Takeout 201 - Rebating

After discussions with many across the racing industry in the last several months, we have come to realize that there are some basic, fundamental issues that are not understood widely. One of those is the issue of takeout. In Takeout 101 (which you can read HERE), we revealed the basics of takeout rates. Now, we pursue a slightly more complex reality when factoring in rebates. And thus, we present: Takeout 201 – Rebating.

The Basics:

-    There are two types of customers betting with ADWs, those who get rebates and those that do not. Rebates serve as an incentive to high-volume customers and help offset the high takeout that exists in racing’s pari-mutuel pools.

-    The existing business model was established prior to the explosive growth of ADWs, and the trickle-down effect is that less money reaches horsemen, which harms the sustainability of the sport. 

-    Racing stakeholders need to uncover a method which incentivizes bettors, the ultimate optional participants in this endeavor, while concurrently providing a commensurate return to both the operators of races and the horsemen.

The Details: 

Rebating is a practice employed by every Advance Deposit Wagering company (ADW), whereby the ADW returns to a player a percentage of total betting handle, regardless of whether the player wins or loses a bet.

Rebates are a way of reducing the cost of making a bet to racing’s biggest bettors. If the takeout rate – the cost of the bet – is 20% and a player receives a 10% rebate, then the actual cost of that player’s bets is only 10%.  Rebates are designed to incentivize betting: the more you bet, the better price you get, just like in many other daily life examples tied to volume-related purchasing. 

With that in mind, let’s look at what happens to dollars bet by two different types of horseplayers.
 
Player A bets $10,000 in a race on track and doubles his money, walking away with $20,000.
 
The host track takes approximately $2,000 off Player A in the form of a 20% takeout, of which horsemen get approximately half after the state takes its cut (an amount which varies based on jurisdiction).
 
Meanwhile, Player B makes the same $10,000 wager but bets through an ADW that offers him a 10% rebate. Player B wins the same $20,000 as Player A, but the ADW also rebates him an additional $1,000; walking away with a total of $21,000.

If they lose the bet, Player A ends up with nothing, while Player B still gets the $1,000 rebate.
 
From Player B’s wager, the ADW, like the track, deducts $2,000 in takeout, out of which it pays a host fee to the track, say $500 at a typical negotiated rate of 5%, which the track then splits with its horsemen. The ADW thus retains $1,500 from the bet, and can afford to give Player B the $1,000 rebate while netting $500 (5% of handle) for itself.

The track has a tremendous cost of doing business -- running races – while the ADW has fewer costs and a much larger customer base. With less overhead, ADW’s operate on much thinner margins. As such, ADWs can offer a far more appealing price to the customer than the provider of the content, the racetrack itself.

Of course, not all ADW players receive rebates, but the growth of ADW play overall, both to retail and rebated customers, is the strongest growth sector in the business. For some racetracks that also run ADWs, the current situation can incentivize tracks to push customers to their ADW, which is often a more profitable endeavor for the track (it receives half the host fee plus the ADW’s share of the takeout), at the expense of horsemen. 
 
If that sounds like an unhealthy business model, you’d be correct. And yet it’s exactly what happens in horse racing every day. Had the industry leaders who developed the host fee pricing model in the early days of simulcasting anticipated that there would come a day when ADW betting accounted for as much as 50% of the handle, as it does today, pricing would likely have been quite different. 

The rebate shops, and the takeout reduction they afford gamblers, undoubtedly create additional billions in handle (not a typo) and have changed the game. With a 10% rebate, a professional player could easily churn five or 10 times his previous betting, or -- in multiple documented examples -- 100 times. 

With that 10% back, even if a player shows a natural 5% loss on his bets, the player still earns 5% in profit. By 2018, at least 20% of the total US pari-mutuel racehorse handle is wagered through ADWs offering substantial rebates to high-volume players. Under the current model and with racing’s takeout rates where they are, the rebate is necessary to incentivize these big players. A rebate-less model at today’s takeout rates is not a consideration – high-volume players would abandon the game and handle would evaporate. 

So why don’t racetracks at least get involved directly, rebating players who bet at the track? After all, tracks make a lot more money on a percentage basis from handle bet on track than they do via host fees.  

“This is where long-standing state laws come into play. In most jurisdictions, state laws require tracks to split on-track takeout revenue roughly equally with horsemen, in the form of purses. Its net share doesn’t give the track much wiggle room to compete with ADW rebaters, who can deliver 10% or more in rebates to their best customers. 

The situation is a complicated blend of pricing from a bygone era, a depleted mass market (fewer new players fueling the pools), and a rapidly evolving regulatory and consumer environment that favors ADWs. And all of this comes at a time when a far less expensive alternative, sports betting, is on the rise. 

The key to solving the problem may be a renegotiation by all parties of current deals that put a primary focus on the ultimate optional participant in this equation – the horseplayer.