Our 2-year-old champion colt, Uncle Mo, is in good hands. His trainer, Todd Pletcher, is one of the best. His owner, Mike Repole, is a successful businessman committed to the sport.
In marketing terms, Uncle Mo is a brand. Based upon the success his owner Mike Repole had with Vitaminwater, few people know better how to develop, promote and protect a brand.
But it is hard to protect the brand that is Uncle Mo in Thoroughbred racing.
In the real world if Mike Repole's former brand, Vitaminwater, was on the shelf of a grocery store and the store owner said to him, “I will not pay you based upon the sales of your brand, instead I'm going to pool the sales of all drinks and pay that money out later as I see fit.”
If that had happened, Repole might have said, “Pay me for the sales of my brand, or you won't get my brand”.
That seems reasonable. If the store knows the amount of Vitaminwater sold, why not pay Repole for the sales it generated? Actually, they did know and they did pay him for the revenue his brand generated. That's how the real world works.
It is hard to protect the brand that is Uncle Mo in Thoroughbred racing.
Although host tracks know how much money a race generates in minutes, the talent in the race is not paid their share of that revenue. Instead the money goes into a purse account pool, for other racehorse owners, in other races, at some time in the future. That might work in a commune, but not the real world.
My business is marketing, where the variables we work with are: product, price, distribution and communications. New technology is impacting these elements to introduce new brands and re-vitalize old brands.
The issue of how we compensate our talent has intrigued me for years, as our sport is the only one capable of directly connecting the talent in a sporting event to the wagering revenue generated. Currently there is no connection.
I believe new technology in the distribution of racing can give us a real world model for compensating our talent, and change how we package racing products for horseplayers and fans.
These changes will allow us to protect Uncle Mo and other brands in racing.
Currently, the racing secretary uses the racehorse owners' purse account to assign set purses for races. If the wagering revenue on a race is greater than the set purse, the extra money goes into the purse account for future races. If the wagering revenue is less than the set purse, the purse account gets reduced.
Why not let the owners of the “brands” take the purse risk in each race?
Here's how it can work. The racing secretary puts the race conditions together for a race. After the race is over and the wagering revenue known, the top finishers split the purse portion. If the race generates a lot of wagering, they split a big purse (and the track operator gets an equal share). If the race was not popular with horseplayers, the top finishers get less.
Everything is clean. The talent is paid for the value of their performance. After the race is over, the purse account is zero. Next race.
This isn't about redistributing money in the existing pie. This is about changes needed to grow the revenue pie and the sport.
Changing the Incentive
Today, the incentive in racing is to duck competition. With set purse amounts, you can make good money avoiding competition, even in graded stakes.
That's why we have Grade 1 races with five-horse fields. The result is a non-competitive race that few people come out to see and few people wager on it. Such a race might generate less wagering revenue than a $5,000 claiming race with a full field.
Racing's customers and fans are turning their backs on what our sport says are the best races, because the incentive in racing is for owners/trainers to avoid competition. That needs to change.
We need the incentive in racing to where owners/trainers enter races with full fields of competitive horses because that is where they are going to win the highest purse money.
Think about that. Good racing products for horseplayers and fans would generate good purse money. Bad racing products would lose in the marketplace and stop being presented. That's the way the real world works.
Everybody knows there are too many races being packaged. This is the right basis for thinning the herd.
There are many problems in racing. Most are about money and fall under two main categories: Integrity of the Sport and Integrity of the Wager.
The integrity of the sport is not only impacted when participants cheat in a race. The wink and nod cheating when bad races are written to benefit owners/trainers and those races are presented to the betting public also impact it.
What makes a bad/good race? Some would say a race you can easily figure out is a good race, however, most would say just the opposite. The more competitive the race, the better the race for horseplayers and fans.
There is something appealing about finding out who has the best horse, football team, etc. It is so appealing that people will bet billions of dollars this weekend. NFL coaches and the talent will hype their game to increase viewership. What would they do if they got a share of the gambling on their game? Exactly.
This year the NFL and NBA will try to change the compensation model for the talent in their sports. Why not just keep doing what they have been doing? Obviously, what was working years ago isn't working for one side today. They will go through the costly process of changing the compensation model, because they believe the changing business makes it necessary.
Maybe, just maybe, the system we have been using for compensating our talent in racing has become a problem, a big problem.
This year, if things go well, Uncle Mo's races could have total wagering handle of more than $200 million. With average takeout of 20%, the wagering revenue generated by Uncle Mo's races, $40 million, will go somewhere else.
Of that $40 million, about $10 million (5% of the $200 million wagered) will go to the host tracks where the races are held and be split between track operators and future purses. The remaining $30 million (15% of the total wagered) will go to those simply taking bets on Uncle Mo's races. Why?
Why can't the top finishers in Uncle Mo's races receive the $20 million in purses due from wagering on their races? Our stars need to be compensated for the revenue they generate. That's how the real world works.
Racing's welfare system is not working for those putting on the show, thus it is not working for Uncle Mo, and the other brands in the sport.
Racing needs the same distribution model as the Apple brand, where Apple sells customers direct, through bricks and mortar outlets and through on-line vendors. It doesn't matter where the sale is made, or how the sale is made, the money flows to the Apple brand, not to Google.
The first step to getting a new compensation model to protect Uncle Mo and the sport is a new pari-mutuel tote/wagering system.
Integrity of the Wager
Currently we have three tote companies that do not seem to work well with each other. They cannot stop “past posting,” where betting continues after the start of the race. Their technology was good when all wagers were on-track, but that was before the avalanche of off-track and Internet wagering.
Racing can have a new, central tote/wagering system that allows bettors to wager on every racetrack in real time. It would not only settle accounts with winning bettors and tracks, but also when the results are official, send the purse money to all the winning connections of the race. It addition, it would pay all state taxes immediately. How about that? One system, with all accounts settled in minutes, not weeks and months.
This system will return racing to an “on-track” business model where all revenue stays in racing, like Apple. This will infuse hundreds of millions of lost dollars into purses and to host tracks putting on the show. It will continue to allow each state racing commission to set the percentage of takeout and taxes. (If eventually the states agree to a compact agreement and set national rates, that's a bonus.)
This new system would also eliminate the “settlement” issue, where 1,100 off-track outlets scramble to settle with the host event. It eliminates off-track bet takers, such as recently bankrupted NYOTB, from keeping hundreds of millions of dollars in wagers and then not paying the host tracks and purse accounts.
But, the main advantage of this new technology is to provide customer friendly services, such as sending a message to every customer with the results of their bets, including a videolink to the races they wagered on with the horses they bet on highlighted. Uncle Mo could be in living color minutes after the race.
The question is, “Can the separately owned, three-tote system do for racing what a new central system can deliver?” I think we all know that answer.
Technology companies like IBM, or perhaps Google, would be thrilled to show the partners in racing how much money and integrity they could save the sport with a new, state-of-the-art wagering system paid for and upgraded through a percentage of each wager.
In the 1990s, Apple introduced a tablet computer named Newton. About the same time, the Jockey Club introduced a plan for a new tote system and both failed. The ideas were not wrong. It just wasn't the right time.
The time is right for Apple's iPad, because new technology makes a tablet work. The time is right for new technology to deliver a tote/wagering system for racing with many of the capabilities outlined above.
During the January Sales at Keeneland, people were pitching the opportunity to invest in new ADWs to game the upside-down, off-track revenue model. One entry price quoted for individuals was $10 million. That means ten individuals might put up $100 million to start new ADWs, when perhaps $100 million is all it would take to start a national tote/wagering system for the whole sport, that would make the current ADWs archaic.
Technology waits for no one. We should not lose this opportunity because of who currently owns what. Companies go in and out of business every day because customers move to innovation and to those brands that meet their needs.
The owners of the talent, racehorse owners, are equal partners by law with track operators on wagering revenue. They have every right to demand a new, national tote/wagering system to both restore integrity to the wagers and assure the investments in their brands are protected.
With the new central tote/wagering system taking wagers direct from customers and with the compensation of our racing talent based upon the value of their performance, a new energy and incentive will drive the sport.
The actress Angelina Jolie does not appear on David Letterman's show to promote the movies of other actors. She is there to promote her brand and to increase the ticket sales of her movie. That's the way the world works.
If we want racehorse owners, trainers, jockeys and track operators to get involved and promote a race, then give them the money wagered on that race. Don't expect them to promote a race when all the money goes somewhere else, like it does today.
There is great potential for additional sources of revenue to soon be available to racing, i.e. social media, games and services we cannot even imagine now. These new revenue sources are based upon commercial rights to each brand.
Are the owners of the brands to simply give their commercial rights to track operators to squander away to the benefit of others, some not even connected to racing? That is what is happening today.
Time for Change
Changing the compensation system for talent can restore integrity with real world incentives for packaging our races. By establishing a new tote/wagering system, we can restore integrity to the wager and deliver enhanced customer service. This isn't about redistributing revenue; it is about the modern methods needed to grow the sport by targeting horseplayers and fans.
Richard Duchossois, former owner of Arlington, in a recent speech to the Thoroughbred Club of America called for racing to define a new “Goal Line” and he said that would determine what has to be done to get there.
In business management, Strategies precede Structure. Deciding what must be done is more important than who does it.
You have just read my analysis and proposals for how to give Thoroughbred racing the fighting chance it does not have today. These are not big changes, but they will have big results.
We need racing secretaries to move from writing bad races to attract horses, to once again being valued for their ability to put together competitive races that make money for racehorse owners/trainers/jockeys and track operators. They need to be thinking about horseplayers and fans.
That's how you change the direction of the sport and protect Uncle Mo and all those who will follow him. Once we move in that direction, the other “big Mo” will shift toward Thoroughbred racing.
How do we make these changes? One way is to get racehorse owners, like Mike Repole, who understand the value of building and protecting brands in a room and put this analysis and others on the table. That's when you define the “Goal Line.” Then figuring out how to get there will be easy.
Broad concepts in racing's mix of product, price, distribution and communications will determine how change can be implemented. Once a new wagering platform is in place, new ideas and methods can be tested and perfected at individual tracks, then rolled out nationwide.
The business methods in use today are artificial and upside down, so many of the inherent problems that plague racing now, will go away when we move to new, real world methods.
The ability of a racehorse owner to develop, protect and promote the individual brand name of their horses is severely compromised by the current methods in the sport.
In a fast changing world of technology and social media, Thoroughbred racing allows the foundation of brand management, commercial rights, to be taken hostage by track operators, who have squandered and given away those rights for little value. The owner of Uncle Mo has no rights to his races.
The compensation and distribution systems in racing are completely upside down. The owners of the horses putting on the show receive no direct benefit for the revenue their talent is generating. Our welfare system has not only failed, it has corrupted the very foundation of who has the best horse.
Our sport has exhausted every possible advantage of monopoly and is now declining because we continue to do what has always been done and ignore the basics of operating like a modern sport.
We have great opportunity to link current and new customers to the talent in our sport and reach the full potential of legal wagering through technology with increasing capabilities. At the same time, we can start to develop and enjoy fan growth and revenue streams available to all other modern sports.
Racehorse owners need to understand the enormous potential of controlling their individual rights to their brands, the talent in the sport, and how those rights can be used collectively to benefit Thoroughbred racing. The owners of the talent in every other sport reached this conclusion years ago and got ahead of us.
Exploring new ways to package and present racing based upon giving our present and new customers what they want, instead of what the industry wants to give them, is the answer to success in our sport.
The best way to protect a brand is to make it economically viable.
The best way to protect Thoroughbred racing is to embrace real world business methods to make the sport economically viable. Then it can take care of itself.
The first step is a new, national tote/wagering system. Every other step depends on taking the firststep.
© Fred A. Pope 2011
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