Different Slicing of Takeout Pie Could Equate to a Way for Tracks to 'Have Your Cake and Eat It Too'

No industry gathering at which Thoroughbred executives discuss pricing issues is immune from the intertwined topic of death and taxes. In the pari-mutuel world, that means talking about takeout, or, more specifically, how the disparate fees that different classes of bettors must pay for the privilege of placing wagers are killing off smaller-scale casual horseplayers.

A Wednesday panel discussion at the Global Symposium on Racing hosted by the University of Arizona Race Track Industry Program in Tucson was the latest Thoroughbred confab at which the takeout issue got batted around like a piñata.

But instead of just griping about the problem, a session titled “How Do We Keep Racing Relevant in the Evolving Wagering Landscape?” yielded one very specific suggestion from an economics expert who is also a Thoroughbred owner and horseplayer about how two of the nation's premier boutique-meet tracks could get others in the industry to follow along with lowered takeouts.

Marshall Gramm, a professor and chair of the Department of Economics at Rhodes College in Memphis, outlined how Keeneland Race Course and Del Mar Thoroughbred Club, in particular, could both be best positioned to experiment with lower takeout rates.

In this current era of pari-mutuels, the setting of takeout rates is complicated by opaque contractual agreements related to host fees–the charge advance-deposit wagering (ADW) outlets pay to track operators for the right to import a simulcast signal–plus betting-volume rebates that are individually negotiated and paid by tracks and ADWs to computer-assisted wagering teams (CAWs).

CAWs are largely anonymous individuals or entities that are permitted to tie sophisticated wagering technologies directly into tote systems to bet vast sums in the final moments before a race's start that try to take advantage of pari-mutuel market inefficiencies that the general public can't see.

Gramm began his takeout riff by responding to an audience member's postulation that tracks like Keeneland and Del Mar might be the least incentivized to lower takeouts, because casual horseplayers seem to flock to those signals regardless of the rates imposed upon them.

On the contrary, Gramm responded, he believes those two meets have the most to gain from experimenting with lowered takeouts.

“They're the ones who have to do it. The smaller tracks, the ADWs won't let them. If a smaller track reduced takeout, [the ADWs] would make them reduce host fees, so they can't do it,” Gramm said.

“Churchill Downs having a higher takeout on [GI Kentucky] Derby weekend?” Gramm asked rhetorically, “I totally get it. That's totally understandable. The Derby's a 20-horse field” and a product that's very much in demand, he said.

“But Keeneland is in such a unique position–they don't own an ADW, but they have real market power. So if I were Keeneland, here's what I'd do: I'd lower takeout, especially on tris, supers [and other exotic bets to] 18 %. I'd keep host fees the same.”

“All you lose,” Gramm continued, “is the margin on your on-track players. The CAWs, they're getting their rebates cut. But their effective takeout's the same. And then you could go and advertise, 'Hey, we have the lowest takeouts, across every pool, in the country.'”

“TwinSpires, Xpressbet, NYRA Bets, they may not like it. But they're not going to cut your signal off. So [Keeneland] and [Del Mar] have a unique opportunity to actually experiment with lowering [the] takeout, and you don't have to move your host fee along with it. I would love to see that happen.”

Gramm said he has “tried to press this point” to industry leaders, using the 18% rate for exotics as a number that might be more palatable to bet-pricing executives even when he believes that actual takeout rate should really be several points lower than that.

“I'd love it to be 14-16% across the board, and I'd like to lower the [pricing] gap between [CAW] teams and recreational players,” Gramm said.

Marshall Gramm | Lucas Marquardt

Wouldn't the big-volume CAW teams balk at having their rebates cut, and thus walk away from horse betting?

Gramm didn't buy that reasoning.

“They're looking at their takeout rate, not the size of their rebate. In fact, the teams should benefit, because if takeout comes down, people will bet more and more into those pools, and they'll churn more. So it's a win/win,” Gramm said.

“That would be my message to Keeneland and Del Mar. Let's give it a try. Let's see what would happen. And give it a try over a sustained period of time. Don't do it one meet and say it didn't work; [that lowering] takeout doesn't work. You've got to give it time,” Gramm said.

“And remember, there are all sorts of other factors. It's not like we're looking at this in a vacuum. Any sort of theory would say if you lower price, it's going to increase handle. Other factors may be driving handle down. But here is a way that you can have your cake and eat it too,” Gramm said.

At a different point in the discussion, panelists were asked to gaze into their crystal balls and predict what the biggest change in horse racing's betting landscape might be five years from now.

Matt Feig, the chief operating officer of NYRA Bets, said the “exasperation of the seasonality of our sport” will be a challenge that needs to be addressed.

“We're kind of seeing it now, where you get into the fall, which used to be really robust from a wagering standpoint,” Feig said.

But now, Feig explained, “there is some stagnation that's happening in [the third quarter of the year]. And that's something that needs to be looked at from an industry standpoint, [by] making sure that we align our track schedules and content to look at the new landscape. Because what's happened three years ago, four years ago, isn't the same any more with the different wagering opportunities that are out there, especially in the fall.

“It's going to be important to make sure that horse racing is aligned from a content-filler [standpoint],” Feig summed up. “But also, we have to make sure that we're not on top of [pro and college football] and kind of drowned out by it.”

Nelson Clemmens, the owner and chief executive the simulcast service provider AmWest Entertainment as well as a Thoroughbred owner and breeder, touched upon the consolidation and reduction of racetracks as a troublesome trend.

“Five years from now, if the worst happens–and we know the dynamics within the industry–we might not have an 'A' track west of the Mississippi,” Clemmens said. “I trust it won't probably be that dire. But the way that we operate, our industry has to [restructure into] a more aligned industry.”

Zach Taylor, the North American director of sales for the technology and tote services firm Global Tote, said that, “It's a very real possibility that maybe some tracks aren't here [in five years]. But if it's done in a measured way, organized and planned out, it could very well be a boon for the wagering industry.”

Gramm said that one way or another, five years from now will be a benchmark for horse racing, because that time frame will represent roughly a decade since the national legalization of sports wagering.

Sports betting initially was proclaimed to be a positive for the racing industry because it was assumed that many tracks would get sports betting licenses, and separately, horse racing would be able to ride the wave of sports betting to a higher profile.

But racing's relationship with sports betting–which does not generate direct revenues earmarked for purses like pari-mutuel horse betting does–could turn out to be having an erosive effect on the Thoroughbred industry.

“Will we look back on this, and this will be another one of those things that we hoped was going to change the game, like American Pharoah winning the Triple Crown [in 2015] and the [2002] Seabiscuit book [by Laura Hillenbrand]?” Gramm asked. “Or will [sports betting] be something that we'll be able to capitalize on?”