02/13/2004 12:00AM

Why tracks are beaching whales


NEW YORK - Do horseplayers need protection from whales?

Tampa Bay Downs last month and Oaklawn Park last week announced they had shut their pools to some of the offshore betting hubs where high-rolling "whales" have been rocking the toteboard with big last-second wagers. The plunge that sent Master David from 2-1 to 11-10 in the Santa Catalina last Sunday was only the most recent in a series of incidents that have given some ordinary players the feeling that they're nothing but whale food these days.

Oaklawn's announcement on Thursday portrayed the cutoff as a boon to fans. Bobby Geiger, the track's director of mutuels and simulcasting, said, "this decision means racing fans wagering on Oaklawn races should see higher payoffs on winners."

All of this creates the mis-impression that some secret society of geniuses sipping banana daiquiris on Caribbean beaches has discovered the secret of horse racing and is picking winners at a profitable rate. That's just not the case.

Last year, Racing and Gaming Services, the largest offshore hub, estimated that its customers were doing better than most but still losing about 10 percent on their investments through the pools. Even armed with sophisticated computer arbitrage programs and last-second access to pools, they can't beat the takeout through betting alone. This is a tough game and success remains elusive.

So if an offshore's customers are losing 10 percent on $600 million in handle, isn't that an extra $60 million for the rest of us? Yes and no. A bookmaker or a casino would be thrilled to take unlimited action from someone who loses 10 percent on the dollar, but due to racing's exorbitant takeout of around 20 percent, a 10 percent loser is doing better than average and actually depressing the payouts to everyone else. The paradox is that even though they're losing, they're making the other losers lose even more.

This may sound contradictory but it's true. Imagine a betting pool with $100 in it. After $20 in takeout, the remaining $80 is distributed among the holders of winning tickets. Now add another $100 to the pool from a group that over time gets back $90 of every $100 it invests. The total pool is now $200, with $160 paid out after takeout. If the new group is getting back $90, that now leaves only $70, rather than the original $80, for the first group of bettors.

So even while losing, the new group is taking money from the old one. Someone who loses 10 percent is really doing two different things: losing 20 percent to takeout but winning 10 percent from the other players.

The genius of the offshore bettors is not that they are winning handicappers but that they found a massive loophole in the economics of racing's distribution system that allows them to recoup some or all of their net loss. By effectively becoming their own OTB's and holding the majority of the 20 percent takeout, the offshore shops can rebate much of their customers' losses to them and still walk away with a profit. A particularly talented arbitrage bettor who is losing 5 percent becomes a 5 percent winner if he's getting a 10 percent rebate.

The racing industry wants to reclaim some of this money being used for rebates and this, rather than protecting the bankroll of the average Joe in the grandstand, is what the cutoffs are really about. Oaklawn's announcement included the following: "Initially Oaklawn attempted to develop an efficient pricing formula that was designed to offset some of the advantage enjoyed by the off-shore sites. But, when that was not accepted, Oaklawn chose to withhold its signal from those sites."

The "attempted offset" was not a takeout reduction for ordinary players, but an increase in the fees an offsite receiver would pay for a signal. This is the dominant business issue in the racing industry today, the same driver that is ultimately behind Magna's controversial restrictions on its signal. Tracks went through a giddy decade of selling their signals dirt cheap to anyone who would pay as little as 3 percent for it, and now are trying to raise prices without engaging in actionably blatant antitrust price-fixing.

The issue here isn't that racing has decided to chase winners away for the good of the chronic losers, but that tracks want to keep a bigger piece of the takeout.