Thursday, December 1, 2011

Juice the Handle, Up the Eyeballs, Grow the Sport

In the 1970's share purchases were generally for rich folk. The Dow did very little volume, and a trade could cost me and you 3% or more (hundreds of dollars a trade). It was very difficult, and not cost effective to buy and sell stocks. Later on, much to the chagrin of seatholders, commissions were slashed. In the 1990's you could trade a stock for as low as $6. This (along with many other factors) allowed share volume to explode.

The commission revenue from investors, even at a $6 price instead of a $400 or $500 one, also exploded.

Not only that, it drove eyeballs. Books, DVD's, channels like CNBC and much more are more than a cottage industry, investing has become wholly mainstream, and a multiple billion dollar one.

In this day and age, racing has its own push/pull with commissions. Today on the Paulick Report Peter Berube of Tampa was interviewed. He has been lowering takeout since the early 2000's and Tampa has seen an increase in revenue.
  • “I am convinced reducing takeout does increase handle,” Berube said. Furthermore, he said he is convinced the increase in handle makes up for the lower commissions from each dollar wagered when takeout is lowered.
Ray Paulick metioned another fact in the comments, the growth of purses:
  • The aspect that concerns me is that while handle has increased significantly for Tampa Bay, purses have been flat [they are up 3% the past few years]. It's the antithesis of handle down/purses up....
That is an argument we do hear from horsemen regarding purses. If handle goes up 10%, purses better go up close to 10% too. Tampa's 3% purse increase and 15% handle increase is not doing the dollar for dollar job over the last couple of years.

Since we have competition and we must put more into customer retention to compete with other gambling games, we have not seen 6% to 8% of all handle going to purses like it had been (although Scott Daruty and Monarch are trying to go after market forces by doing that). In other parts of the world, where they have lived with competition for decades, like the UK and Australia, they have lower margins. About 2% of handle goes to purses in Australia and about 0.95% in the UK. We're simply catching up due to disruptive market forces.

Tampa, back in the 1990's, raised their takeout rates to 20% in straight pools and 28% in all others. Handle fell and they were only processing about $500,000 per day. Purses, I guess we can assume, would have been around $50,000 per day (that's a guess, I do not have the figures). Fifteen or so years later, in an industry that has lost upwards of half its business during that time, Tampa is doing $161,000 per day in purses (some of it from alternate revenue), or about a 300% increase. And they are doing over $4.2M in handle at the lower rates, instead of $500k at the higher rates, about an 850% increase. Tampa is not putting the same margin into purses now, but it still looks damn good.

One can only imagine what purses would have been today if they stayed at the old business model. Maybe they would do $40k per day, or they might have run a super-short boutique meet, doing nothing for local horsepeople. It's probably more likely they would've shut their doors, and we would not even be speaking about them today.

Regardless, the argument that an 850% increase in handle with only a 300% increase in purses resonates with a lot of people in racing as a bad thing for the business of horse racing. The phrase "our fair share" comes to mind. But I do not think it's a bad thing, for another reason other than the one above (i.e. if Tampa hadn't competed, it might not be racing today).

It focuses on eyeballs.

Let me ask. What would you rather have as a horse racing fan, exec, or trainer?:

20% of handle for purses with a $4M daily handle, or 5% of handle for purses with a $16M per day handle (e.g. what Tampa has done)?

I'd choose the latter.

If this was done industry-wide and we as a business did $40 billion in handle a year instead of $10 billion by taking less, many more people would be watching racing, and we have any more people interested in the sport.
  • We'd have more people visiting racetracks
  • We'd have more people buying horses
  • We'd have more people buying data
  • We'd have more people watching racing on television (maybe so that one day we don't have to pay networks to show us)
  • We'd have more people extolling its virtues on social media
  • We'd have more money going to horse retirement (those who get a share of handle)
  • We'd have more money going to jockey and driver insurance and charities
  • We'd have more people telling their friends about racing
  • We'd have more money going to state houses and legislatures (some of them get a share of wagering dollars too) giving us tremendous lobbying power and political pull
And much more.

It's easy to be upset about the changing landscape and its perfectly natural. It's easy to fight over slices of the pie and worry about what went where ten years ago instead of where it goes today. However, when we grow the pie there are spin-offs and machinations that can grow the sport of horse racing because volume and eyeballs matter. Just like the stock exchange.

Sometimes taking less today, means more for tomorrow.

1 comment:

Anonymous said...

There isn't much I disagree with here. What I think you're missing..... you are dealing with racing. If the track took in $16 million/day by taking less,there'd be horsemen groups wanting more of 'their fair share' & in five years handle would be back down to $4 million/day. We already see it with Tampa and the new signal fees. They want more. Next year they'll probably have less handle.


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