California Lottery Success a Lesson for State’s Racing Industry?

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The California Lottery and California’s horse racing industry both were experiencing economic declines in 2010. The lottery benefits public schools and state officials became concerned after 2009 when the revenue stream to education, while still over $1 billion per year, hit its lowest point since 2003.

Horse racing interests were concerned, too. On-track attendance and overall wagering, with the exception of Del Mar, were in steep decline. Competition with other forms of gambling in and out of state was growing. Breeding activity was falling and racehorse ownership was down. Leaders of horsemen’s organizations and racetracks believed increased purse levels would stimulate horse ownership, leading to larger field sizes and a reversal of wagering declines.

The legislature took on both problems from different approaches.

Lottery officials felt not enough prize money was being returned to lottery players. California law capped the percentage returned to prizes at 50 percent, with a minimum 34 percent of revenue going to education.

A new law gave the lottery pricing flexibility, permitting officials to effectively reduce takeout. In 2011, according to a recent Los Angeles Times article, the portion going to prizes was increased to 55 percent. In 2012, that percentage was increased even further, to 59 percent.

There was only one rub to the law: education contributions were required to grow year-to-year. If they fell, the lottery was required to return to the previous formula capping prize money at 50 percent of revenue.

It worked. Helped in part by the introduction of new games, lottery revenue soared by 42 percent over the first two years of the new law. The contribution to education increased by 21 percent, even though the percentage of revenue going to public schools fell from 34 percent to 30 percent.

Horseracing went in a different direction. Instead of returning more to horseplayers, a new law passed in 2010 returned less by increasing the takeout by 2 percent on exactas and by 3 percent on trifectas and multi-race bets. All of the revenue from the takeout increases went toward purses.

Statewide handle has declined since the law passed and went into effect in 2011, dropping 10.5 percent from $3,441,290,099 in 2010 to $3,077,584,646 in 2012. In response to the wagering declines and an outcry from some vocal horseplayers, a few new bettor friendly wagers have been created, including a low takeout Pick 5 that has become very popular, and three low takeout daily doubles offered since the start of the Santa Anita Park meeting Dec. 26.

The headline in a recent Los Angeles Times article reads: “California Lottery Is Booming, Creating More Players – And Excitement.” It’s been awhile since California horse racing saw a headline like that.

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  • Andrew A.

    Jeff Platt and I included this in our package of recommendations for California Racing. Good job Ray. Maybe they will get a clue but SB1072 needs to be repealed.

    Borrow a Page from the CA Lottery:

    CA Lottery Increases Total Revenue for Education through INCREASED PRIZE PAYOUTS

    AB142, a bill authorizing the CA Lottery to LOWER the Takeout on
    Scratchers Games, was signed into law in 2010 by CA Governor Arnold
    Schwarzenegger.

    Unlike horse racing (which took the opposite approach and raised racing
    takeout with SB1072) the CA Lottery has been able to leverage LOWER
    TAKEOUT to drive brand recognition and generate significant increases in
    both sales and total revenue for Education.

    Here’s a quote from Linh Nguyen, Acting Director, California Lottery:

    “Increasing the prize payout percentage improves the
    product’s value to the consumer, provides us with a powerful message
    that gets consumer attention, and gives us a tool to drive sales and
    profits.

    A relatively small increase in prize payout percentage can be leveraged
    into a much more significant increase in top-line sales.

    Although the increase in prize payout percentage leaves a smaller
    percentage to be transferred to education, the total dollars going to
    our beneficiary goes up. And at the end of the day, you can spend a
    dollar, but you can’t spend a percentage. So these changes have
    resulted in increased funding to education and that’s what our
    constituents care most about and the reason the Lottery was created in
    1984.”

    • David

      Don’t get me wrong, Racing shouldn’t be allowed to write text on most any subject but, the kind of Board room garbage offered by these Lottery types is nauseating.

    • 4Bellwether666

      They are clueless the hole crowd that’s how they do it!!!…Period…

  • Roger

    Good article Ray. However, I wouldn’t include the Ludt Restricted 3 Doubles -scrapping Rolling Doubles as “bettor friendly” given there is currently a PETITION to reinstate Rolling Doubles with over 200 signatures from fans all over the country.
    The SA DD Handle has been DOWN -EVERY race day this Meet after 13 Race days because
    of the Restricted 3 Doubles vs Rolling Doubles…..SA DD Handle to Date: DOWN – $1.6 million and TOTAL HANDLE is DOWN over $7.3 million.
    There is ZERO CA Racing leadership…..not at SA – the TOC – the CTT – the CHRB…..ZERO.

    • kyle

      You have to pare the menu somewhere. Obviously double handle is going to be lower with four or five fewer pools. Pool liquidity is becoming a problem almost everywhere and if this was done to drive money into the straight pools where their takeout is the lowest in the industry I can’t object. The problem in So Cal are the tiny fields. It’s tough to find plays in the win pool.

      • Roger

        Santa Anita Executive Ludt’s CHRB presentation explained that the Restricted 3 Doubles would drive more “eyeballs” to the track/game. That clearly hasn’t happened given the DOWN HANDLE NUMBERS. Furthermore, there is currently an online PETITION requesting Rolling Doubles being reinstated with over 200 signatures from all areas of the country.
        Paring the menu was never mentioned other than your statement but if that was the goal…rolling doubles would be low on the list with the majority customer (bets under $300). The “takeout price” on the menu is the relevant factor.

        • kyle

          I guess I was in a charitable mood ascribing a logical motive to a move from a California racing exec. Ludt’s statement is obviously ridiculous. But while rolling doubles wouldn’t be my first target – rolling pick threes would be along with one of the pick fours – with these small fields doubles don’t pay much,if any, premium relative to the win parlay. Better the money goes in the win pools.

          • Roger

            I agree that the Racing menu back 4 decades and longer was better for churn,etc. because the only exotics back then were an early double and 1 or 2 exactas at $5 minimums.
            The expanded menu with many exotic bets make many small-medium bettors looking for their “score” with Rolling Doubles because they can’t afford to be competitive in the P-6 and the superfectas,super high 5′s type bets that just don’t appeal. The LOWER minimums do help the majority players managing their bankrolls which is why I strongly feel the California Rolling Doubles should be reinstated but at a lower minimum to $1.
            Finally, I believe the time has come to have ONE TAKEOUT RATE …..
            the HIGHER takeout rate established 50-60 years ago with only a few
            EXOTIC bets back then (one double and 1-2 exactas) doesn’t make much sense in today’s game. I wonder what kind of RESURGENCE thoroughbred racing HANDLE would have if ALL bets were at 17%
            for example?

          • kyle

            I’m all for lowering bet minimums. I’m also for true fractional wagering. I see no inherent plus to uniform takeout rates. Lower certainly, uniform no. I actually advocate takeout becoming a function of field size. That is, for example, making win takeout 1.5 percent per betting interest with a max of 15%. Doing takeout this way would largely negate the negative effect on value of small fields. Pie in the sky, I know. But easily doable from a technology standpoint.

          • Roger

            Why do you think the CHRB back in the early 60′s when the Daily Double opened at Santa Anita applied a HIGHER takeout rate than win/place/show? Whatever reason…..does that logic apply today?

    • Nancy Taylor

      Rolling Doubles to me, along with other insignificant wagers such as the Place P-9, Quinellas or Grand Slam Wagers are a non-issue in the grand scheme of things. Now if you want to complain about the idiotic position the TOC and Stronach have taken vs very low takeout Exchange Wagering then you have my attention. Potential millions of dollars in revenue are being lost to the industry by not exploring this option. Because of the paper trail an account holder leaves, current cheaters that are wagering in secret will stand a much better chance of being caught than they are now. Much the same as the sports books in Vegas that blow the whistle on the cheating in College hoops, Betfair could help get rid of those that would never get exposed in the current system.

  • Tinky

    In addition to Ray’s excellent post and Andrew’s valuable comment, ask yourself this pertinent question: As a group, which are more likely to be price-sensitive, horseplayers or those seeking to turn a dollar into millions by purchasing a lottery ticket?

    • Jennifer

      Having said that why can’t the horseplayer buy a ticket (example pick six) at the same locations as a lottery ticket? Then horseracing could be on the same playing field as the lottery

      • Tinky

        If the racing industry had any brains, it would be able to differentiate itself from the lottery in a very positive manner. But it hasn’t any, and instead emphasizes ‘lottery-type’ wagers to the detriment of its customers and business.

  • kyle

    How can this possibly be? Lottery players don’t have a clue what the takeout is. Are you sure California Lottery didn’t run an advertising campaign depicting the beauty of the drawing? Now, Massachusetts Lottery had the same experience a decade ago. Still, I’m sure it’s just a coincidence.

    • fb0252

      Are you suggesting horse racing should advertise itself like the lottery does?

      • Cangamble

        Huh? Looks more like the point is that takeout has a big psychological component to it, and that people don’t have to have a clue what takeout is when it comes to how they play. However, how much they play and how much more they put in from their discretionary entertainment bankroll is determined by the takeout.

        • fb0252

          u miss point possibly. if there is a $600,000 pick six pot at Hollywood Park it might help handle if someone outside the church actually was aware of the pot. what good does it do to lower takeout for all seven of our whales?

          • Cangamble

            Horse racing has been trying to promote the game in every way with the exception of lowering the price. Lower the price first. Lets see some visible winners. Then more people will become interested.

          • fb0252

            really? when was the last time u saw an internet add featuring horse racing other than on paulick report? u get people interested by advertising. when revenue comes in take out lowers. purses adjusted to track economics might also help as CA experiment shows.

          • Cangamble

            I see horse racing ads all the time. Especially Google ads from ADWs and tracks. The price of the bet is sky high compared to other thinking person’s games of skill, and it needs to be addressed or horse racing will continue to swirl slowly down the drain. I’m a lifer when it comes to horse racing, but now I’ve started getting back into sports wagering again because I think I have a shot of winning due to the low rake, and have cut back quite a bit on seriously trying to beat the ponies. Advertising only works if new potential players think the game is beatable. They aren’t going to waste resources trying to learn a game that has next to no visible winners, no matter how much advertising there is, and no matter how majestic horses are. Some new players might try, but because the learning curve is so high, and the churn just doesn’t please the average person, they will quickly leave for something else.

          • fb0252

            ok–provide one link outside horse racing with an adw add. good lucck finding one.

          • Cangamble

            I see them all the time when I do Google searches. Maybe you have ad block or you don’t search gambling terms like I do. But beside that, think about this: Zenyatta on 60 Minutes, Napravnik on 60 Minutes, the show Jockeys. All this amounted to fantastic free advertising for the racing industry, and handle continued to drop. Pricing needs to be addressed before horse racing has any chance to grow. If you think otherwise, you live in a fantasy world.

          • fb0252

            My opinion is that there is an unlimited market for gambling out there that horse racing fails to tap because it does not advertise on the internet except on rare occasions. I’m on the net all day long. I can count # of horse racing adds I’ve seen on non-horse racing sites in the last 10 years on two hands. Again–I’m pro lower take out. The paramount issue right now is survival. If you had a visible add on Yahoo games advertising large pick six pots, how much handle would that generate. then you lower the take out from the profits.

          • Cangamble

            A 600k carryover would draw next to no newbies, no matter how much you advertised it. When it comes to big scores, the lotteries are where people will flock (no learning curve). Survival? When handle was much higher a few years ago, how many tracks lowered their takeouts? In business, when there is little demand, you lower prices to the consumer. When there is demand, then you can think about increasing prices. That is Business 101. I can’t relate to your concept of business. I don’t think you understand how gamblers think or behave.

          • fb0252

            before reaching the conclusion that large pots would fail to draw newbies, this should be tried, possibly?

          • TJS

            Low rake? 10% on an even money shot. Huh?

          • Cangamble

            In horse racing the rake on an even money shot is 17%. In sports betting it is 4.6%. Example, $200 bet, $100 bet on each team, loser pays $110. That means $210 was wagered. House gets 10 divided by 210.

          • betterthannothing

            The learning curve would not be so high if only healthy and fit horses were allowed to race off drugs; if equine health records were disclosed instead of hiding “pre-existing conditions” with drugs to fool horses, jockeys and horseplayers into believing those horses are fit to run and as good as ever; if horses were protected inside barns and stalls and wherever they go with 24/7 surveillance cams and tracking. Otherwise, seasoned horseplayers are forced to handicap owners, trainers, vets and drugs on top of everything else and toss certain trainers, races or tracks out.

          • betterthannothing

            “Horse racing has been trying to promote the game in every way with the exception of lowering the price.”

            With the exception of lowering the price AND lowering the kill-rate.

            Racing has failed miserably to recognize how turned-off people are about racing based on what happens to its horses on and off track.

            Racing is absolutely not “promoting the game in every way” it can as long as it fails to drastically improve equine welfare and safety. Lower the price AND kill rate. Horseplayers should enjoy fewer DNFs.

          • Linda Broussard

            I agree. Aside from the fact that nobody wants to take their children to watch a sport where one of the players is liable to die on the field, how is it fair to the horseplayers to have know clue who’s training on what? As one who grew up in racing (and boy howdy, do I have a nice 2YO…), I am tired of the drugs and the secrets and the lies and the way the game is stacked against those of us who want to train clean, tired of the way us little guys get the stick when a big barn sends its third string to town (and suddenly, all the races are written for whatever Mr. Big sent down). Seems to me that those who enjoy racing just for the gambling ought to feel the same.

      • kyle

        Marketing wasn’t the central point of my post, but since you asked. I live in New York. I actually find the advertising done by The New York State lottery despicable. It features and targets the brainless and the unhappy. I certainly wouldn’t want racing to emulate that. I think racing should advertise honestly and target its natural constituency. I would like to see an ad campaign that featured the challenge of handicapping, the satisfaction of a good and winning opinion and the possibility of achieving a level of skill that ales a winner. I’d also run a parallel campaign aimed at a younger demo that paints racing in a certain exclusive, out of the mainstream way. Kind of reverse psychology. To me, racing is George Costanza. If every impulse it has ever had has been wrong, the opposite must be right.

        • kyle

          That should read: “makes a winner.”

        • fb0252

          Here’s what I’d like to see: An internet add on all sites featuring Zenyatta and the Lisa Fly Song with a list of today’s national pick six pots with amounts and links where our unlimited internet market can place their bets to win the pots.

        • Linda Broussard

          Got to clean things up, alas, before any honest advertising can happen. I’m not a gambler (well, anyone who owns or breeds racehorses is) in that I rarely bet on the races. Knowing what I do about how many horses are patched together chemically in order to reach the gate, it seems miraculous to me that anyone does.

          • kyle

            You conflate a couple different things. By being honest, I mean fessing up to and highlighting racing as a gambling game in advertising. As for the care of the breed, that’s not my principle concern or in any way my responsibility. That’s on you and others on the breeding and racing end.

    • Andrew A.

      What is Churn Anyway?

      A common used term by any gambler or gambling establishment
      is “churn”. But what exactly is it and what does it mean?

      Churn is simply the times you turn your bankroll over at any
      gambling game. If you bring $100 to a slot machine at 3% takeout, with a nickel
      minimum you will churn that hundred dollars many times, and play for a long
      time. If you bring that same $100 to a $5 machine it will last much less time –
      you will roll over that bankroll few times and probably leave the casino early.

      It is easy to see that at a lower takeout slot machine the
      player plays much longer and has more fun. Las Vegas casinos try to maximize
      revenue by balancing the churn with profit. That is how they come up with their
      “optimal takeout” where they make the most money and keep the most customers
      happy and coming back.

      In horse racing it is not really that different at all, and it is a big part of
      our enjoyment as players.

      Kenny Mayne in an ESPN piece spoke of the walk to the ATM at
      a racetrack as the “walk of shame”. We’d all love to be able to buy a $100
      voucher or have $100 on a players card and play with it all day, like the
      nickel slot player, but we know that all too often our cash can disappear
      quickly. For a long time we were the only gambling game in town, and churn was
      not a huge factor to those in power to any large extent. If horseplayers got mad
      and left, or lost all their money quickly, where else were they going to
      gamble?

      Now however, with competition for the betting dollar and as
      handles fall, we want players to churn as much as possible, because churn means
      more enjoyment for the player and more handle for the industry, just like the
      casinos have long ago figured out.

      So how is churn increased?

      1) Decrease the takeout

      2) Increase cashable tickets

      3) Eliminate hard to hit bets

      If we have a takeout rate of 20% and $1 million bet on the first
      race, we return approximately 800,000 to the players. That means for race two
      there is $800,000 left in the players bankrolls to rebet. After race two the
      players bankrolls shrink to $640,000 and so on. It takes about 18
      races to bust bettors bankrolls.

      If we have a takeout rate of 5%, the $1 million dollars bet
      in race one return $950,000 to the bettors after the race, $902,500 after race
      two and so on. While at the 20% takeout level bettors are busted at 18
      races, after 18 races at 5%, horseplayers still have almost $500,000 in their
      bankrolls and they are happily churning away.

      • kyle

        How do you increase churn? Pare the menu, especially the horizontals. And drive money to the straight pools and verticals with a significant takeout reduction and the elimination of breakage.

      • Andrew A.

        The second way to increase churn is cashable tickets.

        If horse racing had a “pick 8” on every eight race card,
        made the minimum $5 for a bet and paid off in the last race, churn would be
        very poor. Customers would not have much fun, because they would rarely
        or never cash and have to spend $240 on an unhittable 48 horse combo.
        This is why we have seen fractional wagers be added. If you play a 10 cent
        super in a nine horse field you are going to cash many more supers. If you play
        a 50 cent double, like Retama has, you are going to cash many more doubles.
        This adds to churn and it is a major reason this is one factor in the HANA
        track Ratings.

        Lastly, we could eliminate hard to hit bets.

        At Betfair, where only win betting is allowed, there is a
        great deal of churn because with low take and win bets only, players cash
        frequently. In press releases and their annual reviews they mention this
        is a huge part of their success as a gambling company – players think they can
        win. In the 1970’s that menu was similar in the US – there were very few
        exotics – and a lot of players thought they had a shot to beat the game. In
        fact, some tracks only had two or three exacta races a card, and sometimes a
        tri in the last race. Just like it is easy to churn at betfair, it was much
        easier for tracks to add handle in the 1970’s because of increased churn.
        Today, with hundreds of races a day to bet, with many hard to hit exotics,
        (some at a $2 minimum) we can lose the GDP of a small country in a half an
        hour.

        Maximizing these three parts of churn is a like walking a
        tightrope for horse racing. We know the takeout is too high, and every
        piece of literature backs that up, so lowering it will help, but the other two
        are very hard to decipher. Do we cut exotics and hurt short term handle to grow
        churn? Do we add very low fractions for every exotic wager which makes the
        payoffs less attractive for people who love the ability to make a big score? Do
        we stifle choice where choice can hurt handles, but it also up handles as more
        choice assures that?

        There is a formula which maximizes the customer experience along
        with revenues for purses by maximizing churn. It has to be found and all
        tracks have to follow it, or the system will break down. It takes some
        organization, which we seem to lack in our sport at the present time, but if we
        ever found the right spot, our sport will grow.

  • Knowitall

    So improve your product offering to players instead of taking more of less from them? That is a rather long term outlook. Racing runs on borrowed time.

  • 4Bellwether666

    Nation wide state Lottery’s getting 78% of all gambling in the USA…This is old news in our camp…ty…

    • rxdr2be

      This 78% number that you cite, I wonder if that includes “lottery wagers” like those placed in Delaware casinos(which are technically part of the the lottery) and other locales with VLTs. If that is the case, while technically this is money played on the lottery, it is not what most would consider to be lottery-type bets(i.e. scratchers, pick3/4 daily draws, weekly jackpot draws).

  • PTP

    I’m ready to follow Bacon into the center of the sun.

    PTP

  • David

    Be interested to learn which (CA) lottery games increased the return (reduced the hold). I’ll accept the tactic is successful with smaller $1-2 range products but wonder about jackpot versions. Lotteries are keenly aware added churn with lower-priced tics keeps players’ interest and action in the game. Simply lowering the cost of betting the ponies, however, may or may not accomplish the same result. The Lottery knows precisely how many added bodies will win (or break even) if they lower the hold of a $2 scratch-off ticket; Racing has no idea the outcome – in terms of number of players – who benefits from added return. The dynamic of gimmicks coupled with the degree of difficulty of picking winners at the track translates most leaving with blood in their shoes. In short (again IMO) racing needs to think out of the preverbal pari-mutuel box and begin to spread the return (whatever number it is) to a wider portion of bettors. Simply lowering the price won’t get it.

  • santacruzchuck

    Want to be player friendly? How about catching up with some of the tracks east of the Mississippi and offer .50 cent Trifectas and .50 cent Pick Threes? It would also do yourselves a world of good to follow in the footsteps of Keenland and install a state of the art High Definition Television feed. When someone walks by a race book and sees Keenlands HD feed being displayed they are attracted to it immediately. Maybe that has a lot to do with their numbers growing year after year. Think about it.

  • jeff

    It seems to me the price sensitivity is not part of the lottery success but rather the macro-economics of returning that money back into players hands for re-purchase of tickets (churn). Few lottery players take lottery winnings less than 20-50 bucks and put them in their pocket. Oftentimes that money is used to repurchase (parlay) those winnings into more scratchers or jackpot tickets. I believe that part of the equation is similar to racing in the general population wherein the collective bankroll determines the total handle.

  • 4Bellwether666

    How about the whole Horse racing Nation???…Please…

  • dbrown

    Why not have the state Parimutuel Boards and the horseman’s groups devise a lottery game run by the Lottery system that picks the winning lottery numbers from results of actual horse races? The public awareness could be astronomical for horse racing by blending the two systems.Has this been tried?

    • Robert

      V75 in Sweden

  • FourCats

    Hi Ray,
    I think that a more detailed analysis of the increase in lottery revenues is needed before saying that the decrease in takeout accounted for the increase in revenue. The year 2009, when the revenues were way down, was also the deepest year of the recession. The stock market hit its low in March 2009. Discretionary funds for many lottery players were probably at their lowest in that year. It is certainly conceivable that the vast amount of the lottery revenue increase is due to many people having much more to spend in 2012 than in 2009.

    • biggar

      Me thinks that you are on to something here.

    • Cangamble

      Then what does that say about horse racing? Handle went down from 2009 to 2012.

  • Bob Fasching

    Maybe if the California tracks had a joint marketing campaign and flooded the airwaves line the lottery does they would see some increases in attendance and handle.

    What is horse racings marketing campaign in so cal??? You hardly ever hear a radio add or see a tv commercial unless there is some dumb beer fear of something.

    Horse racing management is clueless.

    • 4Bellwether666

      “Horse racing management/racing commission’s are clueless” from coast to coast and have gotten a lot worse in the last 15 years…There are a bunch of greedy/cheating/clueless souls in “The Game” but we can’t let that stop a ton of us that love and respect a “National Treasure”…”The Horse”…ty…

  • Roger

    Don’t forget the $7.50 Daily Racing Form which leaves you with $1…..you can’t even bet a Double.
    Speaking of the DRF…..where are these veteran writers Hovdey, Privman and Anderson
    when SA Meet is off so poorly – fans want Rolling Doubles reinstated given the 200 plus signatures throughout the country when DD and TOTAL HANDLE are DOWN at SA?
    What happen to these JOURNALISTS….just playing it safe now – don’t rock the boat collecting their paychecks but once in awhile will write an article about the Declining Game and NEVER MENTION their role they’ve played in this decline…..FAILURE to ask and
    probe tough questions to SA execs, Stronach, TOC, CHRB……

    • jack

      The DRF is boring! Hardly ever go to the site.

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