Wednesday, November 20, 2013

Margin Price Setting, Racing's Historically Huge Issue

A few years ago I was speaking to a racetrack executive, who ran both the track and the casino at his track. I won't say who it was because, this is a blog and I am not Woodward, Bernstien or anyone remotely close, and more importantly, I have not asked him if I could. He was speaking to me about how they tweaked their slot machine "margins" to make more money - they moved them down a half a point.

Inflation was happening - slots machine manufacturers were raising prices, the labour market was getting more expensive, myriad things all businesses go through were getting more expensive - but the margins were falling, to try and increase revenues. That's the way things work.

In racing, it does not work like that. When people want "more money" they ask for an increase in the margins (takeout) because they have control over that, through the Interstate Horse Racing Act and other mechanisms. This is why, while the margins have shrunk in slot machines (say from Vegas since 1970) by 50% or more, while inflation has caused prices to go up by 50% or more, they are all flourishing. Meanwhile in horse racing, the margins have gone up by 400% or more since the 1920's, and we can't compete.

Across the pond and in several other jurisdictions, the racing business (from a pricing standpoint) is run like other businesses. Gross profits are taxed for purses and other needed revenues, not gross margins. They can't walk in and say, let's take another three points of gross betting to fund me, the funding comes when more money is made. If the margins need to be brought down by three points to make more money, that's what happens, because, well, you make more money.

It's not a panacea and racing has issues almost everywhere, but it certainly is a better system. At least it makes sense to anyone with even a rudimentary understanding of business.

In Pennsylvania, New York and other states we've seen surcharges or taxes instituted or going to be instituted. Yesterday it was announced that Illinois is going through some sort of funding crisis. What do they do? Create a surcharge on bettors.

It's gotten beyond the point of silliness. Skill gambling games depend on payouts to survive. The lower the payouts the less the value, the less the value, the fewer people are attracted to it. This game of "margin tweaking", started in the 1920's and alive and well today, is the single most reason racing has become a game for suckers. If fifty or sixty years ago someone decided that gross profits would be taxed instead, the landscape would not only look very different for horse racing, but would be in much better health, too.

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