Ken Ramsey & Purse Red Herrings

Yesterday, big time horse owner and breeder Ken Ramsey made some major waves with his comments on Keenelend (35 minute mark and on). Quips like "they make Benedict Arnold look like a patriot", and a call for players (and the industry) to boycott the track through withholding their wagering got the most play, and deservedly so.

But he also touched on the so called reason for the takeout hike - to increase purses. Ramsey believes that it's a red herring because Keeneland gets so much of its revenue from alternate means - gaming, sales and the like. He's probably correct.

But the reason itself is suspect. Sure it's arguable that raising takeout even increases purses; in the long run it likely doesn't. However, I suspect Ramsey knows what everyone else does. Even if purses are raised, they are not optimally distributing revenue to the business, and the proposed net benefit - more horses purchased, more horse owners getting into the game - is simply not there.

The economics of $90,000 MSW's instead of $70,000 MSW's, to me, is a little like health care economics. In the US, for example, the lack of economic rationing of services causes costs to be higher, physicians allow for more tests, and the private market creates more and more products that are costly. What it does not do is allocate scarce resources in what economists call a Pareto efficient manner; which loosely means things are doing what they should, where everyone is better off.

For example, injecting capital into purses that are already at high levels does not attract more betting dollars, does not attract more owners, and causes some inflation to be injected into the system where everyone's costs go up.

For you and me, that means this MSW for us as a local owner means nothing if Chad Brown and Todd Pletcher send more horses. This means - for you and me with a small string - we're priced out of the race anyway, and worse, we check our supplement, shoeing and vet bills for our claimers at the end of the month and see the prices went up, hurting us even further.  We might as well go race at Indiana Downs or Penn National, and many of us do.

The next time we see a 5 horse MSW for $90,000 and scratch our heads, there are reasons for it. Believe me, the short field is not there because horse owners don't like money.

So, like Ramsey, many of us are often left dumbfounded by rudimentary decision making like this. It's a multi-billion dollar business, but at times it feels like new policies are enacted on the back of a napkin over a round of martinis. If that continues - and it likely will, it has not changed in generations - I don't think Pareto efficient outcomes when it comes to purse money or takeout rates are anywhere near being a realization.

Pass me another martini, and enjoy your weekend everyone. And thanks Ken. It's nice to see bettors and leading owners at the Keeneland meet on the same page. Hey, it's magical place, so magical things happen.

If Racing Wants to Make Big Wagering Decisions, At Least Study the Numbers

For a long while, we've often wrung our hands at how the business of horse racing (publicly at least) studies their facts and figures when it comes to wagering.

What should be a deep dive - something that looks at things with a microscope with statistical significance attached - is often fishing in a pond; a pond stocked with whatever fish you're looking for to boost your argument.

I read this line in a few places, regarding the Keeneland takeout increase, and it's been passed around some as a justification for raising rates.

"Churchill Downs boosted its rates to the same thresholds in 2014, and records indicate that despite horseplayer backlash handle has continued to increase slightly over the past several years, from $501.3 million in 2014 to $511.8 million in 2015 and $516.9 million last year."

There are many problems with this 'fact', and this is very common in the horse racing business when racetracks offer out new policy.

• The numbers include Derby week, which is an outlier. If it rained a few years, turf cards cancelled and handle tanked, it had little to do with a takeout rate. Derby week is, arguably, one of the least price sensitive week in all of North American racing.
• The numbers do not include 2013, which was the last year at the old (lower) takeout rates
• Field size and number of races have an effect - the elasticities for both are, according to a 1998 study, about -0.6. 
• The business never includes real numbers, i.e. real as in including inflation rate. $501M in 2014 is worth $510M in 2016 for example. If the price of hay goes up, handle needs to go up too.
• We'd want to look at underlying subsets for comparison and to gauge market share.  If Wal Mart sales are flat, but Dollarama up 15%, Wal Mart is going to want to know it. 
• Factors - like the organized Churchill Downs boycott in 2014 - can be important and need to be examined

So what can we learn about Churchill's takeout hike, if anything?

In 2013 (omitted from the above statement), outside Derby week, at the 16%-19% takeout rates, handle was $322.6M.

In 2014 at the takeout rates Keeneland just hiked to, this handle was down to $248.4M, or off about $74 million.

2015: $252.6M

2016: $260.8M

Since 2013, total handle outside the Derby is down about 20%, or $62 million.

When looking at handle per entry, which includes field size, number of races and controls a little for weather and other outlying issues, the handle is down 13% since they changed the takeout rates.

When looked at the underlying handle numbers, which are down about 2% since that time (2.29% with inflation), Churchill has done appreciably worse.

Another phenomenon we've noticed is that large signals at big tracks are doing better since 2013. Last year, for example, tracks with over $200M in meet handle grew at 12% in gross. Churchill is one of these tracks and has not followed suit - they've been down (although in 2017 they seem to be catching up after a decent couple of months).

On the surface handle is down 20%, per entry handle down 13% and $62 million less is bet than it was a few years ago.

Those who are pro-takeout hike, or carry water for industry decisions often pivot their argument by moving the goalposts at this point, and talk about gross revenue. That, in my view, is a complete rabbit hole that does no one any good at all. As I've often noted, if any track wants to increase gross revenue for a few years just double takeout rates and that will happen. It's what happens afterwards that's the problem. When Italy doubled trifecta takeout to 41% revenue was up for awhile, but now Italian racing is Blockbuster Video.

So, it's the time I should probably conclude that the takeout rake hike was absolutely horrible - the worst thing ever! After all, $322M in handle down to $260M with other big signal tracks holding their own or growing since that time, dates down, races down, and horses entered down is not good news. The supply and demand ecosystem have both struggled.

But if I have a lick of intellectual honesty, I can't even do that - with rebating, signal fees, upwards of handle coming from large players, and other "noise", we can't really conclude anything with 100% certainty. At best we can say the takeout increase at Churchill probably didn't do any good - other than the increased "EBITDA" Derby week, which they could've achieved by hiking takeout for Derby week alone.

What I offer as an argument is simple: What makes for analysis in this business when people argue big, important items, is poisonous to the future of horse racing. Without honest, detailed, statistically significant modeled data, the sport will never get anywhere. And we'll likely see more moves like Keeneland did Monday, buttressed with low hanging fruit data, that says whatever they want it to say.

Anger at Keeneland is Different Because It's an Old Friend

When a takeout increase is announced there's usually some grumbling. Let's face it, no one in their right mind is happy with a price hike; even a smaller but dedicated player who bets $1,000 in a meet and made $50 will find herself now losing money. No one likes to spend hours and hours at a craft, to lose when they used to win.

This time though, it feels much different. The breadth of the complaints are wider - horseplayers yes, but it's also industry watchers, some horsemen and some in the press. There's a sense of deflation from so many quarters. I think this makes some sense.

Over the years Keeneland has always been the track we've leaned on; the track we'd say to non-fans, "go to Keeneland, it's horse racing and they care." It's the track that when you walked in the door you felt catered to, important; whether you were betting $2, or bidding $2 million on a horse, it did not matter. It's the track where it seemed Nick Nicholson would spend as much time talking to customers, asking what they want to be better customers, as he would at the sales, shaking hands with breeders.

The Keeneland brand was built on these pillars; built on them so much that they are in their mission statement.

It's never like this at other tracks. We know CDI will run numbers and harvest bettors. We know So Cal and the CHRB to be mired in constant committee and usually come up with something we shake our heads at. Keeneland was the port in a storm. It was horse racing done right. It was the "do no evil" racetrack. They were Keeneland, they weren't them.

When a strong brand - any strong brand - is built on something and sold on something and then goes a full 180, it sticks out like a sore thumb. As I read someone say, it feels like a 'betrayal'.

In horse racing when you wake up and see a track slept with your husband, it is what it is; this industry has not made the best decisions. But with Keeneland, it's like you just found out they slept with your maid of honor on your wedding night. It's not who we thought our old friend was, and that punches you right in the gut.

Have a nice Wednesday everyone.