CHRB Meeting: If You Can't Ask a Proper Question, You Can't Get a Proper Answer

As most know, I have long given up on California Racing steering themselves out of the abyss, and don't pay much attention anymore, but I got an email with a link to yesterday's meeting. And I listened.

"Racetrackandy" on twitter - not employed by the industry, but a guy who probably works harder for it than a lot of people who are paid by it - drove up to make a public comment, as is customary at CHRB meetings. His comment - well thought out - regarded takeout rates in California, their changes, and the analysis of them.

It was an academically sound question and comment: 'There is a proper takeout rate for wagers in California that increases purses and increases payouts to customers to encourage more betting, both short-term, but particularly the long-term. Can California racing move toward this number, professionally and academically, rather than specious, arbitrary changes that no one can learn a thing from?'

The response, and question, from CHRB member Madeline Auerbach shows how far racing needs to go to change its preconceived notion of what gambling and takeout is, and how to begin to move the sport forward.Paraphrasing, she said "How can you guarantee these takeout changes will not hurt the people who invest in horse racing."

The thinking is: We now have "$X" because takeout is "set". We may have less than $X if we adjust off this "set" number.

That question is misguided (the easy answer to that is, "with real handles off 50%, purses down, racedates down, foal crops down, the threat of online poker from Indian casino's up, and everything else, how can you afford to not find optimal takeout rates."), but it's much more than that.

Racing has clung to a takeout number that has never been set by the gambling market. It's guaranteed to be wrong. I'll type that again: The current pricing structure in California (and elsewhere) is 100%, bet all you got, Secretariat in the Belmont, never a doubt, no question, unequivocally, wrong.

Neighborhood bookies are not charities; they did not come up with 5 cent or 10 cent lines because someone told them to. Slot machines, long in Vegas priced at terrible 15-25% takeout rates in the 1960's and 1970's, did not come down to their present 2%-7% levels because a politician told them to set them there. Poker, long played in more than spaghetti westerns over the years, does not rake 4% out of a pot because someone liked Bobby Orr's number.

Those rates were all set by markets.

Racing's current takeout structure was not created from analysis, trial and error, the market, or anything else. They were set in 1907, and changed based on whims. As a monopoly, this could be done. Cash strapped governments who haven't liked a program they did not want to fund, needed more and more money; racing happily went along for the ride. Even though this price setting did not work and never really has (read up on the handle and revenue changes in the 1940's to see evidence of that), at least racing had a monopoly, where some sort of average cost, rather than marginal cost pricing could allow it to get by.

That all changed in the 1970's, 1980's and then through the massive disruption of the Internet beginning in about 2000.

Ms. Auerbach is asking a question that has no basis in reality, in terms of academically and fiscally sound pricing policy. She's asking to protect a takeout rate that has never been set by the market. She's protecting a phantom number.

In regular businesses, we have discounted cash flows, internal rate of return targets, and opportunity costs of capital. Those are taken into account with a capital project, pricing changes, what have you. A company who sells widgets for $4 (because the market says so) can raise their price to $5, analyze the changes beforehand with forecasting, and analyze the emprical results afterwards. it's been done forever. They can ask the question "will this price change hurt us" and do so with sound logic.

Racing's pricing is phantom, a ruse, a number that might as well be made up. Protecting it, or not wanting to move away from it to ensure the business is doing the best it can is not logical. It's not sound. It's not right. And it's bad for horse racing.

I see on chat boards and on social media, Ms. Auerbach is getting criticized. I guess I did the same above too, but I don't mean to, nor do I blame her. The culture of racing has taught her, and others, to think that way. They think at current rates the pie is full, and a change off them lower will cause a "piece to be taken away" from them. It's wrong, and it's detrimental to racing, but like Will Cummings in his pricing study paid for by the HBPA said in 2003 "racing has lived with high takeout for so long" it really knows no other way.

One day - and I am sure of this - racing will move off the numbers. The old guard will be purged and change will come. When that day comes, racing will begin to move forward and be priced like the rest of the gambling world. For the people Ms. Auerbach speaks about who invest everything in this sport, I hope that day comes sooner rather than later. 

Have a nice day everyone.