Part III

by: Jeff Platt - November 16, 2008

The Signal Impasse Series - Part III

The fact that the current signal impasse is occurring during one of the worst economic downturns in recent memory while all sources handle is falling leaves me scratching my head.

I want to emphasize something vitally important.

The parties involved aren't just going back and forth on numbers for signal and host market fees. Decisions reached in these negotiations are going to have a profound effect on thoroughbred racing well into the future. Whatever final agreement is reached, it should be part of a comprehensive strategy that takes into account the future of the industry.

One of the reasons I got involved was to find out if industry decision makers were aware of the value of a long term outlook as opposed to a short term outlook.

In 2003, the National HBPA hired the consulting firm, Cummings Associates, to analyze the economics of the thoroughbred racing industry. Cummings' report, titled Analysis of the Data and Fundamental Economics Behind Recent Trends in the Thoroughbred Racing Industry was published in July, 2004. Pretty much everything in the report is spot on. Sadly, the industry continues to largely ignore recommendations made by Cummings as well as recommendations made by others in similar reports. Ironically, many of the report's findings have played out - manifesting themseles in one form or another - stagnation of handle growth leading to the current signal impasse being just one example.

I think it's imperative that the parties involved consider the findings outlined by Cummings - especially the parts about ADW being an incremental market with marginal production costs - and pricing it as such - with the payoff coming from growing the ADW market segment exponentially in the long term.

Keep in mind that at a time when all sources handle is declining the TOC and THG are asking tracks and ADWs to hike the percentage share of ADW revenue paid out to horsemen by 65 percent. The TOC and THG are essentially asking the tracks and ADWs to act in a manner contrary to the long term best interests of thoroughbred racing as outlined by Cummings.

From p 13 of the report:

In sum, in this new and much more intensely competitive world, the racing industry must invest more and more to attract each incremental dollar of revenue. It is again a measure of the industry’s effectiveness that we have been able to raise handle at all -- but at times, simply not enough to raise purses as well. Does this mean the industry should raise prices (its takeout) to increase its margins? NO - - as I describe below, that would be counterproductive. The industry should recognize that lower margins are inevitable in a more competitive environment, and continue to invest wisely in new distribution systems, improve its focus on the consumer, develop more “show” for the casual fan and more bettable products (field size!) for the core fans. In this respect, I will contend below that it is just as legitimate, and perhaps even more effective, for the industry to invest in customers as well as in bricks and mortar and new technology to raise its revenues.

From p 29-30 of the report:

Economic theory holds that a competitive marketplace is the best way to match producers and consumers of almost every product. It also says that in a competitive market, price equals marginal cost. That maximizes joint benefits to the buyers and sellers. But the most relevant factor here is marginal cost, not average cost. The marginal cost of a simulcast signal / betting opportunity is close to zero. The high average cost of putting on a horse race is unfortunately almost irrelevant -- the consumer is under no obligation to support a hundred race tracks and a hundred thousand horses. The only industries that can successfully charge more than the competitive price are monopolies. Monopolies don’t last. Horse racing’s ended years ago. If we charge more than the competitive price, we will lose customers.

Tracks and ADWs currently reinvest a percentage of the ADW revenue they receive back into the game. On the track side of things some of it shows up in the form of marketing campaigns and special promotions designed to attract new customers. On the ADW side some of it shows up in the form of new technology such as improvements in online wagering platforms and streaming track video. Some of it also shows up in the form of free past performance files and handicapping contests. And yes, some of it shows up in the form of direct cash rebates back to the customer.

Make no mistake, if the tracks and ADWs concede to the horsemen's demands, that 65 percent pay hike means tracks and ADWs will have to cut back on money they reinvest back into the game.

As one ADW operator told me:

"Jeff, it's getting to the point that every time I sign a new deal for a signal I have customers asking why their rebate percentages went down. When signal prices go up that's a cost increase - one that I have to pass on to the customer if I want to stay in business."

After talking with some of the higher ups at the tracks, ADWs, and the TOC, I came away with the impression that many of the people I spoke with actually realize Cummings was right. Aside from all of the finger pointing, frazzled nerves, tempers, and the he said/she said, etc... I think the recommendations presented by Cummings are a primary reason why these negotiations remain at an impasse.

I suspect that at least a handful of track and ADW executives are actually trying to act with racing's best long term interests in mind. So far they haven't offered anything close to the 65 percent increase being demanded by the horsemen. I don't think they are going to. And after reading Analysis of the Data and Fundamental Economics Behind Recent Trends in the Thoroughbred Racing Industry by Cummings I think I understand why.

The longer the TOC and THG hold firm in their demands for a 65 pecent hike in their share of ADW revenue the uglier things might get for them.

An interesting thought ocurred to me.

If an agreement can't be reached then the next logical step becomes binding judicial arbitration.

What do you think an arbitrator is going to do?

He's probably going to read Analysis of the Data and Fundamental Economics Behind Recent Trends in the Thoroughbred Racing Industry by Cummings - remember it's still fairly current and was funded by the National HBPA.

Are the findings in the report going to weigh into his decision?

If the industry decides that the 2004 report by Cummings is out of date, I'll make an educated guess that another outside consulting firm is hired to make a new careful analysis of the industry and the ADW market space. If that happens, how likely do you think it is that the new outside consulting firm reaches many of the same conclusions that Cummings did about how best to handle an incremental market like ADW?... ie. price it lower.

Rather than drag this thing out any longer, might it be in the best interests of tracks, ADWs, and horsemen to come to their senses, reach an agreement where the ADW market space is priced with racing's best long term interests in mind, and move on?

Ultimately I think that's what has to happen.

From what we hear from H.A.N.A. members, as well as some critical thinkers in this sport, it is not about getting 4% or 9% or 11%, or whatever. It is about growing the sport in 2009 and beyond by reaching a gambling customer who is currently spending his/her money elsewhere, or who might be interested in racing if we offer it to him/her in a new, fresh way. We believe that if E*trade was created on a "fight for a slice" model, rather than an internet model it would not be successful, and we believe the same online stock brokerage model should be used for the ADW system. It is time for racing to become 21st century. This dispute and the future of racing is bigger than the parties, and what's best for the industry as a whole must be the only consideration.

I say better sooner than later. For the good of the game.

Jeff Platt

President, H.A.N.A.

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