Given the feedback the Thoroughbred Idea Foundation has received in the last week, it’s fair to suggest that last week’s edition of #FreeDataFriday served as a bit of a wake-up call. Expect more this week.

We cannot say this any simpler: American racing does not have a fair and equitable split of the takeout dollar, it has overly and foolishly relied on alternate sources of gaming to supplement purses.

So we remind you – whether you are for or against a ‘federal bill,’ a Jockey Club member, a commercial breeder, a small syndicate member or anything in between – the status quo is untenable. Something must change.

The economics for the sustainability of racing are all askew.

ADWs (online account wagering platforms) aren’t bad – our business REALLY needs them, particularly now.

Their percentage of total handle on racing is at an all-time high, essentially 100% of total racing betting handle in America at the moment. When a “new normal” returns, it is likely more people who have been kept away from the track but finally opened ADW accounts will continue using them, increasing the overall share of ADWs compared to pre-pandemic level.

The problem is that while the financial splits the big ADWs receive have grown significantly, due to long-standing, negotiated rates, the amount this handle contributes to purses is incredibly small. The problem is exacerbated by a loss of other revenue sources for purses, namely, casinos.

Now, for the shock?

The National Thoroughbred Racing Association, an organization which its own former head, Tim Smith, described in 1999 as being formed by “the industry, led by The Jockey Club, Breeders’ Cup, Keeneland, Oak Tree, and the NTA,“ commissioned a report, published in January 2004, which actually gave tracks the blueprint to exploit this model.

The report offered no plan to follow-up or oversee its execution, particularly in the event the suggestions received by their consultants were only partially adopted…and that’s exactly what happened.

RUIN FROM WITHIN

The NTRA report, which was presented by Giuliani Partners, offered three key measures to remedy what the NTRA Board of Directors identified as “one of the leading problems facing the Thoroughbred industry.”

That problem was “the phenomenon of ‘handle up, purses down.” Essentially, handle was rising and purses were either not growing at the same rate, or as had been experienced in 2003, they fell.

So what caused this “leading problem” to emerge? The report enlightens:

“New distribution systems that are not necessarily directly affiliated with a Thoroughbred track or horsemen’s group through ownership, or through state law and/or regulatory policy” were responsible for generating increased handle. These entities, what we would now recognize today as ADWs, focused on tech-savvy, high-volume bettors, and that the “growth in interstate simulcasting increases economic competition.”

In other words, neither tracks nor horsemen controlled the betting in ADWs, which were attracting a growing portion of handle and the revenue splits for this were not advantageous for tracks or horsemen, via purses.

The three measures the report offers to “remedy” this are summarized as follows: (1) increase handle, (2) get tracks into the ADW business, and (3) create economic incentives through competitive takeout rates to grow the betting base while also enhancing technological development to ensure a level playing field for all bettors.

Item one has never really happened – in fact, it’s just the opposite.

Item two, essentially, got 100% of the focus as tracks became ADW companies, through acquisitions and development.

Item three remains a pipe dream…for now.

THE BIG PICTURE

Instead of addressing the bigger picture, and the impact to all stakeholders, the biggest track owners got into the ADW business and focused their efforts on maximizing them as a revenue source – which also happens to provide the smallest slice to purses. Concurrently, horsemen were left to rely on payments from casinos on racing properties to make up the lion’s share in purses.

Whatever you want to call them – payments from casinos have served as a massive subsidization to purses. There is little doubt that tracks, already the home for legal gambling, were conduits for bringing casinos into parts of mainstream America. As much as the industry might want to suggest that the casinos exist because of racing, the modern reality must be acknowledged – it really doesn’t matter much anymore.

As we said last week, it defies logic that, with so few tracks running and all wagering concentrated in those tracks, that purses are being cut at those tracks. This surprise is met, somewhat understandably, with grateful cries from horsemen just happy to be racing in those few spots.

To the business entities behind racing, the artificial situation created by the pandemic has exposed a rather distasteful truth: getting back to racing while casinos, and therefore a major source of purses, are shuttered is a monumental challenge in some states. The big ADWs, owned by track operators, have done just fine over the years, but purses are on the verge of massive declines – either now as casinos are offline entirely, or as increasingly-strapped state governments reduce casino subsidies in favor of more pressing needs.

Don’t mistake us, the industry is a massive job source and a big player in agriculture and it SHOULD continue to pursue whatever support from government it can get or retain, but these should be viewed as a secondary, not a primary source of funding. As hard fought as they have been earned, they can be easily withdrawn.

By relying on alternate gaming revenue as a primary source of purse funding in many states, horsemen have been generally benign to declines in handle. That is problematic. Since the NTRA’s 2004 report was published, handle is down 27.4% in nominal terms, but adjusted for inflation, it’s down a staggering 49%. As for purses since then, well, they ARE up, but only in raw numbers. Nominal purses are up about 10% and prize money per race is up 15%. In real, inflation-adjusted terms, purses are actually down 19% on a per-race basis.

What could purses across America look like in a landscape totally free of casino subsidies?

It isn’t pretty.

THE CALIFORNIA MODEL

California has proactively published intricate detail explaining where wagering takeout (the amount of total wagered less total returned – a number that is roughly 20.9% of all money bet) actually goes.

When examining these figures published by the California Horse Racing Board, it becomes clear how racing operations are funded in a state that has never “enjoyed” casino subsidies. What also becomes clear, over time, is how the income has shifted over the last two decades, enriching the sport’s technological “middle people,” as purses, track commissions and even taxes to state and local governments shrink. We will offer more insight on this next week.

For now, let’s make this as simple and straightforward as possible.

The comparison we are about to make is not perfect. There are many variables in the numbers that would not make a fair comparison between say, racing in California and racing in Pennsylvania, Indiana or New Mexico. If anything, our projections below inflate a nationwide application of the California model.

According to the California Horse Racing Board, bets on California racing or from California bettors on racing elsewhere totaled approximately $2.9 billion in 2019. An effective overall takeout of 20.9% was applied, withholding $608 million from those bets. Of that takeout, 21.12% went to purses, or roughly $128 million. So, from $2.9 billion in wagers, purses that sustain racing equated to about 4.4% of every dollar bet.

For now, consider how purses would look if this model was stretched across America – perhaps in a changed American landscape where casinos start shifting their model, where they look to decouple old arrangements with racetracks, where they start lobbying states to shift to online slot machines with daily limits.

Nationwide handle in 2019 was $11.037 billion. With an average takeout of 20.9%, and a split of 21.12% of THAT amount, the total that goes to purses is only $487 million, 59% lower than the current standard. See the chart below.

FDF31 - TIF - California Model.PNG

We can see the future of purses for American horsemen in these estimated figures, fraught with assumptions, including that all other variables remain unchanged. These numbers are far from perfect, but clearly reveal how dangerously dependent upon a slice of casino play our sport has become.

What is American racing like with a nearly 60% decline in prize money? In a few months, racing might get a taste of that.

Horsemen must commence re-negotiations and force a changed model, one that favors the racing product rather than the gaming company, then develop conditions that will attract wagering as opposed to the high-cost actions which have driven bettors away from the sport for years. High-profile Thoroughbred owners and trainers, many of whom have stayed out of the discussions for years, must be drawn into the fray.

Horsemen need revenue from takeout now, and likely more in the future, than ever before. That should not mean raising the price of betting, that’s exactly the wrong move. The path is a combination of reduced pricing on betting and re-negotiated deals that yield more money to purses.  

The sustainability of the business is at stake.