06/13/2016 3:12PM

Zoccali: Breaking down a takeout reduction plan

Derick Giwner

Granted, at 32 years old, I am still one of the younger people working within the racing industry.  But I have been a gambler, a fan, an oddsmaker/handicapper and a racing executive, so I have been around. 

As we have seen in several states, and as I have discussed in the past, there is a legitimate threat to racetracks in that they could eventually lose the revenue they receive from the casino affiliated with the track.

In other words, racetracks need to optimize handle, revenue and return to players.

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Many people are shouting at the top of their lungs that takeout rates need to be lowered while others are shouting equally as loud that it should not.  But very few have ever put forth a specific plan while outlining what has to happen for a lower-takeout plan to work in harness racing.

First, let us assume, for purposes of keeping things simple, that a standardbred racetrack handles $100 million over the course of the year.  Furthermore, let’s assume that $90 million is handled through export signals while $10 million is bet on-track.

If the blended takeout rate for the track is 20-percent and the blended export rate is 4-percent, that would mean that the track is receiving $2 million in revenue for the on-track wagers ($10 Million at 20%) and $3.6 Million in revenue for export wagering ($90 Million at 4%), for a total revenue of $5.6 Million. These figures are before taxes and regulatory fees.

Simultaneously, assuming a 20-percent blended takeout rate, of the $100 Million wagered, $80 Million is paid back out to the players in the form of winning wagers.

If takeout was cut in half, so that the blended rate became 10-percent, the racetrack would have to reduce its signal fee to those sites importing the signal to help sell the idea of lowering takeout.  Let’s assume that the export rate now blends at 2.5% instead of 4%.

Applying the same 90/10 split on export and live handle, the live handle at $10 Million, a 10-percent takeout rate, would produce $1 Million in revenue and the export handle of $90 Million at 2.5% would produce $2.25 Million in revenue.  Therefore, total revenue, if handle remained the same, would become $3.25 Million instead of $5.6 Million.

So what has to happen to make up that difference?  Handle has to go up, substantially in fact. 

First and foremost, by lowering takeout to 10-percent and paying out $90 Million instead of $80 Million, there is an extra $10 Million for players to churn and for the most part, all of that $10 Million is going to go back through the windows.  Here is where the opponents of lowering takeout fail to understand how this cycle of increased handle continues.  Of that additional $10 Million, $9 Million is paid out and put back through the windows and of that $9 Million that is re-invested, $8.1 Million is paid out and of that $8.1 Million that is re-invested, $7.3 Million is bet back through the windows and on and on.

Now, in order to offset the initial revenue loss by lowering takeout, assuming the $100 Million scenario above, handle would have to go from $100 Million to $175 Million per year, an increase of $75 Million.  (Live Handle of $17.5 Million producing $1.75 Million in revenue and Export Handle of $157.5 Million producing $3.94 Million in revenue, a total of $5.7 Million in revenue). But if you continue the churn cycle listed above, you reach $40 Million in the first five churn cycles.  Obviously the number of race dates and actual races determines how long that takes, but $75 Million as shown above is far from unattainable.

Even in the scenario where there is a slight revenue shortfall in the first year of operation, the churn cycles will continue year-in and year-out and over the next two, five, 10 or 20 years, revenue will continuously grow.

On the thoroughbred side of the aisle, tracks are beginning to take the approach of lowering takeout.  Kentucky Downs was the first and the results were excellent, including a 69-percent increase in all-sources handle according to an article on Brisnet.com

This year, Canterbury Park has taken a proactive approach in lowering takeout and the early returns are strong as well (see http://www.brisnet.com/cgi-bin/editorial/article.cgi?id=39917).

Tioga Downs lowered takeout a few years ago, but their takeout rates are only permitted to be lowered so much due to regulatory reasons in New York, which stunts the growth potential of such a concept.

With all of this information, what is stopping a standardbred racetrack from taking a bold stand, particularly a racetrack that has casino revenue subsidizing its purse account, where any perceived risk is minimized?  The fact that tracks like Harrah’s Philadelphia and Pocono Downs are charging takeout rates in the mid-20 percent range and some rates approaching and hitting 30 percent is simply outrageous.  The bottom line is that a horseplayer cannot win over a long period of time betting into those types of takeout rates.

The first standardbred racetrack to lower its takeout rate to 10% across the board and market the fact that they are doing so, will see handle grow through churn, will capture handle from other racetracks that refuse to do so and will have thoroughbred crossover appeal with the players who understand margins, rebates and the impact of a lower effective takeout.

We can argue back and forth about whether or not horse racing has any new money coming in, but these numbers above are indisputable and are just simple math.  The more money you put into a bettor’s pocket, the more they bet, especially when they don’t even realize that they have more money than they would have if takeout were higher.

That’s my plan and I’m sticking to it.