Horse Racing's Super-Strange Model

I've been racking my brain (no jokes please) and I am completely flummoxed trying to find parallels.

Horse racing in North America has, for a million years it seems, dealt in a system of revenue with a percentage of margin. If takeout is 22% and it brings in $1,000,000, the one million is not split, the 22% is. 22% is a margin, not profit, or money, but it is somehow treated as a price, or profit.

If a track wants "more money" or if a horsemen group wants "more money" or a state wants "more money", they don't ask for more money, they ask for more margin. "You get 9% of takeout but we want 11%". "Well, we charge 22% but we can raise that to 24%, would that do?"

It's the only business that I know that even remotely works like that.

If Raptors guard Kyle Lowery wants a new contract, he is not paid in a percentage of a ticket. His agent won't ask for 3.4% of ticket sales, instead of 2.9% of ticket sales.

Wal Mart's margin is about 1.5%. No one in that board room who wants a raise gets one by saying "raise margins by 0.1%, and pay me please". That's just silly.

When my local mine growing up went on strike, they did not ask for an increase of margin on a gold bar sold, they asked for $20 an hour instead of $18, and a new plan for eyeglasses.

There's a simple reason it's not used in every day life; at my job, or your job, at casinos, horse racing in other parts of the world, lotteries, or in virtually anything. Margins are not set by union negotiations, or salaries, or Barack Obama, or the United Nations. Margins are set by the market. You can't tell someone what they are going to pay arbitrarily, they tell you what they are going to pay by buying things. Then what your margin is - through regular good old fashioned management-  is maximized to grow the firm.

In horse racing, what Obama, the UN, Bill Gates or George Clooney or the King of the World (who might actually be George Clooney) can't do, is done as a matter of course. It sets a margin, and moves it around willy-nilly; it's used as weapon by tracks to other tracks, horsemen to tracks, tracks to customers. It's something to be added to with impunity, like dropping cubes of sugar into sour lemonade. It's a super-strange, sub-optimal, bizarre model. And it doesn't seem to be going anywhere soon.


Sal Carcia said...

One term that is not used by horseracing is productivity. I assume that if productivity is improved then the margin can be increased.

When Monmouth ran their super meet, they decreased the number of days and increased the handle. If they doubled the handle in half the days, I am assuming that would have lowered expenses and increased productivity..

That discussion never came up. I don't think.

ITP said...

One great racetrack exec who is now a horsemen's representative told me that that he was raising host fee % due to inflation.

I don't think that one will ever be topped in the history of reasons for raising margins.

Only in horse racing!

Anonymous said...

Heart and soul of game is based on how difficult it is to participate. A 22% skim combined with events spaced 30 minutes apart make it unatractive to new fans . It is a great sport but needs to reduce take and move along quicker to survive

Anonymous said...

Why having journalist not interviewed horseman leaders from ny, cal., fl., chur., etc..about their thoughts on takeout?

How bad is the media in horse racing?

lazydaisy said...

From what I can see, racing’s biggest dilemma is that their sources of revenue have drastically decreased over the last 20 years – especially since simulcasting and now internet wagering have evolved.

Traditionally, a track had many sources of revenue, including:

1. Gate receipts
2. Parking
3. Programs
4. Clubhouse Seating
5. Preferred Seating
6. Concessions
7. Takeout

Note that 1 – 6 were dependent on attendance, which was traditionally very strong and typically fairly consistent from year to year. If you look at Rockingham Park’s thoroughbred meets in the 1960’s, weekday average attendance was easily in excess of 10,000 patrons! That is a huge amount of revenue coming in from 1 – 6.

Racing today, other than a few major tracks during their seasonal meets (i.e. Del Mar, Saratoga, Keeneland), do not have many patrons actually going to the track. Although, most (all?) of the tracks do not list attendance figures (too embarrassing, I guess), I would have to believe that revenue from 1 - 6 is probably less than 10% of what it was in the good old days.

That leaves only #7 and, a new category, a track’s racing signal, as their main sources of revenue. That is why tracks are raising the takeout and signal fees – they really do not have any other sources of revenue to call upon. It is expensive to operate a race track and the money has to come from somewhere or the track simply closes (take a look at how many thoroughbred tracks are still operating in New England (answer is zero)).

Now, you can say that tracks should have seen this coming, and most probably did, and they undoubtedly tried to deal with it through the usual methods (i.e. cost cutting, adding race dates, increasing the number of races per day, etc.) but then a silver bullet called Racinos came along and bailed them out. Why would management spend cycles looking for new sources of revenue when they had a golden-egg laying goose at their disposal. Better to spend your resources protecting that valuable revenue source.

I don’t see racing surviving without the Racinos (or some other sort of government subsidy). State legislators are just going to have to realize that and, if they want to keep horseracing viable, enact or maintain laws that ensure the Racino revenues are split with the tracks that host them. I also think the state legislation should set a maximum takeout rate that is fair and equitable to both the track and their customers (i.e. the bettors). Something like 15% for all parimutual bets (WPS, exotics). The track should have no choice on what its takeout is but it can do what it wants with its cut of the racino profits. If they are savvy, they will use some of it for purposes other than fattening owner’s pockets.

Cangamble said...

Lazydaisy, in the 60's, purses were probably relatively low to maybe equal compared to today except for big races when considering inflation. Back then, taxes made up a huge amount of most takeouts which were collectively lower than today because there were fewer exotics and most money was wagered on lower takeout WPS. Horsemen only got around one third of total takeout back then (not sure if they got part of admission or concessions, etc.) It worked out to less than around 5% of total collective handle (which amounted to slightly less than one third of the collective takeout). Today, collectively, horsemen receive around 9-10% (close to one half of total collective takeout) of the total handle for purses albeit that includes monies from slots where applicable which isn't derived from parimutual betting on horses.


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