Takeout

The truth on takeout

March 24, 2017

Pennsylvania’s path forward will take planning, structure and patience

Just a couple of weeks ago Dave Briggs had an interview with Brett Revington, the new head of standardbred racing for the state of Pennsylvania. This position, and the accompanying structure set up at the state’s racing commission, represents a pretty nice opportunity to move forward with several items that can help the racing and betting product in the Keystone State.

Although Brett’s interview focused mainly on the very important issues of uniform rules and harness racing integrity, one item particularly caught my eye.

“I don’t think it’s any secret that we do have high takeout rates here. As far as I’m concerned, anything we can do to improve the industry within Pennsylvania is definitely on the table. That’s one of the things I’m looking at now, doing a bit of a case study to see if it’s worth our while. I think that it is, but it’s just a matter of putting up the numbers and showcasing a plan. Anything is on the table for improving the industry as a whole, as well as Pennsylvania,” Brett noted.

I thought Brett mentioning takeout rates was fantastic. But, I must confess I was also a little frightened for him. Talking takeout in racing is tantamount to a Senator bringing up entitlement reform. It’s always been a minefield.

Along those lines — if you will — please allow me to share a story.

A decade or so ago, I was presenting at a racing conference about new ways to wager, and the price of a bet. I touched on several points, that (at the time) I thought were quite strong.

First, examining the history of how horse racing has been priced has always been a worthwhile discussion.

I bet a lot of people don’t know that when Dan Patch was racing, takeout rates were five per cent. These rates then moved to 10 per cent, and 15 per cent and so on, to where they are today (around 23 per cent blended in harness racing). None of these price hikes were implemented with econometrics, other fancy calculations, with the use of a 1940’s version of Lotus 123, or at the advice of pricing experts. Nor did they have anything to do with supply and demand, which we all know is how prices for hay, trucks and trailers, sandwiches at the track kitchen or just about everything else we buy are set. The rates were hiked because someone (governments, racetracks) wanted more money, and the consumer – with no other gambling games to play – had little choice in the matter. Even when the consumer was speaking — when handle and revenue fell after yet another hike in New York in the late 1940s — the price increases didn’t pause.

Pricing expert Will Cummings in his 2004 report, Analysis of the Data and Fundamental Economics Behind Recent Trends in the Thoroughbred Racing Industry, summed this up when he said “racing has lived with high takeout rates for so long, they’ve become a way of life.” It’s just the way things are, even to this day.

“All we’re doing when we raise takeout is driving away people. The regulars are coming less often or they’re coming just as often but getting ground down. People within the game still don’t understand how destructive takeout is.” 
- Professional Horseplayer Mike Maloney

Moving on, we can look at academic studies in the horse racing gambling space. I think it surprises more than a few people that virtually every published and peer reviewed academic study since the late 1970’s on racetrack pricing concluded the same thing – the takeout was too high. It beats that whole “97 per cent of scientists” and global warming number.

After a brief history of how racetrack pricing has been set over the last century – and that academia agreed it’s too high — I spoke a little about the modern consumer.

Because of high pricing, some betting customers have searched for, and received (primarily through the Internet), lower takeout since about the year 2000. This has been effective for the gross handle number and customer retention. Betfair, which for most of their existence charged five per cent takeout on racing, moved from a start-up with zero customers, to a multi-billion dollar business in less than a decade. Offshore sites sprung up, offering good deals, and punters flocked to them in droves, returning nothing back to racing. Completely legal rebate shops began to flourish, and in some ways continue to do so today. It’s been estimated by some that legal outlets offering lower takeout through cash rewards now make up 40 per cent of total North American betting handle.

“I quit betting horses about 7 or 8 years ago when I realized how hard it was to beat, simply because of the takeout.” 
- Customer on a chat board

After my presentation, I expected some comments, but there was only one. Someone from the industry immediately stood up and said (I’m paraphrasing), “lower takeout doesn’t work, because if we charge 15 per cent instead of 23 per cent, handle has to go up by a lot and we won’t make as much money.”

Well, that ended things quickly. I felt like Donald Trump after making a proposal to the editorial team at MSNBC.

I would never be so deluded to say my opinion was completely right, but I thought I did a fair job in making a case that:
• Current takeout rates – the 23 per cent number – were never set by a market, but capriciously.
• Academic journals all show the price of a bet is too high.
• When customers are offered lower takeout, as some have been this century, they move to the better deal, stay engaged, and in many cases bet exponentially more than they ever had in the past.

It was apparently not good enough to foster even a modicum of debate. Twenty-three per cent is what pricing has to be, and that’s that. End of discussion.

Harness racing takeout rates in Pennsylvania (and in fact, all of racing) are the elephant in the room. Any takeout discussion usually ends up in the status quo blanket. Why this tends to occur, in my view, is due to (as we spoke about a few weeks ago in this column) harness racing being in the clutches of a harvesting business strategy.

A harvesting strategy is prevalent in mature businesses, where the decisions are tilted towards maximizing near-term cash flows, and making changes that only straddle a very tight middle ground. Sacrificing market share (top-line revenues), to maximize these short-term revenues is vital to a harvester.

Where this strategy butts heads with the folks who want to explore lower takeout, is that (like my commenter at the conference) immediate returns are asked for. Unfortunately this rarely happens. An often used analogy is that if gas prices go to $10 per gallon tomorrow, people won’t all immediately show up at the local Toyota dealership to trade in their Dodge Ram for a Prius. If takeout rates fall in harness racing, it takes time to show an actionable result.

I grew up a horseplayer and got to the point where I could pretty well break even. I then discovered sports betting, where a 4.54 per cent cut is considered excessive. Never looked back.” 
– Sports bettor on a chat board

However, there is some evidence that – if given time – lower takeout can increase market share, attract betting dollars, and make the sport healthier.

In late 2009, Balmoral Park lowered the takeout on their Pick 4 bet from 25 per cent to 15 per cent. The bet averaged $8,827 in handle in 2009, and in the early months of 2010 it looked like it was the wrong move, because Pick 4 handle was down, not up. As the natives got restless (wanting to reverse course) a funny thing happened. By 2011, the Balmoral Pick 4 pools averaged $23,675, a 168 per cent increase from 2009. By 2015, this number was $33,176, a whopping 275 per cent higher than the last season with the 25 per cent takeout rate.

Revenue (with a crude calculation of the takeout multiplied by the wager amount), increased from $2,206 in 2009, to $4,976 in 2015, per Pick 4. Handle picked up in other pools, as well, and Balmoral had a nice year in 2015, with many days churning over $1 million per card.

“When you see a 4-1 and a 7-2 double pay $26.50 do you think horses are worth playing?” 
– Poker professional on a gambling chat board

Now, we can’t get the wrong idea about those sparkling results, because if it was that easy, everyone would be doing it. And it’s important to know that (sadly), Balmoral Park is shuttered, reminding us that the sport is dependent on more than handle alone. But, it’s clear that lower takeout and the branding and promotion it affords, can work, with some patience. More broadly, and with a longer time frame, Tampa Bay Downs presents a compelling case study.

Back in the 1990’s, Tampa Bay Downs raised their takeout to a whopping 20 per cent on WPS and 28 per cent on all exotics (note that this is lower than many harness tracks, but high for thoroughbred racing). After some time, handle was off 20 per cent and the track was handling only about $500,000 on an entire card.

“This could be a disaster for us,” said then general manager Stephen Baker.

By 2001, after opening up their signal (to some rebate shops, no less) and tweaking the betting menu, things began to improve, and handle rebounded to $1.8 million per day. In almost each year since that time, Tampa Bay decided it would gradually lower takeout on its various bets to try and gain more and more market share. Today, win takeout is no longer 20 per cent, but 17.5 per cent; doubles are not 28 per cent, but 18 per cent; exacta juice dropped from 28 per cent to 20.5 per cent.

Along with a lot of hard work (they do some great things on-track and otherwise) Tampa handle has doubled to about $4 million per day since 2001. Even from the dark days of 2008 — with continual smaller field size, a lower horse population and other maladies that have plagued racing since — Tampa’s handle per horse was $49,000 last season, up about 19 per cent.

“Rake 30 per cent out of a pot and you’ll see how quickly your poker room becomes a ghost town” 
– Horseplayer on a chat board

Tampa Bay Downs is going into the second decade of their marginal takeout reductions and the accompanying marketing strategy. Yes, the second decade. Again, there are a lot of components to betting handle, but one thing is for sure, if takeout changes are going to work, you better have more than a six or eight month time horizon.

As Pennsylvania embarks on studying takeout rate changes and their potential, I hope they take heed from what’s happened with those who have come before them. The lessons regarding the history of pricing in the sport of horse racing can shed some light on how, and why, changes can help their tracks’ (and the horsemen’s) bottom line, if done correctly. The theory is important to know, but how that theory works best in practice (especially in racing’s discretionary pricing environment), is something worth studying.

I believe it’s important for us to realize that this is not about bumper stickers, or quick fixes, or day to day handle changes. It’s not some sort of magic sauce. It’s about planning, foresight, testing and patience.

It took a hundred years of increasing prices to chase some of racing’s best customers away, through the drip, drip; like a leaky faucet in an old barn. In 2017, Pennsylvania racing’s brand is arguably at an all-time low in the eyes of the punter. Earning some of those betting dollars back will not happen overnight, and it won’t be easy. But, it’s nice to see a state with some of the highest takeout rates not only in the country, but the world, at least speak about exploring these exciting new possibilities. Everyone in harness racing should wish them well.

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