Sunday, December 26, 2010

Ray Paulick is Having Rough Time

Common sense, devoid in a lot of areas in our business, is making a comeback. Just take a look at some of the comments on the Paulick Report.

During the debate about California racing raising its prices while fans are leaving the turnstiles quicker than any Milli Vanilli album signing in history, Ray Paulick has tried to make the case for California, but has not done it very well. It's not his fault, of course. It is difficult to make an argument for policies that fly in the face of economic theory and all common sense. But he sure has tried.

His latest salvo is "that it is really tough to be a horse owner." No kidding. And he says that money going into purses, by increasing prices on customers is the way to go. All you have to do is read the comments on the story to see the cogent, sharp and articulate points against that, so we won't hash too many out here.

In "The Story of Dan Patch" owners spoke of how the game of racehorse ownership was not, and probably never will be profitable. This was in a time when racing was North America's number one sport, and race horses were on cereal boxes. It was a proud game yes, but not a money making game. At the turn of the century it was estimated that 1 in 500 horse owners would make money. When you buy a horse, one thing you know, and this holds to this day - if you hit the big horse you can make some money, but if you don't you will struggle.

From 1930 to today, takeout increased over 130% (takeouts are margins, not real dollars, so the rate of inflation has nothing to do with that number). The thinking for the last 80 years is that if we take more money from the customer and sink it into purses (this actually had theoretical merit because horse racing was a monopoly and could average cost price back then - i.e. raise takeout and make more money), all will be well. It is 2010, and that thinking is alive and well in California, despite the fact our sport has been relegated to a minor sports and gambling entity. Of course, as we all know: raising takeout does not raise more money because we are moving further away from optimal take as we raise it.

As a California horse owner with around 20 head posted (someone who both owns horses, and bets this game daily):

If the magical purse fairy made avg purses in CA 100K starting tomorrow, they would not lower takeout for the bettors.......owners would just go out and spend higher prices on horses....trainers, vets and vendors would raise their prices, etc....and in a short while, owners would be complaining that they need more money to stay in the business.

Bingo. That is exactly what has happened and will happen. Add to the fact that raising takeout does not raise purses in the long run and you realize just how hard it is for Ray to make this silly argument show legs.

Horse ownership has grown already - by a ton. In Canada, there were 30,000 racehorses registered in 1975. In 2008, there were close to 200,000 - a 587% increase. How did that 6-fold increase in horse ownership do for our handles and popularity since 1975? Not well. Increasing foal crops, into a system where we don't have customers, is an experiment which already has empirical data associated with it and has failed. This is nothing new and should not be shocking to anyone. Without customers paying for purses, every business must shrink. There is no way around it. We have a customer problem in racing, and have for some time.

From my personal experience, I have filed 17 tax returns since 1990 where I have asked for the maximum tax deduction for losses all but twice. I have owned about 80-100 horses since that time, in a super-slot rich province. We have an expensive hobby. We all know that going in because we stick money into something for entertainment as a hobby. Our customers on the other hand are not hobbyists, they are rational gambling customers who like all customers of anything, seek value.

A big four automaker three years ago might have said "if we could only charge $44,000 for an Impala instead of $30,000 we'll be well." Clearly that is folly, because they had more than a revenue problem. If you have a cost problem, throwing more money at it will not help. In addition, at $44,000 you are going to sell less Impala's and more Honda's anyway, so in the long run you are toast.

We try to put round pegs in square holes in racing. We try and use faulty logic about takeout and ignore all the real issues. Some like Ray write: higher takeout means more money for purses, more purses mean more owners, and somehow (this is the real stretch - see the Ontario foal increase for that above) more owners mean more bettors and a healthy industry.

Since we have tried that algorithm about 50 times since 1900 and it has failed horribly, one can see how Ray and the CHRB are having such a difficult time convincing people it makes sense.

I congratulate the commenters on the Paulick Report for seeing through it. We may finally have a chance in this industry to do some good if we start finding and solving the real problems, and stop concentrating on the specious ones. If we can find a way to decrease horse owner costs in our business we have a chance at more horse ownership; until then everything else is simply ignoring the real problem. If the CHRB and Ray Paulick spent more time on that, they would be doing our business a service.

As a poster on the article penned (and a sharp poster at that): "Your stance will hurt the industry Ray. Everyone involved. That is why you "strike a nerve" with it. It's not provocative, it's just wrong."

And "wrong" is a hard thing to sell.

Note: The comments at the Paulick Report have brought out the best from people who care about this sport and have a keen understanding of the issues. There are several intelligent posts (in fact most of them). It is so nice to see people standing up and saying "enough is enough". They are worth a read because it shows we are maturing as an industry and when sharp people like that get involved, it is good for our long-term prospects. Four years ago a topic like this would have 12 comments and 9 of them would be "bravo Ray, we put on the show". Not any longer. There is real discussion going on, based on sound economics and business principle. It appears industry back slapping and "woe is me" hyperbole has finally taken a back seat to proper discussion. For that we should all be thankful.

8 comments:

Pacingguy said...

Owning a horse used to be like owning a baseball team; an ego thing. Two things have changed this. Number 1, Lou Guida who commoditized horses once the Meadowlands opened turned it from an ego thing to a near wall street investment.

In the United States in 1986, the IRS tightened rules a lot tougher on being able to deduct expenses on owning a horse. Before hand, the government subsidized your losses; now you better be running it as a business to get any tax benefit and if you don't show a profit at least once every three years it will be declared a hobby and then you can forget the government subsidizing it as a tax deduction.

Anonymous said...

"it is wrong"

Correct.

We need to stop this thinking.... if we do not we are in more trouble than we aleady have been.

Does Ray know the exact same thing was tried by the same CHRB in 2006 and it didnt work? Does he know that? I do not think he does, because if he did he would not continue to write this complete and utter nonsense.

Anonymous said...

Ray is getting annihilated in the comments section. Maybe that california revenue from advertsing helps his bottom line, but maybe he should stop there. he is out of his depth with this issue and it is painful to watch.

Phil

Steve Zorn said...

I run a modest thoroughbred partnership operation (Castle Village Farm). Our business plans warn prospective owners that they've very likely to lose money. And, as you point out, that wouldn't change with modest increases in purses. Even the non-takeout-related boost in purses that we in New York will be (finally!) getting next summer will just get us back, in inflation-adjusted dollars, to where we were a decade ago. Obviously, raining takeout beyond a 20% blended rate is counterproductive.

What I don't know, though, is what the optimal rate is, given the current mix of on-track, OTB, ADW, casino and rebate-shop betting. Does anyone know? The data I've seen at HANA isn't conclusive.

Pull the Pocket said...

Steve,

As we have spoken about before, I sincerely hope (and I know this is asking a lot in New York) that the slots deal is written with proper business fundamentals in mind when the time comes. Give x% for rebating the player (or lower take), give x% to lower the cost of horse ownership by setting up a system which lowers costs of additives and supplements..... and then add to purses.

If the three legs are at least addressed, New York might be the mecca for the horse owner, the bettor and the grooms and trainers. Maybe then other jurisdictions follow suit and we start to grow.

Pie in the sky, probably. But I am an optimist that the generation of trying things that fail and doing them over again will soon be a thing of the past.

PTP

Jeff Seder said...

Owners are not the enemy of bettors - they pay a lot for the privilege of facilitating racing. No sense the two groups being at each others throats.

Also, a lot of bogus statistics were posted by Paulick's critics on this topic. One of the most ridiculous was 200,000 horses actually racing in Canada. It's closer to 50,000 in North America. AND the foal crop dramatically shrinking the last two years by double digit percentages in the USA.

Finally, if takeout is such a killer, why have lotteries grown so dramatically the last decade, with 50%+ takeouts, while racing shrank? The "Takeout Whiners" just haven't done any real research that meets minimal professional staticitical requirements for eliminating extraneous and misleading variables.

The takeout seems to only really affect handle from the whales, and they can be rebated to encourage them to stay.
-- Jeff Seder, EQB, In.

Pull the Pocket said...

Jeff,

May I suggest you pay closer attention to a post on this matter before calling people "whiners" and criticizing their data.

There is myriad data on horse racing and takeout, from the University of Louisville, Will Cummings, Thalheimer, University of Colorado, and Eugene Christiansen, among others. These are currently being debated and added to by economists (two of whom I follow and correspond with) at two accredited universities.

It appears you have not read any of these or follow revenue patterns in gambling based on price, because if you did you would have never posted that comment (FYI lottery takeouts and elasticity are also being tested and proven. In fact, in CA the takeout on the lottery has been dropped and revenue increased. In addition the most successful lottery in the world is in Massachusetts where they have dropped lotto takeout from 72% to 31% and make more money).

Lastly, the foal crop numbers are published in a Canadian horse racing magazine and include all thoroughbred and harness racehorses. You can search from "Trot" magazine and find the article I am sure.

I welcome debate here, but I like it to be informed. The next time you post a critique of something I write, you are very welcome to, however please get your facts straight before you do.

Regards,

PTP

Anonymous said...

I read the same issue, PTP. It is there in black and white.... 587% increase (all registered horses, including those who are retired I would surmise). Maybe Jeff does not know that the group who published that is the equibase of Canada... and he probably is unaware that in Ontario alone, in addition to 300+ thoroughbred dates there are 1500 standardbred dates. 1500 dates X 12 races with 8 horses in each is 144k trips. That's a lot of horses.

As for the takeout stuff, I know better than to enter the fray with you on that. I have read enough posts and seen enough quotes from you in conferences to understand you in the matter.

Phil