HANA's Position on Takeout

by: Jeff Platt 07/28/2011

The difference between racing and other forms of gaming such as State Lotteries and Slots is that probabilities for individual outcomes with games of chance are based on random occurrences while probabilities for race outcomes in horse racing are not.

Horse race betting is a game of skill.

The horse racing customer can study past performances and analyze attributes that affect race outcomes: early speed, late speed, form, class, ability from speed figures, the human connections, weight carried, distance, track biases, equipment changes, condition and attitude of the animal, trips from previous running lines, etc... all of that (and more) shapes the outcome of the race.

Because the odds are determined by the public as they collectively bet the races, and because every now and then the public makes mistakes (creating inefficiencies in the odds) the sharp player exercising judgment can identify wagers with a positive expectancy.

To those who think I just said takeout doesn't matter – think again.

Takeout matters – on both sides of the window.

To the player, takeout determines odds and payoffs.

In every wagering situation, lower takeout means higher payoffs.

Conversely, higher takeout means lower payoffs.

As horseplayers, we bet value. We make a careful analysis of factors we see as relevant and weigh our analysis against the odds. If we think value exists we bet. If we think value is absent we pass.

Lower takeout translates into more situations worthy of our betting dollar. Higer takeout translates into fewer situations worthy of our betting dollar. The more situations where we find value, the more situations we bet. It's as simple as that.

To tracks, horsemen, and state governments takeout is one of the primary driving forces behind the total amount bet (or handle) which in turn drives total revenue (and purses.)

For every pool, the takeout rate is multiplied by the amount handled, that amount is removed from the pool, and the remainder is divided up among bettors holding winning tickets.

The amount removed from the pool (revenue) is then split between the track, the horsemen (purses) and in most jurisdictions the state (taxes.)

Takeout for every pool has an optimal price point: This is the price point that drives total wagering handle upward to where revenue becomes maximized for tracks, horsemen, and governments. We might not know exactly where the optimal price point is, but with a little thought we can see how to get there.

On the one hand, if takeout were set at 100%, nobody in their right mind would bet... and revenue for tracks, horsemen, and governments would be zero. (That is why nobody from the racing industry lobbies for 100% takeout.)

On the other hand, if takeout were set at 0%, handle might soar... but revenue for tracks, horsemen, and governments would be zero. (That is why nobody from HANA has ever asked for 0% takeout.)

The optimal price point (where max revenue is generated) lies somewhere between these two extremes.

The thoroughbred racing industry has funded a number of studies (by real economists) that deal with elasticity between takeout and handle. A few of these studies contain ample info to derive models suggesting what the optimal price point might be. (And all of those models suggest the optimal price point is lower than present takeout levels.)

Note: For a list of economic studies on takeout and elasticity paid for by the thoroughbred racing industry, goto Google Scholar at http://scholar.google.com/ and search the phrase "pari-mutuel takeout rates +elasticity"

Given the structure of thoroughbred racing, with its many separate jurisdictions and absence of a central governing body, perhaps the best way to seek out optimal pricing is for individual racing jurisdictions to experiment... to move takeout a point or two in the direction of where the industry's own paid for economic studies suggest the optimal price point might be (hint: lower not higher) and then carefully analyze the results. If the results prove out to be positive: repeat the process.

Tampa Bay Downs has been quietly doing this over the past nine years and has doubled their average daily handle (at least in part) as a result of this strategy.

Ladies and gentlemen, THAT is what HANA is advocating in the way of takeout reform. HANA is not asking for (and has never asked for) 0% takeout. HANA is simply asking racing decision makers to maximize their revenue by pricing the game in an intelligent manner (by making an effort to seek out an optimal price point.)

What does any of this have to do with games of chance like State Lotteries and Slots?

Thoroughbred racing faces stiff competition from other forms of gaming. Over the past decade, State Lotteries and the Casino industry have been quietly winning market share away from thoroughbred racing.

How bad is it?

Earlier this year I attended a meeting at Hollywood Park. Track management did a presentation illustrating just how badly thoroughbred racing has fared vs. Casinos and State Lotteries. They presented a slide that compared all sources California thoroughbred handle from 2001 against all sources California thoroughbred handle in 2010. The slide showed an alarming trend: All sources California thoroughbred handle in 2010 had shrunk to 50% of what it was just nine years ealrier in 2001.

How and why did this happen?

I would argue that optimal pricing has played a bigger role in racing's fall than most in racing are willing to accept.

Just like thoroughbred racing, State Lotteries and the Casino industry have industry funded economic studies too.

Unlike thoroughbred racing, State Lotteries and Casinos have been actively implementing the recommendations found in their economic studies.

Make no mistake. Racing is losing market share to competitors who are taking advantage of racing's status quo by pricing their games in a more optimal way.

Jeff Platt
President, H.A.N.A.

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