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:

•  But even as some politicians look to divert attention from the issue, public focus returned to the evils of automation. The New York Times ran a story titled “The Long-Term Jobs Killer Is Not China. It’s Automation,” while the Associated Press explained “Why robots, not trade, are behind so many factory job losses.” You get the picture. Technology is killing manufacturing jobs.

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.

Fantastic to see #Arrogate get the job done yesterday. Hat tip to NJ Exchange players who took almost 2/1 on him during the race. #inplay

— BetfairUS (@BetfairUSA) March 26, 2017

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.