Following the Thoroughbred Idea Foundation's call for stakeholder groups within the industry to pursue compromise, "A New Way Forward" offers the opinions of five industry leaders over five different areas. If we can work together to move beyond that which has divided us for so long, the ideas presented in this series present a glimpse into a more prosperous future for the sport. 

Marshall Gramm is chair of the Rhodes College economics department and co-founder of Ten Strike Racing.

Wagering and Innovation
By: Marshall Gramm

The gambling landscape dramatically changed with the Supreme Court decision in May 2018 that opened the door for states to legalize sports betting across the United States. This is the latest, and biggest, blow to the monopoly on gambling that racing enjoyed through its resurgence in the 1930s until the first competitor appeared with the introduction of the lottery in New Hampshire in 1964.

With casinos, card rooms and lotteries now pervasive, and with sports betting soon to be, racing should not continue pricing its product as if they are the only bet in town. Change is of paramount importance –both in the pricing of bets and in order to create a competitive environment that encourages innovation among bet providers, racetracks and tote companies. 

Of primary concern is the pricing problem. For even the most heavily-rebated racing bettor, the cost of wagering remains significantly higher than a sports bet. 

For reasons which defy long-term economic logic, bet-takers, racetracks and regulators continue to enable racing’s decline. With more non-racing competition than ever and years of limited or negative handle growth, racing’s reluctance to price bets to attract more participation is an irrational practice.  

We hope that cooperation in the industry yields lower takeout and lower host fees but have legitimate concern the outcome may be exactly the opposite. As alternative sources of revenue fuel purses, the link between the horseplayer and the racing industry has become even more fractured. These alternative revenue sources historically have been short lived. 

Ultimately, if racing does not expand its direct wagering handle it will experience an even more dramatic decline. Consolidation of racing signal distribution in recent years has increased host fees at the expense of the horseplayer, so it is right and natural that horseplayers should fear industry-wide consolidation. A concerted, unified effort to reduce takeout and host fees will help ensure horse racing’s survival. 

Industry cooperation can also help secure needed changes for horseplayers in the following areas: 

1. Cease anti-competitive tactics.

All tracks should sell their signal and provide access to betting pools to all licensed bet-takers. Denying signals to some participants is an anti-competitive action which limits the industry’s growth at a time when we clearly need it. For those entities denied signals, a culture of fear pervades those bullied by those doing the withholding. Instead of a vibrant competitive market, ADWs have become relatively innovation-less, territorial fiefdoms, with little change to the betting experience over the last two decades. 

Source market fees are also anti-competitive. Used to protect a monopoly for a single ADW or local racetrack, they increase the cost of wagering for players and assure the impracticality for other ADWs to enter certain states. 

Overall, the quest to lower takeout is denied by a cavalcade of fees tacked onto bet processing. The market should be streamlined. For every bet, there should be a host fee (from the track that runs the races), and a tote fee (to the tote company for processing the bet). The remainder would stay with the entity that originated the wager and often comes back to the player in the form of rebate. Unfortunately, there are far more fees in the tote business at present.

2. Equalize access to batch wagering for all bettors while updating technology to process all bets at the time they are made.

Bets need to be processed into the tote system at the time they are made, regardless of where they originate. The industry’s failure to modernize the tote, at their own expense, stifles growth.

Bet providers should reward their best betting customers with rebates, just as casinos reward their best customers with comps. However, the rules of the game should be the same for all horseplayers. Every player should have the same opportunity to make high speed batch wagers that high volume computer teams have. This is not only essential for fairness, but also critical in marketing opportunities to younger, more technologically savvy gamblers. 

3. Introduce alternatives to pari-mutuel wagering.

Considered controversial by both existing bet-takers and horsemen, the industry should adopt alternatives to the current single market option available to customers – pari-mutuel bets. If for no other reason, the sport must be willing to experiment with these options.

Fixed-odds, exchange wagering, handicapping tournaments and takeout-reduced parlays all offer alternatives to the traditional wagering experience. Customer churn is far greater through fixed-odds and exchange play. While revenue to those receiving pieces of takeout would be smaller on a per-bet basis, the frequency of play would increase while also being much more attractive to those engaged in fixed-odds betting on other sports. 

4. Round tote dividends to the nearest penny, dramatically reducing breakage.

Bet-takers receive approximately $50 million annually in breakage – the rounding down of tote dividends to the nearest 10 or 20 cents. The business logic is really quite simple – stop rounding down, return this money to all customers across all tracks and bet types, customers will have more money to bet in subsequent betting cycles, injecting more money to all stakeholders in the takeout cycle over and over. Remove $50 million annually, once, or reinvest that over and over and over? Breakage is especially harmful when there are smaller payouts thus disproportionally affects favorites, small fields, and the place and show pools. The long-term math is far more favorable for all parties than the short-term retention of breakage.

5. Pursue legal pari-mutuel wagering and ADWs to residents of all 50 states.

There remain 12 states that do not allow online wagering on horse racing, with seven of those not even permitting any pari-mutuel wagering. Several states allow it, but impose significant restrictions on access. The proliferation of gambling – particularly sports betting – should improve overall customer access to the market, but efforts from the industry to target these states could expedite the process. Why would we not pursue increasing our customer base?

In addition to lower takeout and lower host fees, improvements in these five areas would be incredibly beneficial to the overall health of our industry as measured by interest in wagering. 

Follow Marshall Gramm on Twitter @truxtonstables


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