Racing, the Kentucky Derby & the Strange Case of the DisappearingGambling Dollar

The Kentucky Derby has been growing. As the sports' premiere event, it has a built in cachet that other events (outside the Triple Crown, certainly) do not have. In a word, it's Americana. Saturday's raceday possessed what should end up being a record $194 million handle, and the TV ratings were the best since 1992.  In addition, let's not forget Friday's Oaks day, which is a success and has been for a number of years now.

It's easy to say this is expected, and that it would take a lot to screw up a Derby or Oaks (just like it would take a lot to mess up other niche events like the Indy 500), but I think that's very unfair. Remember the Oaks on Bravo? Special coverage, Derby draws? Johnny Weir and Tara Lapinsky? Hats, suits, red carpets? Some of those things were met with consternation inside the industry. What they do, are doing, and have done is present the event to a new audience in new ways, hoping the people come back each year to watch, one day come in person to buy $11 Mint Juleps and possibly bet a trifecta into 19% 22% takeouts. That's hard work, and it means something.

The problem with all of that is the horse racing industry - not all but a good deal of it - tends to lean to glass half full, rather than looking at the big picture. We see this almost on a meet by meet, or month by month basis. If a handle goes down for six meets, but goes up the seventh, things are improved. If handle and attendance goes down each month, but one month it goes up, we're turning a corner. It's similar with the Derby, or other big events. A small spike in TV ratings are trumpeted, a small hike in handle is warm and fuzzy. But the real story is not these incremental increases or decreases, it's what's not being done that's worrisome.

Pinnacle Sports is a website. It's in Curacao and takes bets on the NFL, MLB and other sports. It's not an elaborate website, nor is it very difficult to run. You can't bet into it from all countries, it doesn't have easy-peasy deposit or withdrawals, it's just an offshore website.

Pinnacle took in $40 billion in bets last year. Yep, $40 billion.

The Kentucky Derby has the power of a long time brand, millions from industry groups spent to show Derby preps on television, mint juleps, Bravo, Johnny and Tara, hats, free media, a year of planning, and an attendance of 170,000 in house, and 16 million watching on TV. And it generated about $120 million or about 0.3% Pinnacle's yearly handle. Overall, horse racing in North America bets about $11 billion a year, with 40,000 races, 50 ADW's, 70 racetracks, hundreds of OTB's, all the rest. That's barely one quarter of Pinnacle's handle.

How does a website take in that amount of gambling money with no slots subsidies or government help? How do they survive with all the competition from casinos, racetracks, lotteries? The obvious answer is that they don't have much overhead and don't have to put on a race or game, but if you run to that as an explanation, you're missing the big picture.

Pinnacle takes in $40 billion of gambling dollars a year because they focus on attracting gambling dollars. Pinnacle has the best lines, best value and does not try and hoodwink anyone with high rake gimmicks, or hat giveaways. Each player at this site has a chance to win, and they're open for your gambling business. Betting five cent baseball lines attracts money, and people's bankrolls can last.

Horse racing events like the Derby are the exact opposite when it comes to gambling economics. They deliver 16 million viewers and $200 million in handle. That handle comes, for the most part, from increased deposits at ADW's, and both on-track and OTB juiced bankrolls. That's a good thing. What happens next is not. The day after the Derby the folks who bet and cashed on American Pharoah either take their money immediately out, or bet it into egregious takeouts that they have no shot of beating. They get ground down and lose their money quickly. They then tell their friends "the Derby was fun, I cashed, and you should come with me next year, but you know the old line: You can beat a race but can't beat the races."

While the Pinnacle customer deposits money to bet the Super Bowl, makes a cash on the Patriots, then looks to bet a little hockey, then baseball, then the NFL the following year, the horse racing customer - with apologies to Steve Miller - takes their money and runs. Can you blame them?

This probably explains almost all you'd need to know: The average sportsbook customer in Australia bets 6 games per week, at around $30 per game. Pinnacle's average customer bets probably double that, for about $400 handle per week, each and every week. Horse racing's on track handle for ten races at a big event, like the Arkansas Derby last month, hovers somewhere around $40 per capita, and most of those people come once a year.

Handle at some events, along with good attendance, prove that horse racing still has relevance. Horse racing is not the proverbial 'dead'.  But it is unfortunately delivering gambling customers who are dead on arrival. Because these high and mid-funnel customers are needed to support a labor intensive industry and are being converted at microscopic rates, the glass is not half full; it might as well be shattered. It might be relevant for a Churchill Downs exec's bonus check what the Derby handle is, but for everyone else it's probably one of the most useless industry metrics you'll ever see.

Horse racing needs to change to attract gamblers, just like Pinnacle Sports has, or it will never become a gambling game that allows racing to generate the long term revenues needed to support it. That mountain is not climbed with Derbies, hats, drinks or TV ratings. That goal is achieved with a complete restructure of horse racing as a gambling game.


Jon Shonk said...

I've always wondered why race tracks seem to take their regular bettors for granted. They might say they offer their "guaranteed pools" which are nothing more than marketing gimmicks or maybe some give out some perks (box seats, turf club, etc.).
As you state in your very well written article, the industry continues to lose its regular customers to high takeout. It is very difficult to beat long term and many have left for other gambling options such as sports betting or poker. True, you need to have marketing to attract new fans. However, to retain or possibly bring back former horseplayers, the takeout needs to be more favorable or we will continue to lose more customers to such places as Pinnacle and more recently daily fantasy sports sites(FanDuel and Draft Kings).

Anonymous said...

The ratings may be up a bit, and lots of folks may have tuned in for 30mins or even an hour, but I've been to all my usual sports blogs the past 2 days and have not seen a single comment about the KY Derby. When everybody is talking boxing and nobody mentions horse racing, welp, it is what it is.

Anonymous said...

There is absolutely 0% chance Pinnacle did $40billion in handle last year unless they are including casino games. Further, TV ratings of just every sport except the NFL, NCAA Tourney and horse racing have been falling for a long time. It is an accomplishment.

Obviously the point is the case, 99.9% of the time horse racing is gambling and 99.9% of the executives in racing are completely clueless when it comes to gambling.

You have this guy Simball VP at CG of risk management who doesn't believe in the laffer curve.

Chairman of the Arkansas racing commission in essence called off track winners parasites on Friday='nuff said.

Not going to want to hear it either-Pinnacle did not create a new generation of winning sports bettors. They just give off that illusion because to the modern youth nominal take out is effective take out with zero regard for anything else. In simple English it is far easier to beat some higher take out online sportsbooks than it is Pinnacle. Just like it is far easier to beat a superfecta with thousands of combos at 20% than it is a binomial sporting event at 2.5%-modern youth either doesn't get it or chooses not to.

Anonymous said...

I saw a news story about ten years ago that said offshore books were doing about $77b in turnover. I believe the $40b for Pinny.

PTP said...

Good info anon.

I have researched online sports books for some time now as a hobby and if there's one thing I notice : the projections vary wildly. Adam Silver, NBA commish, recently cited stories and reports about the illegal sports betting market in the US and pegged it at $400 billion. That seems high. If you add up all the revenues from legal sports books in the UK and elsewhere, you get $60B or so for that, but much of them do not take clients outside their jurisdictions now.

KPMG did a study and it too varied.

As you note in your article, whether $40B or $4B, the premise is the same, though.

Thanks for the comment.


Craig said...

To Jon Shonk:

Well, I mean, it is logical. Websites like FanDuel or even just websites that do FanDuel reviews are getting more important, since the playstyle is much faster. Also, for a lot of people it is much more interesting than the other "gambling" possibilites.


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