Posts Tagged ‘ellis park’

Earlier this week, we were the first to publish Bill Farish’s editorial on why slots were an important step in give aid to Kentucky’s horse industry. Claiming that as a Republican this shouldn’t be a partisan issue but instead a Kentucky issue, Farish took Senate President David Williams to task over his divisive tactics of pitting Republicans against Republicans.

Late last night, the Paulick Report received an email response to Farish’s editorial from Williams. While 7:45 on a Friday night is generally a slot relegated for the announcement of John Edwards’ love child, we felt it important to give both sides of this issue a proper hearing. What follows is the counter argument to the pro-slots lobby. Where do you stand? -

 

I never cease to be amazed by the manner in which slot interests and their spokesmen such as Bill Farish continue to mislead Kentuckians. The proposed expansion of gambling in Kentucky is bad economic policy for the state and for the horse industry.  Those tied to the slots may do their best to raise the specter of false divisions and false hope, but the reality of the situation is unchanged.
 
Fact #1: Expanded gambling will flood Kentucky with funds that will skew our body politic.
Bill Farish failed to mention his family’s financial affiliation with the tracks as well as to the 527 “issues” group formed by the tracks and their supporters to circumvent campaign finance laws in order to intimidate legislators to support slots.  During the recent special election, his pro-slots 527 ran negative ads that never even once mentioned slots.  State after state with gambling in the mix has been rife with stories of political corruption.
 
Fact #2: Once slots arrive, horse-owners and trainers will get the short end of the stick.
In Florida, horsemen have complained that their promised doubling of purses has never materialized.  In Ohio, under the Governor’s executive orders, owners were left to their own devices to negotiate purses with the slots people.  In West Virginia, purse money was shifted back to state government to make up for shortfalls.  And in Kentucky, have we forgotten the bitter battle waged by Churchill Downs attempting to force our horsemen to accept a smaller slice of the revenue from Internet bets?  Or the fact that Churchill Downs pays to transport horses to its own Arlington Park in Chicago in direct competition with Ellis Park?  Once slots come in the picture, players will thrill to the speed of the machine and ignore the speed of our ponies.
 
Fact #3: Slots will not “save” Kentucky’s budget.
Gambling is an unstable source of revenue.  In spite of gambling, Illinois raised taxes.  Hardly a session has passed without Indiana’s casinos and racinos asking for yet another tax break. And gambling revenues are in a decline nationwide sending governments addicted to them scurrying for additional funds.
 
Fact #4: The horse business is beset with problems endemic to the industry itself.
The horse industry acknowledges that it breeds too many horses and runs too many races in a national economy that is fragile.  Racing fans are growing older.  The industry’s weak marketing has done little to help.  Very few people these days have the discretionary cash to plunk down a cool million for a horse, or even tens of thousands of dollars.
 
During the Special Session in June, Senate Democrats and Republicans unanimously passed legislation that would have nearly doubled funding for the Kentucky Thoroughbred Development Fund and actually doubled funding for the Kentucky Breeders’ Incentive Fund without slots.  Our plan would have kept the KEES scholarship program whole and not hurt charitable gaming.  It would not have used any General Fund dollars.
 
The House plan would have forked over more than 50% of the revenue to the tracks and massively undervalued the license fees the tracks would have had to pay.  All businesses are suffering in this economy, yet the tracks insist that they and they alone deserve special treatment.
 
When the House introduced its gambling bill during the 2008 session, committee members were mysteriously replaced in order to ensure passage.  The 2009 version was heard in a committee that didn’t even allow the opposition to testify.  Finally, with the addition of over $1 billion worth of projects the bill barely passed during the Special Session. It was a far cry from the fair hearing the bill received in the Senate committee where both sides were allowed to air their views.
 
The House plan relied on Kentuckians gambling a whopping $11.9 billion – a figure that represents five times more than what is currently wagered at the tracks, at out-of-state casinos, and through charitable gaming.  Where are these players going to come from?  With gambling already in many of our sister states, slots will only cannibalize our own people — our most vulnerable sacrificed for what a horse industry insider, Ray Paulick, calls a “band-aid” solution.
 
We need to explore all the ways Kentucky horsemen can control their own future because as Churchill Downs trainer Michael Lauer recently noted, “…once the tracks get the slots, the horsemen become secondary citizens.”  I respectfully would amend that quote to include all Kentuckians.

By Ray Paulick
There were several byproducts of the Kentucky General Assembly’s special session called last month by Gov. Steve Beshear to tackle the state’s budget crisis and consider a bill to allow video lottery terminals or slot machines at racetracks.

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By Ray Paulick

There may not have been anyone at Wednesday’s press conference at Churchill Downs who understands horse racing’s need for slot machines or alternative forms of gambling better than Chip Woolley, the trainer of Kentucky Derby winner Mine That Bird.

Copyright © 2009, The Paulick Report

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(The Paulick Report was contacted by the recently formed Horseplayers Association of North America (HANA) with a response to our recent article on the Thoroughbred Horsemen’s Group and its approach to negotiations with account wagering or advance deposit wagering companies (ADWs). The following commentary does not reflect the views of the Paulick Report but is published in the interest of advancing the discussions on this subject. — Ray Paulick)

It was announced a few weeks ago that Ellis Park in Henderson, Kentucky struck a last hour compromise between Ellis and the KHBPA, allowing for racing to begin in 2008. With it, close to 6% of ADW handle will be going to purses this summer. It appears that Ellis is charging Advance Deposit Wagering (ADS) companies up to 8% signal fees for the right to broadcast Ellis races.

The Thoroughbred Horsemen’s Group’s Bob Reeves said this recently about the deal as reported by Ray Paulick of The Paulick Report: "We are trying to save racing."

We think deals like this will do the exact opposite. And we’ll tell you why.

An ADW normally pays about 5% (which is about what the current free market dictates) for the right to broadcast a signal and sell it to their customers. It is like a web-affiliate bookseller selling a book and keeping a commission. Then the ADW pays expenses, keeps some of the generated handle for themselves to run their businesses, and returns the rest to the player in a few ways:

1) Player Rewards - A video game, maybe a hat, trinkets of some sort, what have you. We all have received these perks.

2) Innovations and Customer-centric Benefits - An improved betting interface, R and D (like Twin Spires TV), free handicapping information (like Ian Meyers’ paddock reports at Premier Turf Club, his deal with Woodsideassociates.com, or partnerships with Thorograph at betfair), free past performances, free video. Things to encourage the player to up their handles.

3) Cash Rewards Through Rebating - Churn baby churn.

This model of giving something back to the player and delivering it in a customer-centric way has resulted in a rise in handles for ADW. Up over 17% last year - our only true blue growth segment.

If ADW’s are charged a higher fee, things like free rewards, hats and shirts; or the interesting innovations we have seen like race replays, and conditional wagering and paddock reports can all be cut. This hurts us in attracting new fans to our Internet platform, as well it alienates our existing customers (ask Vegas how they’d do without comps or adding a concert as an attraction; and ask them now what would happen if they took them away!). All those rewards and incentives are very important, but the most important point however to us as a business: It effectively increases takeouts. If 3% more is charged for a signal, 0.5% might be absorbed by the ADW. Where does the other 2.5% come from? Yes, the customer’s pocket - the customer that already pays for purses to the tune of 21% blended rakes.

When the signal fee is raised 3%, more than likely 2-2.5% will be taken from the cash rewards from certain ADW’s. If you were receiving a rebate of 5% on win wagers at track ‘A’ and they are cut in half you know, we all know what happens, you bet less. With these price sensitive players, where 2.5% can mean a huge difference, it can kill their handle. As Dan, a professional player, said recently to us "Even miniscule reductions of 2 points can make a HUGE impact on a player’s bottom line. The intelligence of the modern player is frankly overlooked by those in positions of decision."

With a conservative elasticity of demand of 4 for rebated high volume players, this takeout increase could result in a 10% drop in handle (many would argue it would be much more). Not to mention any new players (especially the younger demographic we covet) that are attracted to some of the perks like free past performances, or innovations, will find they are not there any longer, and it makes the customer experience deficient in a demanding 21st century business model. Online poker anyone?

It’s like going to McDonald’s and finding out that yes, the price of a Big Mac was raised 30 cents, so you might eat one less a month now; or maybe go to Wendy’s instead, but not only that: Now your more expensive Big Mac is served not complete in a nice wrapper, but in a do it yourself kit. When sales of Big Macs go into the tank, it would not surprise any executive at McDonald’s, they would know they cut their own throat.

Increasing takeouts, poor customer service and an absence of both soft and hard innovation through reinvestment is something we should have learned has helped kill this business by now. Year after year the evidence is overwhelming. In fact, this study written several years ago by a gambling expert and reported to racing, stressed the takeout point and making sure these players are taken care of.

Racing has lived with rising rates of takeout for so long that they have become a way of life. They are the line of least resistance whenever the industry needs money. It is all too easy for the industry to see that if we have a constant $100 in handle, and we raise the takeout by one percent, we’ll make a dollar more. It is much less easy to see that handle is not constant and, over the longer term if not the short, we won’t have that $100 any more.

If we don’t offer a low takeout (via rebate) to customers, we’re going to lose them, or at least a significant portion of their money. Hence the efficacy of rebates: they target reductions in the takeout to the customers who would respond the most to them.. (Analysis of the Data and Fundamental Economics Behind Recent Trends in the Thoroughbred Racing Industry, 2004)

Sometimes I wonder. I really do. Do we actually want racing to lose market share? If we do, we are certainly doing a good job at it.

Everyone needs to work together in the current ADW impasse and the business must know where players stand. If players are not heard from and respected, we will not grow the pie, we will simply end up having less of a pie to split.

This opinion piece was submitted by a HANA member at Pull the Pocket blog spot. We will be discussing the ADW situation and offering solutions over the next few weeks; including a white paper. The paper will show what we think ADW should look like for the 21st century and beyond - it will include, but it is not limited to, open access, fair prices for all players (not just whales), and fairness to the producers - the track and horsepeople. The overall goal is one thing and one thing only - to grow the sport. This is an opinion to kick off the discussion - players matter. We matter. If you would like to join HANA click here. It’s free.

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The racing industry is like a three-legged stool with the horseplayers and fans, owners and breeders, and racetracks and wagering companies comprising each of the three legs. Take one away and the stool collapses.

Horseplayers, as we all know, are the least organized, though some individuals from that group bet massive sums of money and can inflict economic punishment or rewards by shifting their action from one track to another.

Tracks are more organized than ever, largely because of the consolidation by Magna Entertainment and Churchill Downs, their respective wagering companies, ExpressBet and TwinSpires.com, and their joint venture simulcasting consolidator TrackMedia.

Owners and breeders are somewhere in between. Negotiation of purse and simulcast contracts with racetracks are negotiated by local horsemen’s groups (state division of the Horsemen’s Benevolent and Protective Association, Thoroughbred Horsemen’s Association, the Texas Horsemen’s Partnership, and Thoroughbred Owners of California).

Following the startup of TVG and other account wagering companies during the past decade, some of these horsemen’s groups began to notice a troubling trend. Increases in handle were being accompanied by a decrease in purses. The terms "leakage" was entering the racing vernacular and it was not the kind of leakage a package of Depends could help control.

This leakage of purse revenue was caused by multiple factors: more money was being bet off-track, with off-shore rebate betting shops and with fully licensed and state-regulated account wagering or advance deposit wagering (ADW) companies.

The economic pie (wagering on horse racing) was previously cut up with the biggest slice going to horseplayers, and the next largest divided equally between tracks and purse money for horse owners, and a smaller slice going to state and local governments.

A new player began bellying up to the table and demanding its own slice: account wagering companies.

The promise was that these companies were going to help bake a bigger pie and fatten everyone up. In truth, there has been only small growth in handle and more redistribution of wagering from on-track and inter-track to telephone and internet bets through account wagering companies. The net result is a reduction in the percentage of each dollar wagered ending up in purses for horse owners.

Some people think horse owners get enough in purse money already. I guess if you think a dollar invested should be rewarded with a half-dollar in return, you’re right. Horse owners put over $2 billion into the game each year so they can fight over $1 billion in purses. That’s not a very sound investment strategy.

Tracks were hurt by this trend, too, at least in the beginning and until they realized the need to operate the account wagering companies themselves.

State horsemen’s groups started talking to each other about this "handle up, purses down" phenomenon and formed a study group to seek solutions. Late last year, after determining that the economic business model for distribution of account wagering dollars wasn’t working, they decided to form a company, the Thoroughbred Horsemen’s Group, in an attempt to change the model.

Thoroughbred Horsemen’s Group counts 18 horsemen’s organizations among its members in 16 jurisdictions (California, Kentucky, Florida, Texas, Pennsylvania, Ohio, Louisiana, Maryland, Delaware, Arkansas, Virginia, West Virginia, Oklahoma, Minnesota, Indiana and Ontario).Collectively these groups negotiate contracts with 52 North American tracks.

Bob Reeves, a third generation horseman with decades of executive experience in the health, insurance and venture capital fields, is president of the TGH. He’s been head of the Ohio HBPA and that state Thoroughbred Owners and Breeders Association. TGH’s sole employee is Wilson Shirley, a consultant who formerly worked for the national Thoroughbred Owners and Breeders Association and Thoroughbred Owners of California.

Reeves and Shirley, on behalf of their member organizations, are negotiating with account-wagering companies to reshape the distribution formula from one that favors the wagering companies to one that puts more money into purse money, which will strengthen live racing and, ultimately, the racetracks themselves. "We are a shared resource," Reeves told the Paulick Report, in reference to the Thoroughbred Horsemen’s Group, which he called an "intermediary" in negotiations.

Sort of like William Shatner and Priceline negotiating with hotels for the best deals on behalf of consumers.

"We are trying to change the model to one that distributes the account wagering revenue based on a percentage of takeout instead of a percentage of handle," Reeves said.

Reeves said the Thoroughbred Horsemen’s Group has hired attorneys intimately familiar with anti-trust issues and is confident the organization is not in violation of the Sherman Anti-Trust Act. Churchill Downs Inc. has sued the Thoroughbred Horsemen’s Group, alleging violations of the Act.

The formulas for distribution of account wagering revenues are complicated. Account wagering companies first pay a host fee to the track and horsemen where the live race is being run on which a bet is placed. There sometimes is a source market fee, if the bet is made by someone who lives in a racetrack market. That fee is divided between the local track and purse accounts for that track. But more often than not, a bettor does not live within 25 miles, so the account wagering company pays no source market fee and retains the money as profit. That is where a big part of the leakage occurs. The net result is that the company handling the bet is getting more money than the horse owners who are putting on the live race on which the bet is made.

That’s like a retail store making more on a product than the manufacturer of the product. It’s backwards.

Naturally, the account wagering companies - especially those owned by the racetracks - don’t want to change the formula. The wagering companies see greater profits for themselves as more people stay home and bet rather than drive to a track or OTB. (And with $4-plus per gallon gas, that number could soar.) There have been stalemates in negotiations involving account wagering, which is why horseplayers were not able to bet by phone or computer on Churchill Downs, Lone Star Park, Calder and other tracks. Churchill reported large declines in handle and purses at their spring-summer meeting.

Horsemen won in their negotiations with Ellis Park owner Ron Geary, who threatened to close his track rather than change the previous account wagering structures. That victory should inspire the local horsemen’s organizations to stay the course in the current and upcoming negotiations. There may be short-term pain but remaining firm in their position will result in long-term gain.

"I am delighted with the resolve the different horsemen’s groups have shown," Reeves said. "We are trying to save racing." 

By Ray Paulick

Copyright ©2008, The Paulick Report