Wednesday, March 2, 2011

Racing at a Crossroads with Online Wagering

Today the Wall Street Journal has a feature piece on online gaming. In it they review several states that are looking to the avenue to make up for budget shortfalls.

One of the states, as we know, is New Jersey and they are further along than any other state at the present time.

Once one state passes an online-gambling law, "you will see other states go 'aha.' It will spread very rapidly," said Anthony Cabot, an expert in Internet gambling law.

Racing has had a virtual monopoly on online wagering for some time now (a legal one anyway). What have we done with it? Most would say not much. Archaic 1978 rules for a 2011 internet world, horsemen fighting tracks for revenues or "more of a shrinking pie", huge takeouts in a very low marginal cost medium, and red tape to sign up for an account that would make one's head spin are a few of the unaddressed problems. 

We don't have much longer to capitalize on this medium, in my opinion. But with the aforementioned stakeholders digging their trenches for more of less and not relenting even for a moment to work together does not make anyone very optimistic. Horse racing might be the only industry, aside from music, who have the shown the ability to use the internet to help destroy itself.

12 comments:

Scott Ferguson said...

Betfair taking control of Monmouth Park and the Meadowlands and revitalising the tote (rather than setting up an exchange) could just be what is needed. The tote makes them a much higher margin (why start with an exchange on 2% if they can run a tote at 10%), and those are two premier tracks. Improve the purses, lower the takeouts, control the OTBs, suddenly they are taking business from other tracks and other states & punters will want to play ball.....

See my blog post yesterday for more details.

Pull the Pocket said...

Sweet post Scott, and bang-on. I will link that in my next post.

PTP

Tinky said...

I agree that Betfair could be good for Monmouth and U.S. racing. I strongly disagree, however, with the idea that they should forget about the exchange market. That market would be the single biggest boon to U.S. racing in a very, very long time.

I also disagree with PTP, as racing could do very well in a crowded online space if they had a clue how to market, and fix the deep problems afflicting the game.

Racing is unique, and uniquely fascinating to many gamblers. It can compete against other forms of online gambling, as evidenced by the amounts of money wagered on Betfair vis-a-vis other sports.

Pull the Pocket said...

Tink,

You must be thinking of another PTP. I have long said if done right, racing is built for the internet. It's simply not done right, and never has been due to the intransigence of the above mentioned stakeholders.

PTP

Scott Ferguson said...

You miss my point Tinky. Where Betfair have to face competition, then the exchange is their best weapon. But whether it is great for racing overall is another matter - there's not a big return for the industry, but it will bring back the gamblers.

Where they are able to operate without competition, then there's no need to start from a base of very thin margins. They can slash the tote takeouts in half and get racing going again that way, and leave themselves some profit. The govt would be more likely to let them do that if they guaranteed the net sum of taxes received didn't fall.

Tinky said...

Scott –

I do see your point. But why must exchange wagering only work with razor thin takeout margins?

PTP –

Sorry, I thought that the thoughts expressed in the body of the post were yours.

Pull the Pocket said...

Tinky,

You said: "I also disagree with PTP, as racing could do very well in a crowded online space if they had a clue how to market, and fix the deep problems afflicting the game."

I said (in my post) "Racing has had a virtual monopoly on online wagering for some time now (a legal one anyway). What have we done with it? Most would say not much. Archaic 1978 rules for a 2011 internet world, horsemen fighting tracks for revenues or "more of a shrinking pie", huge takeouts in a very low marginal cost medium, and red tape to sign up for an account that would make one's head spin are a few of the unaddressed problems.

We don't have much longer to capitalize on this medium, in my opinion. But with the aforementioned stakeholders digging their trenches for more of less and not relenting even for a moment to work together does not make anyone very optimistic. "

I am not sure what you disagree with; as I wrote virtually the exact same thing as you did.

PTP

Scott Ferguson said...

Tinky - exchange betting is based on the concept of evens both sides, trading at its purest with no margin built in. When the odds change, one side takes 6/1, the other side gets 1/6. The only 'margin' is the commission taken from winnings. When you make that too high (and particularly since it is not built into the price), then bettors soon work out it's not worth the effort. Betfair's top commission rate is currently 5%, but that is for the tiny player. The top guys get loyalty discounts which get them down to 2%, remember this is net winnings only. Without rewards for high volume, an exchange is stagnant and dull - bad for everyone. Let's say the average comm rate for a busy market (according to volume traded is 3%). That works out to a maximum cut to Betfair of 1.5% commission of total turnover (half bets win, half bets lose), and that is excluding the trading factor, where people back & lay, back & lay, back & lay, over and over and over, locking in a profit before the event is run. So actually it's now closer to 1%... if the race doesn't go in-play (which brings even more trading and hedging) but I won't go any further with it.

So for a race with a 'hold' of $1m, Betfair might retain somewhere around $10k overall, on their current UK rates. That's how tight the margins are, and that's how UK punters like it.

US bettors will start from scratch so the comm rates might start higher, but they can't be so high as to strange liquidity. No liquidity = no exchange and they're dead in the water before they start. Remember the US has no tradition with fixed-odds betting on horses, no wannabe bookies setting their own odds, no competition in the market - it's a HUGE culture change to 'force' upon the US betting public, most of whom are more likely to remember Elvis Presley than Justin Bieber...

If eBay suddenly changed its model to be no different to the shops it was trying to undersell, most of their customers would stop using them. Same with Betfair....

Pull the Pocket said...

Scott,

If BF's take in the US was 10% or more it would be dead before it starts. I think BF knows that, but maybe they need to enter the market so badly they would do something like that. It would be a huge mistake, imo.

If Jersey racing were smart, they should let the exchange operate as is at these prices, and then get their cash through other ways - using TVG to promote racing in Jersey, seeding pools with betfair money, betfair sponsoring races, setting up cash for advertising both in and out of state etc.

I don't think that would happen, because that is a longer-term growth strategy and those are something very rarely undetaken on this side of the pond.

PTP

Tinky said...

Scott –

Thanks for your response. I'm actually quite familiar with Betfair's model. What I still believe that you are missing is that:

a) being able to back and lay, arbitrage, hedge, etc., would all be very big attractions to en exchange wagering market in the U.S. Yes, I agree that liquidity is crucial, but there is no reason that Betfair couldn't be successful in the U.S. with a high margin than they generally use.

It is true that foreign bettors might not wish to participate at higher takeout rates, but the primary market – and a big one at that – would potentially welcome a decrease in take relative to the usurious pari-mutual rates.

Scott Ferguson said...

Tinky - you're obviously one of the wiser players. Are there enough players at your level of knowledge to make it work? If it is restricted to only NJ players, that's a very small pool to work on.

Educating the masses to take up the benefits of the complicated exchange format will be very difficult. My role at Betfair for several years was teaching that to UK bettors who were familiar with fixed odds and bookmakers who lay odds. You have none of that in the US, it is an ENORMOUS task. It was bad enough in Aus where the older generation knew fixed-odds but the younger ones only understood totes...


It will work in the US in time, I'm just saying Betfair don't need to dive in first with a low margin product. Better to gain business by cutting prices than start low and then increase them...

Pull the Pocket said...

I would agree with that. The culture is so different.

I remember being at a conference on new wagering techniques and a fellow who was on the panel with me was from NZ. He was asking me where he could bet tonight's hockey game; completely unaware that we don't do that. For him, betting a -120 puck line, or 1.80 at BF is second nature. After his team goes up 1-0, laying to lock in some is second nature as well.

As well, in the SC poll where they asked about exchange wagering, and people's knowledge of it, with one being not aware at all and 10 being very aware, 1 got 66% of the votes.

On the recent HANA survey of harness players, quite a few bettors (I cant remember exactly) answered an exchange question as "I don't know what it is".

If BF does not come in at a similar rake, while piping in the UK and world money for liquidity, methinks the Jersey exchange markets look more like EhorseX, and less like BF.

PTP