Racing's Unhealthy Obsession With Cannibalization

In racing we often hear about cannibalization. This "refers to a reduction in sales volume, sales revenue, or market share of one product as a result of the introduction of a new product by the same producer."

Horse racing contests, more exotics, Derby futures wagering, exchanges, internet wagering, fixed odds -- they're all things to fear in some way, because they 'detract from the core betting pools'.

Daily Fantasy Sports should be doing similar, one would think, to sports betting. In fact, a big slice DFS players see it as a substitute to sports betting.

 But, if sports betting were legal across all 50 states:


This helps explain why since 2010 or so, when the proliferation of DFS sites occurred, sports betting revenue marched on, in tandem. In Vegas, sports betting volume has moved from under $3.0B to over $4.5B the last few years alone. DFS has added about $2.0B in "wagers" per year.

In mergers and acquisition economics you'll often hear the word "accretive". An investment, or merger, is accretive if it brings in more revenue (or earnings per share) than the cost of the investment, usually over time.

Adding a new offering, like DFS, is accretive for the sports wagering business. And more importantly, it's good for the underlying equity - in this case, the sports themselves.

Racing, which to this day seems to play whack-a-mole with any new offering, doesn't see things like that. Everything that's offered is "cannibalizing the wagering pools", rather than examined in the context of what said product can do for the total pie.

In the present day (in the gambling business) racing is in a tremendous position. It has a ready-made market, a willing audience with hundreds of millions on account, and leverage through the UIGEA that others do not. With that kind of edge it doesn't have to be scared of eating itself, it should be focusing on taking the necessary steps that will allow it to eat into its competition.


Running & Hiding Isn't Preparing for Racing's Future

Technology breeds change, and at times, this change can be felt (by some demographics and geographies) intensely. Take the recent adoption of robotics and its influence on the rust belt. That - in itself when we look at the electoral map - is a big reason Donald Trump is President.

The narrative is real, not made-up, and most everyone is pushing it:
The problem with most of this story, is that it relies on what's happening in a text book, not what will happen in the future.

Case in point - Adidas.

Adidas has long produced shoes overseas with cheap labor. You know the drill. But with robotics and a new business plan they have found that these jobs can work onshore, with high-skilled labor. They've rehomed a plant from overseas to Germany (and one in the US), which now (alongside the robots) employs 160. These "speed factories" could very well be the future. They produce the product cheaper and faster, they're closer to the market, they can ship quicker and more effectively, and they have access to high skilled folks who run these "collaborative robots."

No that doesn't do much for the rust belt today, but it may for the kids of people from the rust belt tomorrow. Not to mention, when costs are curtailed and companies become more and more competitive, consumers benefit, new products are created and industries function, and grow with an ever-expanding global market:
  • "We have to embrace robotics. It allows us to reduce cost. If I reduce cost, I have more money that I can use for innovation. The more money I have, the more new products I can create. The more products I create, the more workforce I can hire.“
In racing we've gone through a protracted period of malaise and hand-wringing with the shift from on-track betting to off-track. The first stage of this grief involved hoping to get people "back to the track." When that didn't happen, various tracks wanted a bigger share of internet betting, because - like the rust belt - those were "their customers" not others, and those customers need to be charged an average cost price.

Neither tactic has or will work, and I think we all know that.

Unfortunately, while the industry has argued, the inevitable has been happening - more and more wagering (about 40%) has moved online.

But because the industry has failed to innovate with internet wagering, it's being left behind. There has not been "more money that I can use for innovation. The more money I have, the more new products I can create."

I am not confident in the racing industry, its decision making and where its mindset is. But I am bullish on what racing can be. I think it has to change from worrying about protecting the past, to thinking about the future and how to position itself; position itself against e-sports and sports in-running and DFS and so on. That's the issue, and it has nothing to do with track "A" getting 8% instead of 7% of track "B's" wagering pie.

The robots are coming and the free market - like it recently has through the Industrial Revolution, the assembly line, and the micro-chip - will adjust to serve a new paradigm. Racing needs to follow that path, and build a plan to serve theirs. Worrying about their own metaphorical rust belt is a waste of time.



Arrogate's In-Running Odds? It's a Shame you Couldn't See it

Yesterday, as everyone knows, Arrogate again proved there's no horse in training anywhere near him in ability, in the world. Back in August, a geared down Arrogate dusted Gun Runner by 15 in the Travers. Yesterday the same thing happened. The only thing different was the margin, but it appears poor old Gun Runner needs an even bigger head start to change the result.

While most folks talked about how impossible the bad start was to overcome - always a fun debate - in this day and age we can actually quantify it. This, thanks to in-running betting.
This type of betting has been around for awhile.

Those who have patronized Betfair for many years, they knew that Calvin Borel's ride on Street Sense was worth a 5-2 (28% chance) answer, when he took his last risky move to be potentially shut-off, around the far turn up the rail. "This is unbelievable" was 8-1 on the far turn. A steeplechase horse in the UK traded at 1000-1 a couple of furlongs from home awhile ago, when he suddenly pulled up. When the horse got going again, after apparently deciding he still wanted to race, a few people were happy, and one or two were really unhappy when he crossed the line first.

Arrogate, after the break while 15 lengths behind had about a 30%-40% chance to still get the job done in the eyes of bettors. Easy peasy; in this new, connected world.

The problem, in my view is: Not too many of us got to see it. In-running wagering could be played in one smaller state, at higher than average rakes, with regulations up the wazoo, after years and years of debate.

Why? Because in North America this view seems to prevail.


One day, perhaps, the Kentucky Derby market will be a vibrant betting medium, with hundreds of millions traded. Horse futures of all types may be wagered on, like a Joe or Jane fills out an NCAA bracket. One day people may be tweeting, "did you get Arrogate at 2-1? I did!" en masse. But at the present time in North America, that day seems a long, long way off.


California Racing's Slow but Sure Customer Drip

As horseplayer Andy Asaro's led boycott of California racing reaches day three of three, I recently had a look back at a few numbers from the Golden State.

In 2010, as most know, California raised takeout for a reason we often hear from horse racing's braintrust - to raise more money. As Will Cummings put it in his analysis of the racing industry's pricing history, "for [racing] it's a way of life."

Via the BH, seven years ago:
  •  "Currently, over $4 billion is wagered each year in the state on horse races and almost $800 million is withheld as the takeout to fund such things as horsemen's purses, racetrack operations, state oversight of the industry"
  • ".....a 2% increase in the takeout would result in approximately $70 million in horse racing revenue being redirected toward the industry, rather than provided to bettors as winnings."
  • Supporters say the increase will stimulate purses, leading to increased field size and more wagering.
Others weren't so sure the government and horse racing folks who prepared the report - who multiplied the amount wagered by the increase in prices to get at their conclusions - would be correct.

"Horseplayer groups believe increasing the takeout will reduce the amount wagered and therefore will not benefit the industry," the story states.

Looking at the 2015-2016 CHRB annual report, there's some strong evidence that the folks who study gambling, and live each day betting the sport, were more right than wrong.

The "over $4 billion in handle" is now $2.9 billion.

The revenue to the sport in the entire state which was "almost $800 million" is now $604 million.


These are incredibly bad numbers. 

As noted in this look at historical takeout rates, and their influence on racing, hikes (or decreases) can take some time. Seven years seems like enough time.

Mike Maloney, a very sharp player, once said: "All we’re doing when we raise takeout is driving people away. The regulars are coming less often or they’re coming just as often but getting ground down. People within the game still don’t understand how destructive takeout is."

The most disturbing part of this, in my view, is that the effects of destroying a customer's capital seen in California has occurred over and over again, in jurisdiction after jurisdiction, for more than a half century. Yet they keep doing the same thing, hoping for a different result.

I have no idea what California could, or should do. But if they're trying to raise purses, increase handle, and turn the ship around, I am completely convinced that increasing prices is not a solution. In fact, as most of the empirical results and wagering economic theory shows - including those in their very state since 2010 - it's a problem.


ADW's, Critical Mass, & Value

I read an interesting article on Techcrunch the other day about Spotify, the online music streaming portal.

Spotify, which in 2018 will likely IPO, pays royalties per listen to artists, and has amassed a more than 50 million person listener base (from just a handful at startup, in 2008). Early on, the company had to pay about a 70% royalty, but that's changing. Because of their critical mass, they now command value, and are negotiating lower and lower rates.

These lower rates can, and probably will, work, because of volume, and reach through convenience. 
  •  While at first glance, Spotify paying less for per stream might seem worse for artists trying to make a living on music. But the success of Spotify and the path it could forge for streaming services is also in the interest of those artists. Not only could royalty rates start to climb closer to CD sale revenue if it grows big enough. Spotify is also incentivized to help artists use streaming to promote their merchandise and ticket sales....
During the disruptive phase with music and the internet, the music industry was playing checkers. They shut down Napster, and pushed customers to websites for music which were disparate, scattered and impossible to gain any revenue from. They essentially drove an entire new business underground.  Since that point they've tried other tactics (owning their own portals, downloads, etc) to no avail. Now, with the marketing, critical customer mass and dynamism of a Spotify, there has been progress, and there will continue to be hope to achieve even (ridiculously high) CD-type revenues.

With ADW wagering, the prevailing thought in horse racing is - like the music industry at one time - "we own the product, thus we should get all the money".  That's, in my view, fantasy.  ADW's like TVG are Spotify. They provide value through critical mass, marketing and give racing a chance to achieve peak revenues. Resellers in a static industry which is not capable of innovating are worth more and more over time, not less.

I believe that, maybe 10 years on, racetracks will not be earning more from each dollar bet through ADW, but less. If the shackles are taken off (regulatory and through industry intransigence), racing, perhaps like Spotify, can gain the volume to make up for it.




When the Habit is Gone, It's Forgotten

It's been several years (2009)  since New Hampshire enacted a betting tax on winnings over $600 that had disastrous results on betting handle. And it has been several years since the tax was repealed (2011), hoping to regain the lost handle and revenue.
  • “It’s been two years since this tax was put in place, and hopefully, the people who left have not become too comfortable betting someplace else and will return to the track,” said Rockingham president and general manager Ed Callahan.
  •  “What they (the legislature) did to the racing industry in New Hampshire might be something that cannot be undone.
Those two men were prescient. People changed their behavior, and no, they have not come back to the track.

Handle in 2016 in New Hampshire was $53 million (versus about $140M in 2008).

Revenue to racetracks and bet takers in New Hampshire in 2016 was about $10 million (versus about $27 million in 2008).

There are a number of factors that come into play with regards to handle and track revenue (live dates at Rockingham for example). But, most certainly, stepping on your customers toes (when they have a choice, via the Internet or in a neighboring state), causes them to flee to greener pastures, or give up the game altogether.

Horse racing is a unique gambling game. If you leave the poker table for a year, you come back to it and begin again, right where you left off. If you leave betting the races, the return to it is not anywhere near the same.

Betting racing is a habit, and it always has been. When racetracks or alphabets change the way we bet, or push us away, there are deleterious long-term revenue consequences.

They're Bettors, Not Bank Customers

The dichotomy between racing's treatment of their customer base versus the way other gambling games treat theirs is always eye-opening to me.

One looks at the base like they're customers of a bank, the other treats theirs like they're, well, skill game gamblers.

It was reported by the AGA that there will be $10.4 billion dollars wagered in some form on the NCAA tournament this year. Today, David provided us with some early buzz surrounding the wagering of the event.
These are with ten cent lines (about 4.5% takeout, as is customary since, forever), myriad betting products, and a will to grow said betting products.

Meanwhile, horse racing takes a different approach.

I heard there's been a new rule passed in Ontario for racing. Super betting is now allowed in five horse fields, trifecta betting in four. This is nickel and dimesville.

I see Ontario - and others - have not passed a rule to stop the advertising of fictitious payouts; y'know, when there's $40,000 in an entire pool, but if only one twenty cent ticket is owned, the payoff shows as $200,000. Try getting away with that in a lottery, i.e. allowing Power Ball to advertise $2B payoffs for a $5 ticket, instead of $400M that's actually in the $1 ticket base price.

California, oh California, sucks money out of a pool for a jackpot payoff - which does pretty much no one but the track and whales any good - then messes up the last leg with an all, in effect assuring 15% of the pool will be carried over.

Have you heard about the extra takeout charges in Ontario on simo-product? I bet most customers don't even realize they're paying them.

Is there even a law the price of a bet even has to be advertised? I doubt it, because even when you ask a track what their takeout rates are, half the time you're looked at like you're from that new planet.

Breakage? Breakage has been nothing more than an extra charge since breakage was invented. The technology to fix breakage has been around forever, but, again - nickel and diming in the truest sense of the word.

Uncashed tickets? If these are not cashed, they go right into general revenues. Let's slice a little more.

Hidden charges, not advertising properly, tris and supers with very short fields, standing in line for a post drag waiting for a virtual teller, surcharges, cancelled legs, unknown pricing..... the list is seemingly endless.

It leads me to concur, racing is a bank.  A big old, bank. "What can we charge them for next, that they won't know, won't see, and won't complain too much about?"


Banks can get away with it because their customers are not betting customers. Paying a bank $1 for use of a machine is not dependent on them giving you their money to hold. Wagering customers, however, have to possess a replenished bankroll to keep playing your product. Every drip, every nickel and dime, matters to a skill-game gambling customer, and it's directly correlated to how much, and for how long, they wager on the sport of horse racing.

The amount wagered on the NCAA tourney will be near equal to what's wagered on horse racing the next 365 days. You'd think with the popularity of the tournament they'd want to raise the juice to 11% instead of 4.5%, no? Maybe add surcharges here or there. Maybe they'd force you to play parlays, where the rake is hidden, and higher.

Ask yourself why they don't. It helps us understand how this event has had double digit percentage gambling growth the last decade, and why (in part), by next year, people will bet more on an eleven day basketball event with 19 year old kids, than they will in an entire year in North American horse racing.


About that Whole On-track Thing.....

Texas has always been pretty consistent about not letting their customers bet racing over the Internet. This was at the behest of the industry in Texas. A few years ago they even went to court to keep the ban on Internet betting in place.

That - and I know this is not shocking to anyone - hasn't been a good policy.
Now, many years after the original ban, they've reversed course.

If Texas was a country it would have the 12th largest economy in the world. It would be bigger than Australia. To not embrace change, in the form of wagering over the internet, a whole swath of customers have been ignored, or worse, have left racing as a wagering pastime forever. 

Consumers have choice, and when they are not given one which fits into their lifestyles, they will substitute. They won't drive to the track, when they can do other things with their time and money in the comfort of their offices, cars, buses and homes; over tablets, phones and desktops.


Racing Selling the Turtle

March Madness is upon us. This thing with the non-paid semi-pro student athletes has grown leaps and bounds the last ten or twenty years. That's no secret I guess; all you have to do is search "bracketology" on google and the results will blow your mind.

What CBS and the NCAA et al have done is allowed the event to flourish. If you're gambling it, gamble away. If you are playing in an office pool, here's a printable bracket. If you want to partner up and offer ten billion dollars for a perfect bracket, knock yourself out, advertise away, it helps us. If you want to watch on TV, online, on smart phones or tablets, here's a link.


By allowing an ecosystem to flourish, its flourished. They aren't worried about the disparate A, B and C, they worry about the topline ABC's.

Racing, as we all know, doesn't work like that.

The first time something looks like it may flourish, racing tries to shut it down or tax it mercilessly, because it might 'hurt the high margin betting pools.'

Betfair looks interesting - they don't pay enough.

Contests look interesting - we need to shut them down.

And my current favorite (keep in mind, this TDN article was published in 2017, not decades ago):


When racing encounters a new avenue to grow the sport in a big tent way - online, with "brackets", with new mediums to bet - it immediately turtles. Then it complains it has to pay to be on TV, can't attract new owners, and wagering is tanking because not enough people are interested in the sport.

You can't grow the tent if you're too frightened to pitch one.


Sam McKee

By now we've all heard about the tragic passing of Sam McKee. It's been a tough time for harness racing, because Sam was, well Sam.

People who knew Sam well will tell stories and talk about him in ways I can not. But I will share, from my perspective, what I find remarkable in the hours since we received this terrible news.

When someone passes with a public persona, or who most know from their professional life, the immediate condolences all have a theme.

If a hockey player passes, people reminisce and pay homage about his hockey playing career. 

If a baseball player passes, he was a great first basemen, or catcher, or clutch-hitter.

If a businessman passes, she was a great CEO.

If a musician passes, she wrote great songs.

After the initial condolence, then sometimes people talk about the person, and his or her life. 

When Sam McKee passed, it was the exact opposite. The initial thoughts on social media and elsewhere were all about Sam as a person.

"He helped me when I needed a push"

"He made phone calls for me to help my career"

"I didn't know him, but he seemed like such a nice person"

"I met him once and he treated me like I was the most important guy in the world"

"I never met him, but he smiled all the time and that put a smile on my face"

"I met him once and I could not believe how much I enjoyed it"

That stuck out to me. Sam was the best race announcer in the harness racing world, and you'd never even know it.

I think that proves - beyond a shadow of a doubt - he lived life well and he was a good man.

Rest in peace Sam. We'll miss your race calls, and the Jug will never be the same. But we'll miss who you were as a person a thousand times more.

When Racing's Core is Not Sound, the Ancillary Goes Bad First

Back in the early 1990's I got my first real job. I was a pretty much an office gofer for a mining consortium.

One day a gentleman came in the office for a meeting. He had just returned from a trip to Russia. This fellow was there at the behest of the Russian government, to get his opinion on their state-owned zinc and copper mine in the southwest of the country. The story he told was very interesting - especially to a fresh out of school business major, who learned most of this man's craft in a textbook.

He had already studied the numbers and they weren't good. The mine was producing zinc at a cost per ton that was 25% higher than the revenue per ton. The only reason it was running was because the government was printing cash for the shortfall. However, because the industry in eastern Europe was not using modern western engineering, management techniques and technology - which could make a difference -  he still held out hope they could be helped.

While being driven to the mine and smelter by men with furry hats (who he was sure were in the KGB) he began to notice something odd: The closer he got to the mine, the fewer plants and trees he saw.  The terrain grew more and more bleak. When he arrived he figured out why. The smelter was an environmental mess; it was spewing really bad stuff everywhere. The city was equally decrepit; the living conditions poor.

Norlisk Mine, Russia

The mine itself was pretty much a disaster. There was no money placed into training and health and safety. The techniques that were being used in the plant could be found in a Dickens novel. Western filtering of heavy metals and arsenic - byproducts of a smelting process - were non-existent.  Injury rates were high, morale low. Management simply came in, punched their time clock, and went home.

He advised the government there was no hope for this mine unless millions were spent, or the price of zinc skyrocketed. It was too far gone in its present form.

What I took from his story was, yes, a failing business can be kept open for business if you have access to capital. But when all the capital is being used to bridge the revenue gap, there can be no growth. There's simply no money left over for ancillary (non-core) parts of the business. So, the workers are hurt, the management is not engaged, the environment that people and their family are living in each day, gets destroyed. How can your core business possibly grow?

This is something racing is faced with, over and over again, this century; whether it's California, who are focused on shuffling the pie, or harness racing, which simply trudges along.

If you examine either article, you see that these entities are still producing zinc (purses), but everything else has suffered. Harness racing is losing market share, because nothing is being spent on the ancillary to grow market share.  In California, almost everything has been done to prop up purses, but because the ancillary (backstretch monies, workers comp, marketing, new ownership programs, etc) receives a fixed percentage of a falling handle number, it's all getting killed.

California racing can not grow unless it has a growing core, and harness racing can't grow unless it has the same. When the core isn't sound, the fringes suffer first, and most savagely.

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