customer that already pays for purses to the tune of 21% blended rakes.

When the signal fee is raised 3%, more than likely 2-2.5% will be taken from the rebate. If you were receiving a rebate of 5% on win wagers at track ‘A’ and they are cut in half you know, we all know what happens, you bet less. With these price sensitive players, where 2.5% can mean a huge difference, it can kill their handle. As Dan, a professional player, said right on this very website:

Even miniscule reductions of 2 points can make a HUGE impact on a large player’s bottom line. The intelligence of the modern player is frankly overlooked by those in positions of decision.

With a conservative elasticity of demand of 4 for rebated high volume players, this takeout increase could result in a 10% drop in handle (many would argue it would be much more). Not to mention any new players (especially the younger demographic we covet) that are attracted to some of the perks like free past performances, or innovations, will find they are not there any longer, and it makes the customer experience deficient in a demanding 21st century business model. Online poker anyone?

It’s like going to McDonald’s and finding out that yes, the price of a Big Mac was raised 30 cents, so you might eat one less a month now, but not only that - Now your more expensive Big Mac is served not complete in a nice wrapper, but in a do it yourself kit. When sales of Big Mac’s go into the tank, it would not surprise any executive at McDonald’s; they would know they cut their own throat.

Increasing takeouts, poor customer service and an absence of soft innovation through reinvestment is something we should have learned has hurt this business by now. Year after year the evidence is there and it will only get worse. In fact, this study written several years ago stressed the takeout point and making sure these players are taken care of. And ironically this study was commissioned in part by the HBPA, the exact same group that wants a bigger slice of handle by raising takeouts on us, by asking for more from ADW’s.

Racing has lived with rising rates of takeout for so long that they have become a way of life. They are the line of least resistance whenever the industry needs money. It is all too easy for the industry to see that if we have a constant $100 in handle, and we raise the takeout by one percent, we’ll make a dollar more. It is much less easy to see that handle is not constant and, over the longer term if not the short, we won’t have that $100 any more.

If we don’t offer a low takeout (via rebate) to customers, we’re going to lose them, or at least a significant portion of their money. Hence the efficacy of rebates: they target reductions in the takeout to the customers who would respond the most to them. (Analysis of the Data and Fundamental Economics Behind Recent Trends in the Thoroughbred Racing Industry, 2004)

Sometimes I wonder. I really do. Do we actually want racing to lose market share? Is it a grand conspiracy to actually lower handles? If it is a conspiracy, we don’t have to look far for a second shooter on the grassy knoll. We have a plethora of potential suspects.