BC MEMO OUTLINES INVESTMENT HISTORY
Fred Pope is one of those rare individuals in racing who does more than identify problems and complain about them; he actually spends a great deal of time working on solutions. Whether it’s the National Thoroughbred Association, an owners-driven organization he created more than a decade ago, or pushing for a "major league" of racing, the Lexington advertising executive has been a strong proponent of horse owners and their rights to get a greater share of simulcasting revenue.
Pope’s current proposal, which he outlined recently at the University of Arizona Symposium on Racing, is for a change in the Interstate Horseracing Act of 1978, the federal law that governs interstate simulcasting. By providing for more rights to the racehorse owners where the live race is run, Pope believes purses and bloodstock prices will greatly increase and the sport of racing will grow. The complete text of his speech follows.
What is your opinion on this subject? Do you believe the lion’s share of takeout from simulcast wagers should go to the business taking the bet (simulcast site, OTB, or ADW company), or to the track and horsemen’s organization where the live race is run? Take the Daily Paulick Poll (located on the left-hand column of the Paulick Report home page) or leave a comment at the bottom of Pope’s article. — Ray Paulick
Correcting the Interstate Horseracing Act
Racing’s Off-Track Business Model Favors Bet Takers. It Should Favor Host Tracks Putting on the Show.
Speech by Fred Pope at Univ. of Arizona Racing Symposium, December 11, 2008
Let’s start off today with a show of hands. Be honest. How many of you feel that Government should be involved in Thoroughbred racing? I see just one or two hands, so perhaps we should work to get government completely out of Thoroughbred racing.First, let’s tell government we want them to take back the laws that make it legal to bet on racing. Why should government intrude and force our sport to have a monopoly on legal wagering?
Next, let’s ask Jay Hickey when he returns to Washington to see if we can get the federal government to rescind the Interstate Horseracing Act. Why did government feel the need to give our host tracks expanded distribution across state lines?
And third, for good measure, let’s tell government that we don’t want the exemption they gave us in 2000 from the law that prohibits gambling on the Internet. That ought to do it.
Ladies and gentlemen, the truth is racing is more involved with government than any other sport. Government involvement is at the core of racing’s existence. If it weren’t for government involvement in racing, the only place we would enjoy our sport would be at the County Fair.
I understand why most of you didn’t raise your hand today. Government involvement comes with strings doesn’t it? There’s a yin and a yang to government and politics.
It seems when government steps in and passes a law to do one thing; it inadvertently winds up hurting something else.
That’s why I am here today, to talk about how government’s gift of the Interstate Horseracing Act (IHA), has inadvertently resulted in an Upside Down business model that is killing Thoroughbred racing.
We are all aware of how our once-healthy American automakers are suddenly on the verge of collapse because they failed to take action and correct their business model.
Talking about off-track betting and business models isn’t a very sexy subject. It causes a lot of people to get a glassy look in their eyes; however, that is where 90% of all the money in racing is today. If you want to have a future in racing, or breeding, you need to understand where the money from off-track wagering is going now, and where it needs to start going.
Here’s how wagering under the IHA should have worked. The regulated host tracks and racehorse owners putting on the show would have licensed and paid a small commission to those taking off-track bets on their product. For example, if someone bet $100, the host track and purse account would get about 15% and perhaps pay a 5% commission to the bet takers.
That’s the model used by lotteries. Lotteries pay a 5% commission to the convenience stores punching in the numbers on the lottery bets. It is a very straightforward distribution model. The lotteries and the IHA in racing kicked in about the same time, but last year the lotteries grossed $50 billion and paid out about $2.5 billion to their bet takers. Racing could have used that same distribution model, instead racing invented its own model.
Now, here’s how wagering under the IHA actually happens today. The host track and racehorse owners putting on the show contract and receive only 3% from the people taking bets on their product. The bet takers keep 15% or more for just taking the bet.
Whether the bet takers are other racetracks, or OTBs, or ADWs, or casinos, they keep the majority of the takeout on the host track and racehorse owners’ live racing product.
Why? The short answer is because the bet-takers felt they owned their betting customers. If the bettor was going to wager on other tracks’ races, the bet-taker was going to get the lion’s share. Today, bettors can bypass the receiving tracks and pick up the phone or go online. The genie is out of the bottle and won’t ever go back in again.
The 3% going to the host track is split between the track and its purse account. It isn’t enough to pay for the live show, but 3% is the going rate established by the receiving racetracks taking the bets. Since the Interstate Horseracing Act has a provision that requires approval by the group representing horsemen in the receiving state, the host track has no option, but to accept the going rate of 3%.
Bet Takers Keeping All the Off-Track Money
If you bet $100, only $1.50 goes to purses at the track putting on the live show, but more than $15 stays with the place taking your bet.
You might think the cumulative effect of 3% from lots of sources totals more than the bet-takers receive, but it doesn’t. If $3 million is bet off-track, the host track and purse account split 3%, or $45,000 each, while the off-track bet takers keep $450,000 or more and many have no connection to racing.
This upside down, business model impacts 90% of the handle and it is the reason Thoroughbred racing is dying in America.
The bet-takers are gaming the IHA to the effect that there is no incentive for the host track to produce the live racing show. Just like the American automakers; racing has to correct this model or risk a total collapse of the business.
The potential closing of Hollywood Park is the new reality that no matter how large the market, a host track cannot overcome the upside down business model that is enabled by the wording in the IHA.
The IHA is supposed to help racing by simply expanding the distribution of the host tracks’ product. That is all it was supposed to do. Racing was relatively healthy in 1978 and this new distribution should have seen the sport and business revenue explode. If we had used the normal distribution model like the lotteries, racing too could have $50 billion in handle.
Now that it has been identified, this is a problem we can fix. With the stroke of a pen, the promise of the IHA can be realized. We can turn the upside down business model, right side up.
Racing has a monopoly on legal sports betting. We have virtually national distribution of a wagering product. We have a monopoly on Internet gambling. All we are missing is a real world business model and that comes quickly by correcting the Interstate Horseracing Act.
The American automakers’ business model doesn’t work because labor costs are too high. Even if a labor official knew the business was going to collapse, you can image how hard it would be convince the members to go from $70 an hour to $40 an hour.
And the same in our business, even if receiving track horsemen know the off-track business model means major tracks will fail, it would be hard for them to voluntarily give up making 15% as a bet-taker in order to save the host tracks.
That’s why it will take responsible people who have a national interest in racing to get involved, because few people will ever agree to a haircut in the interest of the sport.
That’s the beauty of correcting the Interstate Horseracing Act. Without state by state turf battles, the national law will fix the problem. Racing’s upside down business model will be turned right side up.
At a time when everything in racing and breeding is heading south, correcting the IHA would see $1 Billion going to the host tracks in the first year. Half, $500 million, would go into racehorse owners’ purses at the host tracks. For breeders it should be noted, that $500 million in racehorse owners’ purses is more than all yearling sales in 2008, and it is reasonable to expect racehorse owners would reinvest that purse money into new racing prospects.
So, here’s what we need to do to correct the Interstate Horseracing Act and have a normal business model for off-track wagering that will restore the business of Thoroughbred racing.
1) Change from the term “horsemen” to “racehorse owners”. There is no reason for trainers to be making business decisions for racehorse owners. This should never have been written into the original legislation. Like in California, the HBPA should be funded for benevolent activities in every state.
2) Eliminate the provision in the IHA requiring approval of horsemen in the receiving state taking the bets. This provision, while well intentioned in 1978, is obsolete today and is responsible for the upside down business model that has evolved over the past thirty years. Approval of racehorse owners at the host track should remain in the IHA.
3) Mandate the host racetrack and host purse account receive a minimum of 50% of the takeout on interstate bets. This will allow the host track and a receiving track taking the bet to share the same amount. All other bet takers, like ADWs and OTBs, will need to contract with the host track and racehorse owners who approve the host track agreements under the IHA.
The Interstate Horseracing Act is business distribution legislation and these corrections, that must be made, are relatively minor amendments. I do not support using the IHA as a vehicle for non-business issues like safety and medication.
Once this new business model for off-track wagering is law, racetracks and racehorse owners putting on the show will have great incentive to package, present and yes, promote their Thoroughbred races.
Under the new business model, the host track will be free to go direct to the betting customers in every racing state. Racing can be a leader in the new economy and take advantage of technology that can deliver the same business model we enjoy with on-track wagering.
The problem is today a bettor can be standing in the paddock at the host track putting on the show and make a phone bet that results in very little money going to that host track and its purses.
After these corrections to the IHA, it will not matter where the bettor happens to be at the moment, the majority of the money will go to the host track putting on the show.
That means if even small tracks, like Turfway Park or Tampa Bay Downs, puts on a good day of racing and attracts wagers of $10 million, they could split up to $2,000,000 with the purse account. That’s how you bring Thoroughbred racing back. And, when racehorse owners start winning these purses, that’s when the breeding business has a firm foundation for the future.
Every track in America will have the opportunity to provide their races to every wagering jurisdiction, with no gatekeepers, or middlemen siphoning-off the fruits of their labor.
This philosophy of owning the bettor and giving the majority of the money to the entity taking the bet is a worldwide problem. We have the technology for live racing to be sold to a worldwide audience, yet because of protectionism and old economy thinking, we do not have a business model to grow the live racing product. Everything today favors who takes the bet, not who produces the live show. Change that premise and you assure the international future of racing.
Leaving the Old-Economy Model and Moving to the New Economy
The day of the franchise that values bet taking is over. It has no place in the new economy.
When racing’s business model moves away from the old economy thinking of we own the bettor, to the new economy realization that we own the show, then our sport has a bright future.
Changing economies are frightening things, particularly with the realization that if you don’t change you die. The new economy for racing, under a business model that favors those putting on the show, will bring innovation and opportunities that are unimaginable today.
Nothing succeeds like a profit motive and corrections to the IHA will bring solid incentives to package, present and promote its races. The sky is the limit for our host tracks.
The unfair advantage racing has been given, time and again by government, has never been realized because of the stranglehold bet-takers have had over the sport.
The Holy Grail of Sports Marketing
A monopoly on gambling, with national distribution and a solid profit margin is the holy grail of sports marketing. How we have screwed this up all these years is a crying shame.
Five years ago, I was hired by a racetrack company to do the most extensive consumer research ever done on Thoroughbred racing. I reviewed the research done by the NTRA, and then set out to find more in-depth answers using a top research firm.
I’m restricted from telling you the results, however, I can tell you this: The research did not support other entertainment or alternative gambling at the tracks. The facilities are not the problem and they are not the solution.
The research did show there is nothing wrong with Thoroughbred racing that cannot be fixed by packaging and presenting a better racing product. The first step though, is to change the business model to make it all possible.
The Kentucky Derby and the Breeders’ Cup have shown us the daily market for racing exceeds $100 million. That’s a good goal for host tracks to aspire to each week.
This current ADW problem is a symptom of how upside down our business model has become. ADW’s should be simple businesses that just handle transactions. Not companies trying to game the IHA with schemes and kickbacks called source market fees. When we correct the IHA, the ADW’s will no longer be a problem.
The real problem that must be solved is between the bet-takers, and the host tracks and racehorse owners putting on the show. Everything else at this time is just noise.
We have the opportunity for a new golden age of Thoroughbred racing, in full partnership with government. This industry is all about jobs and a way of life we all love. This is how we take action and reclaim our sport.
To those who might say we should not risk correcting the Interstate Horseracing Act, I say how can we not risk correcting it? Do we, like the automakers, risk total collapse of our business because we’re afraid to change and act?
We cannot fail to correct the Interstate Horseracing Act now.
Thank you.
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