Has Horseracing Ransomed Its Future in the World of Simulcasting, Rebates, Poaching and Other Challenges?
Friday, March 5, 2004
9:00 a.m. - 10:15 a.m.

Mr. Chris Scherf: Hello, my name is Chris Scherf, I am the executive vice president of Thoroughbred Racing Associations and I will be monitoring this next panel. The topic is: Has Horseracing Ransomed Its Future in the New World of Simulcasting, Rebates, Poaching and other Challenges?

We have three panelists today from thoroughbred and harness from the United States and Canada, so we have a nice representative panel to discuss today’s topic. Let me introduce them.

Peter Berube is the general manager of Tampa Bay Downs. He is a graduate of the University in Baltimore, which narrowly escaped having the longest losing streak in division I basketball this year. He will be more than glad to talk to anyone about lacrosse, though. He joined Tampa Bay Downs in January of 1995 as controller and has also held the positions of vice president of finance and assistant general manager. He has been vice president and general manager since 2001, and has been instrumental in the growth of Tampa’s signal, which has grown from a daily average commingled handle of $600,000 in 1995 to this year’s projected daily average handle of $3 million. He has also been instrumental in guiding purse growth over the past nine years from a daily average of $50,000 a day to a projected average this year of  $130,000.

Our next panelist is someone familiar to everyone as president of Harness Tracks of America and also as general manager of the Meadowlands, Chris McErlean.

We are going to start today with a presentation from our third panelist, Steve Mitchell, vice president of wagering operations for Woodbine Entertainment.  Steve’s responsibilities include simulcasting, mutuels and customer service. Being a major importer and exporter of racing signals has enabled Steve to see firsthand how customers react to wagering related issues such as takeouts and other factors impacting payout and what has produced incremental wagering by existing customers versus ideas that create new customers. Steve has promised to discuss in plain English--and I don’t know if that is legal in Canada--the threats to wagering and how to assess them and to deal with them.  

Mr. Steve Mitchell:  Thank you very much, Chris. Account wagering is often in the news nowadays and today’s session, as we have said, is going to be in plain English. There is no mathematical formula and there are no technical Latin terms, the ones that confuse me as well. We are just going to keep it down to straight percentages, very simple, and we want to make sure that the racetrack operators get an idea of how incremental this particular form of wagering is to their business. It doesn’t make sense to continue to do business the way that we started this operation.

In today’s presentation we are going to have a quick look at the origin of simulcasting, which was intertrack wagering, or tracks dealing with one another, the evolution into account wagering, and the creation of secondary pari-mutuel organizations, the SPMO’s. We will then have a little assessment as to how much of their business we believe is incremental versus how much of it is being poached out of racetrack business. We will then have a quick commentary about any reaction to that particular form of business. Is there anything to do with the claims of so-called price fixing, or is it economic survival decisions that racetracks have to start taking? We will then do a brief assessment of how sensitive SPMO customers are to changes in pricing, in other words the host fee percentages that tracks charge them. We will also have a brief analysis about the effective takeout reductions that we have seen occurring over the last few years. Finally we will end up with a movie if we have time, starring Johnny Depp.

Intertrack wagering was a great idea. Customers loved it, it gave them a variety of product, and it brought along much bigger pools once everyone started account pool wagering. So certainly it was a big win for the customers. For the host tracks it was pretty much great incremental revenue coming from the guests in other markets. They never used to get a share of the wagering in those particular markets and with simulcasting and intertrack wagering they certainly did. The big question is how much of it is incremental for the guest locations? 

In Woodbine Entertainment’s case, if you compare the wagering that took place in our own market on the products that were offered there back in 1990, we weren’t in the simulcast business. The only card that we brought in was the Breeders Cup. If we compare the 1990 statistics to what has happened fourteen years later, our business has only gone up $4 million dollars over that particular period of time. Obviously the simulcast market has changed pretty dramatically from a single card to over four thousand cards coming into the market last year, clearly not an indication that there is a portion of incremental business by getting into this.

The other aspect of intertrack wagering that is so critical is just how much can a guest track afford to pay for a particular signal? Woodbine is in the amiable position of both being a major exporter and importer and we do recognize the cost of both operations. But at the end of the day we believe that the guest clearly does bear the bulk of the cost of conducting simulcasting.

We have clearly seen that wagering does shift from your live product over to your simulcast product. The fact that operations are now open seven days a week for at least twelve hours a day, and in many cases more once you start looking at Hong Kong simulcasting and other issues, as well as the fact that it is up to the guest tracks to keep on putting the money into marketing and promotions to develop new customers and let them bet on host track products all around North America.

Consequently, we believe the standard three percent fee that was set up and has been running for a fair period of time is appropriate in most cases. There are some cases between proximity of racetracks where a slightly different fee might be appropriate. We think the three percent fee represents a pretty fair situation.

There has been a lot of talk over the last three years about if the three percent fee is fair. It is enough for the host track, is it not?  What is clear is if we follow the route that has been happening in some of the major league sports where customers quite often are deprived product all together because of disputes, is it is only a matter of time before our customers will give up on us all together. They will stop betting on horse racing and everyone is going to be losing out.

We believe it is time for host tracks and guest tracks to get together and focus on what we believe is the new threat to intertrack wagering. Obviously that has to do with the account wagering aspect of today’s discussions. The tracks were the first ones to get into account wagering and for the right reasons. Much like they started off with off track wagering in teletheaters, we wanted to expand the amount of business, the amount of wagering that is conducted in our own markets. We wanted to get access to new customers, to customers who were no longer visiting us, and those who couldn’t visit us very often because of how far they lived from a racetrack. So certainly we went into it for the right reasons. The other thing that the racetracks do is they tend to respect each other’s markets. They are not going to go out there and try to poach one another’s markets on a dramatic scale.

Once the tracks got into the business, pretty quickly we saw the growth of a number of independent operators, so called secondary pari-mutuel organizations (SPMOs). These entities do not operate live racing. They do not fund purses for that. They do not operate the backstretches with all of the barns and associated costs, or the huge facilities on the front side for the customers. That is where the huge expenses required to keep the racing business operating go. Instead, what a number of these SPMO organizations, and I stress that this is some of them, this is not all of them, we are not labeling all SPMO’s in this same fashion, but there are some out there that have concentrated on a very select group of customers, the big bettors. Those big bettors, to a large extent, at one stage or another in their lives were racetrack customers. There are a few exceptions, but we believe by far, and you will see the evidence today, they used to be racetrack customers at some stage.

What have they done? The SPMO’s, in essence, have grown the business pretty dramatically by rebating a big chunk of the takeout back to those customers.  What has that resulted in? It has resulted in more and more racetrack customers saying, “Hey I’d like a slice of that rebate stuff too. That helps my bottom line.”   So that has led to more racetrack customers leaving the tracks and switching their allegiance to the SPMO services.  We see that basically at the end of the day that wagering is going up, but purses are going down. We look at the press releases that have come out over the last few years from NTRA and Equibase about the wagering on North American thoroughbred signals. Clearly the rate of growth on the wagering is outstripping what is happening on the purse side. We think that reflects the fact that it is the SPMO’s that don’t pay the same amount of purses for the wagering in relation to a track, and that is clear evidence to us that there is a move of racetrack business over to SPMOs.

Woodbine and Mohawk are bet on throughout North America, and that is where the changes have occurred over the last couple of years.  Within our own Canadian markets wagering has actually decreased slightly. The US has gone up slightly, but the SPMOs have enjoyed phenomenal growth. It would just be wonderful to believe that is all incremental business, but when you look at what is happening in our own markets it does not appear to be the case.

That is backed up even more by the fact that those customers that I am most likely to lose as a racetrack operator are my biggest bettors. They are the ones who are most interested in a rebate. I look at the wagering that occurred between the 2003 and 2002 models and I compare those big customers to my average customer in the Toronto market and I am clearly losing a lot more of their betting than I am of the typical type of customer. It must be going somewhere, it isn’t just a case of them deciding get out of the business all of a sudden in comparison to a normal customer.

So we clearly see a shift of wagering taking place. We do believe some of that is being poached away and we have evidence of that. We have customers who have come to us and said, “Hey I have been approached by a guy to sign up an account, right in your grandstand. He has shown us the rebate sheets they are offering.”  They clearly are enticing customers in your own facilities to sign up for some of those services.

To give you an example how expensive that can be, a single million dollar customer at the track, I mean if you earn seventeen percent in takeout, you would be earning $170,000 bucks per year off that particular individual. If he switches his service to an SPMO, where the racetrack at best gets five percent, you have lost $120,000 dollars. We can’t continue doing business on that basis. Clearly our approach at Woodbine is that we don’t do business with any entity that we believe is poaching our customers.

Some of the SPMOs are enhancing how much their customers win by providing some technological systems that typical racetrack customers don’t enjoy. The customer rather than the SPMO has developed the computerized handicapping systems to some extent. That may be justified in terms of an individual using his skill sets to enhance his own handicapping.

The place where we have a real issue is once they give them an edge that other racetrack customers do not enjoy, such as getting them into batch betting or bet streaming. Those are the services where a single SPMO customer can wager two hundred bets in a second. There is no way a racetrack customer can do that type of thing. He can’t analyze all the information at the last second and go and place two hundred to make sure he has the best chance of winning.

On new simulcast contracts nowadays, we require any SPMO to essentially stick to the same type of service that a racetrack customer can enjoy, which is about a single bet every second. If someone tells us that they want to operate services using computers we don’t want to know a lot more before we are prepared to let them into our pools. Once they are in the pools we will continue to monitor their activity to make sure that they don’t go back and slip in some new type of service that is giving their customers an edge over our racetrack customers.

So what about these skewed winnings? Well certainly it has been pretty interesting looking at the TRA settlement files to start identifying what these individuals are doing. We have only spent a lot of time on that particular topic because a lot of racetracks understand who they are.

But why should we care about it?  Everyone keeps on telling me, “Yeah but someone has to win.” Well when it is the same group of customers who are continuing to win, what they are doing is diluting the payoffs to the regular track customer. I am sure we will hear from some of the individuals on the panel today what some of those effects have been, but certainly it is pretty obvious that if all the winning money is going to one select group of customers at an SPMO, the rest of the customers at the racetracks are not getting the same amount of money. That means that over time you are going to start losing business. All this grow, grow, grow the SPMOs to provide new business is not true. They are actually going to cost you money. They are going to be taking money out of your regular customer’s pockets so that they may no longer be able to participate in wagering on any product.

How much are they taking out of our track customers pockets? We looked at the data for Woodbine product and to the Meadowlands. If there were no SPMOs in our pools, the typical racetrack customer would get a pay back of about $79 for every hundred dollars wagered.  That is pretty clear that is the old basis of doing business, an average of 21 percent takeout.  We know for sure, and it has been proven by the stats for 2003, that a typical SPMO customer only loses about five percent of the betting they put through their particular accounts. In some cases they win as much as 20-30 percent, so they don’t even lose money. They are already making money before they even start getting rebates. What that means is that if they win more of a portion of the pool, that your regular racetrack customer is getting far less. One to three percent less doesn’t sound like much, but it can be.

How many racetrack customers can afford to continue sending that type of money out of a racetrack over to a select group of customers at an SPMO? In the old days, racetrack customers used to fund tracks to the extent of $3 billion dollars a year. That is almost adding on an extra 5-15 percent. It is a huge amount of money, and it is not something we can continue to ignore forevermore. It is an effective takeout increase. Tracks are going through decisions as to whether it is a smart move to reduce the takeout to try and increase the wagering. Maybe if we cut the takeout, perhaps it will reduce the amount of rebating that can go on. At the end of the day, if you let the SPMOs into your pools and they win this amount of money, they can actually increase the takeout to your average customer by 10 percent.

What do we believe it is going to do? We believe it is going to take more and more of our regular customers out of circulation. We are not sure we can afford to do that much longer.

What should the tracks do about it? One thing we have to constantly take into account is we know customers follow where they get the best payoffs. They may not recognize it on a single day basis, but over a period of time your regular customers start appreciating where they manage to get the best dollars back for their betting. That payout is a combination of two things. One, what is the percentage of takeout that the track takes in the first place? Two, how many of the players that are playing in those pools actually have winning tickets? So, the more people who have winning tickets, the lower the payout. So when the SPMOs come in and have this huge percentage of winning dollars, in essence they are going to be driving your regular customers away from betting on your product. They are going to be taking so much money out of your regular customer’s pockets that they won’t be able to afford to bet on your product or any other simulcast product anymore. It is an extremely expensive option.

In the worst cases, and certainly we have now reached this stage, we will not do business with those particular entities. It is just too expensive now for racetracks to continue to ignore this. In a less severe case where the winning dollars are a little better than a regular racetrack customer, then maybe what is appropriate in those situations is just to consider raising the host fee to an appropriate level. This is where we have heard the claims, “Gee that is price fixing. If you are going to be raising the fee, then somehow this is getting into the realm of price fixing.” We say absolutely not. This is a case of racetracks needing to survive. They need to consider all of the facts that are going on out there and make a good business decision.

We have had a number of the SPMOs turn around and argue, “Well if you increase the host fee to us we’ll have less money to rebate and you won’t see as much betting on your product.”

Well, interesting enough, when we were doing business with the SPMOs over the last couple of years, we did increase the fee. We increased it by a third one-year and the business didn’t drop. The wagering wasn’t lower. Why do we think that is? At the end of the day those SPMO customers are still making money. And why is that? The SPMO customer doesn’t care what the takeout is on a particular product or what the host fee is. It does not impact on how much they wager. The critical issue for them is if they can make a profit after the rebates that they are being giving by the SPMO are factored in. That’s what determines how much they are going to bet.

In two particular examples, the SPMOs participating on Woodbine and Mohawk products last year had a takeout on average of about 20 percent. The SPMOs were losing on average about 5 percent of the bets they placed, so all the SPMO had to do was offer that customer a 7 percent rebate and the SPMO customer was still making two percent on every bet that he placed. That doesn’t sound like much, but when you bet millions of dollars, that quickly adds up into a large chunk of money again. It gets even better if you have a lower takeout product, because if you have a lower takeout product your prices will generally be higher. So those customers, those SPMO customers don’t even lose 5 percent anymore in a low takeout product. They can actually break even right off the bat. Therefore they don’t need that same hefty rebate anymore to get them into a profit situation. The SPMO customer didn’t stop betting on Woodbine because we had a twenty percent takeout versus another product with a 15 percent takeout. What it left for the SPMO was essentially the same amount of money at the end of the day. The SPMO didn’t care whether he was bringing in a signal at a 20% takeout or at 15% because after paying the rebate to the SPMO customer, we had the same amount of money left to split between the host track and the SPMO.

Now in our minds, we know the SPMOs tend to be very small cost operations. There are some that are different, but you all know who some of the critical guys are out there. That 13% should be split in four different proportions recognizing what the cost of operations are for a live horse racetrack versus an SPMO.

I am going to touch briefly on the other aspect of the payouts, the takeout. There has been a lot of discussion over the years as to what the appropriate takeout level is. Firstly, I just want to comment that takeouts have to be high. Horse racing is an extremely expensive form of gambling. Running horses around the track is not a cheap operation. The purses for the winning, the racing services, the facilities, they all cost a large amount of money and that has to come from somewhere. The customer has to pay for that. There are models that suggest that as takeout is reduced, wagering will increase. We don’t dispute that. What we do want to review today is just how necessary a takeout reduction on a guest track is. Ultimately that is where we believe the group that is going to pay for our takeout reduction lies. One thing to remember is if customers are paying all of the money to run a racing operation, you can’t have a situation where the customer is going to pay less and the racetrack is going to get more. It is a straight shift of money. The more one pays, the better the profits for the racetracks. The less the customer pays, the less money for the racetrack. It is a balance.

The models that we have chosen to present today represent Woodbine wagering where about two-thirds of our wagering takes place in our own source market and about one-third of the wagering in our live pools takes place in the rest of Canada or in the US.

If we follow the traditional churn theory whereby you take your takeout down by a single percent on 20 percent, you will see a churn of about seven times that. That shows that Woodbine would benefit if we dropped our takeout rate. Our revenues would be a percent higher. The bad news is that someone has to pay for that. Who do we believe pays for that? The guest tracks, as they own less commission at the end of the day, and the customers. Even though the customers are wagering more, the takeout still applies to that increased wagering. Therefore they will take more money out of their pockets for that reduced takeout scenario. Those who enjoy the best of all are the taxmen and the SPMOs, and we will come back to them.

The other model that I wanted to present was that in 2001, New York did reduce their takeouts. The states where the takeout reduction took place can be compared to what happened in Canada. In Canada, we have a separate pool and there was not a reduction in the takeout. Within the New York market, about 15% of the wagering in the pools, the almost $3 billion pools that occur each year, about 15% of that takes place at the host track. There is a major reliance for a lot of the major exporters, not just New York. A lot of the suppliers of live racing depend on the business at the guest tracks. If they do even better than the typical churn model, which appears to have been the case based on the 2002 results, we know from the press releases that wagering on New York went up 9.8% in 2002 compared to 2000.

So using the same model that we analyzed for Woodbine, we wondered who would benefit out of that particular scenario. Clearly what comes out of this exercise is it all depends on how much of that new wagering on New York was brand new wagering that would not have taken place at all otherwise versus how much of it would have come from betting on other products.

We know that customers do tend to follow better payout. They would have taken betting on the Woodbine product at 20% and said, “Well, I think I will bet a little bit more on the NYRA product at a lower takeout.” It is likely to happen, certainly not in a single day, but over a period of time those shifts will occur.

So that grade box under the NYRA would indicate somewhere between 100% incremental and 100% non-incremental. Either the racetrack customers are going to be spending more money, giving the tracks more money, both the guest and the host, or the guest is going to be earning less money. You can’t have it both ways. You can’t have customers paying less money and racetracks earning more money. It is a straight flow of funds. In the case of New York, it all depends on how much of that business was incremental to determine whether the guests were worse off or better off.

We love to point out that the taxman can’t lose here. If betting goes up, his share is a direct percentage of the betting. He is going to make more money.

The SPMOs, god bless them, also benefit here. As the betting goes up, as we saw from that model with a lower takeout, they don’t care because they can still make the same profit for their customers without paying as much of a rebate. Therefore the SPMOs are still left with more money in the event of a takeout reduction. If they choose to give it to their customers, then their customers are getting even richer than they currently are.

The host track benefits from higher host fees. As you saw in the Woodbine model, we could generate one percent more in host fee income.

We believe the group that is most likely to lose is the guest track operators. They are the ones who will see wagering shift from high takeout products to the lower takeout products. They will see lower income commission at the end of the day.

The customers are the remaining factor. If there was less money for the guest tracks, then maybe the customers did keep a little bit more money in their pockets, but this is not a great choice. For a host track to say, “Let’s pit the guest locations against the customer to see who wins,” we don’t believe that is the ideal model at all. Let’s try to grow our wagering through a different form rather than through the takeout reductions.

The good old Internet pirates, I have left the worst for the last. There was an article recently in the Trot magazine written by Daryl Caplain entitled, “Facing an Invisible Enemy.” It was really an interesting article. His research indicated that on about 2,200 sites worldwide, this is not just the Caribbean anymore, billions of dollars are bet through these particular services. There are online bookmakers, sports books, casinos, and bet exchanges, such as BetFair in the UK. In this article, it was great to see some of the comments by an operator of a Costa Rican sports book. That operator admits that he believes that 90% of the sports books operated in that area are pure scams. Even scarier is that he made money on 70% of every single bet that went into his pocket. You can’t cut the takeout and put an Internet pirate out of business. If you cut your takeout from 20% to 5%, maybe his percentage is going to go from 70 to 55, but he is still going to be making a fortune. These are very profitable operations. You can’t get them out of business by cutting your takeout.

Whose customers have they taken? Well, if it is a customer that is losing 70 percent of the bets that he has placed, there is a good chance it is a regular racetrack customer. What can we do about it? As a number of the previous panelists started discussing, we better make sure we keep our signal secure. It is not just what goes up on the satellite now, as in the old days, now we have to worry about signals going out over the Internet. Make sure the partners you work with that redistribute your signal do so in a secure environment. Start promoting the issue with your local regulators. Make sure they understand the threats that these operators have to the entire industry. Make your customers more aware. I have gotten phone calls from customers saying, “Well, if you don’t give me more of a rebate, I am going off to the islands to put my betting through there.” I point out to them that they do so at their own risk. I am going to keep that little quote that was in that article right there to read out to them every single time. Take your chances. You may put money into an account and never see it again.

The other obvious fact with the bookmakers is that they cap all the exotic bets. They cannot afford to take the risk that customers can enjoy huge payoff in a pari-mutuel pool. The other fact that we try to promote is that we do offer a convenience service ourselves and the benefit of all the funds coming out of customers wagering through our services go back into supporting live racing to continue this sport.

To sum up, we do believe that intertrack wagering business makes a lot of sense. However, it is relevant as to what the price is. We almost got into some situations at the end of last year where we could not afford to take signals anymore because of potential price increases. We truly believe after we deducted all of the costs of taking a bet in our own market, we were getting close to a 50/50 split of any commissions that were remaining with the host track. We can’t continue to give away those kinds of dollars and still make money. At some stage we would be forced not to take signals if we operate on that basis.

We think tracks need to respect each other’s territories. We remind the host tracks that those guest tracks are putting money into new distribution systems. Woodbine has started up Horseplayer Interactive. We are going out there and developing new customers throughout Canada, who now wager on many US signals. So the host tracks have actually benefited from the expenses that we are putting back into the industry.

Don’t do business with the poachers. Every customer that they steal from you costs you a fortune. Not just a one-off, every single year from then on. From our point of view, you don’t do business with anyone who is poaching your customers.

Determine for yourselves what you feel is a fair host fee for the SPMOs, because they depend on live racing. They have got to help fund the expensive cost structure of live racing. Changing of the host fee, recognizing the business environment that we are finding ourselves in, is not price fixing. Make sure your contracts create that level playing field for your customers. You don’t want to have your racetrack customers at a disadvantage because they can’t do bet streaming and batch betting.

Protect your customer. Again, if you are thinking about going through takeout reductions with the idea of shutting down the Internet pirates or cutting back on the rebates the SPMOs can offer, I say think again. The group that you are most likely going to impact is likely to be your intertrack partner, not the SPMO customer, not the Internet pirates. Do raise the concerns that are out there with the regulators and with your customers to make sure that they don’t take all of their business and just head off to the islands.

Mr. Scherf: We are going to encourage audience participation, but before I open the floor to questions, I would like to talk to our other two panelists first. Steve gave a practical demonstration of an analysis of Woodbine’s business, but also I think people look at it as sort of theoretical. What happens if you don’t have that kind of handle coming in anymore? Is there a real positive impact to the track? At Tampa Bay they have limited access to their pools to certain partners, and what has the result of that been in your practical experience at this point, Peter?

Mr. Peter Berube: Well, the experience has been very favorable from an economic standpoint as well as from our customer’s perspective. We went into this year’s meet with a theory and a concept that we wanted to try to balance our mutuel pools. They were out of balance because we let two sites into the pools the prior year. I will call these two sites A and B. We let them in last year with some reservations. Some people in our organization said, “What took us so long?” namely my simulcast director. She wanted these guys in years ago but we always resisted. Finally we let them in last year.

These sites generated some good handle, upwards of $100,000 per day combined and they paid a premium. They paid a higher rate than the standard three percent. Everything seemed well and good, but when we started looking at the numbers last year, we found out that these two sites combined wagered $7.4 million on Tampa last year. Their net contribution to the pools after takeout was $5.7 million. So far so good, but when you look at the winning dollars that these two sites produced last year, it was $8 million, $2.3 million over what they contributed to the pools. That is a 40 percent premium on what they contributed to the pools. That is unheard of in this industry. If you look at your normal settlement files on your everyday customers, what you see is a settlement figure that is one to two percent plus or minus what they contributed to the pools, nowhere close to the 40 percent that these guys were producing.

We looked a little bit further, and we looked at how many days they were winning. Each site took us approximately 82 days last year. Seven out of ten days they were winning more than they were contributing to the pools. Again, something is not right here. The biggest problem that we saw when we really looked at it was that they were winning over and above what they were contributing to the pools, but there was no increase in their volume in terms of handle. There was no churn taking place of these winning dollars, which normally takes place in your network. They were basically harvesting our network, our pools from our everyday players.

We said, “What is going on? We have got to stop this.” We asked three basic questions. How are they winning at this high percentage? Who are these operators? Who are their customers? How is this disproportionate winning rate impacting the rest of my network in terms of public perception, mutuel prices, late odds changes, and the churn of winning dollars?

The consensus answer, as Steve pointed out, to question number one is these are basically computerized bettors using sophisticated programs to look for pool inefficiencies, particularly in the exotic pools that people have a hard time analyzing at your racetrack. They seem to be able to gain an edge in the exotic pools. They can do the batch processing right up until the totes close to optimize their wagers. Some people would say, “What is wrong with this?” We say it is an uneven playing field and it is leading to an unbalanced network.

The answer to who these guys are, who the operators are, and who their customers are, that has proven to be more elusive. These guys are not heavily regulated like most everybody else, so I really don’t have a clear answer on that.

The answer to what the public thinks, it is all negative. The small-fish racing customer in your stands or at one of your network OTBs has zero appetite for depressed mutuel prices, late odds changes, and the perception of whether or not he is betting into an uneven playing field. The bottom line is these sites, up front, may generate additional handle, but if they are consistently winning at a level that is above normal for your network, they are upsetting the balance of the game.

Therefore, this year we made the decision not to business with these guys regardless of what price they were willing to pay us. We walked away from $7.4 million in handle and roughly $300,000 worth of associated commissions. Our primary theory was that by balancing the network, kicking these guys out, putting the network back into balance, we would increase our churn as well as the public perception of Tampa Bay Downs.

The result so far, after 57 days of our 93-day meet, to date our overall handle has increased by $35 million over last year. If you take into account the two sites that we kicked out, it is in excess of a $40 million increase during the first 57 days of our meet. In all fairness, I cannot attribute all of this to the policy.

This year, we reduced our takeout by about 4.5 percent. We took two-horse wagers down from 25.9% to 22.5% and we believe this has accounted for $10 million worth of growth.

Our average field size has increased also, from 9.3 starters per race to ten starters per race. We believe this has accounted for another $10 million worth of growth.

Additionally, we have increased the distribution of our signal, primarily in the NY OTB system, and that has accounted for another ten million. But the last ten million we attribute to not having these sites harvesting our pools and taking these winning dollars out and not churning them back through. It is really a pretty simple computation. If you take the $2.3 million that these guys won last year over and above what they contributed to the pools, multiply it by the industry standard churn factor of 7, and times it by the complete percentage of my meet, you end up with the ten million dollars. Those four factors have really accounted for our $40 million increase this year. We are very happy with the results. Some additional benefits that we have seen this year are zero late odds changes. I have not had one complaint about that happening this year.

Getting to the payoffs, this year our exacta payoffs, 95 percent of the time, equal or exceed the win-place multiple, meaning if you take the win price and multiply it by the place price, that is about what your exacta should be. Ninety-five percent of the time we are either equal to or above that. Our other prices, our payoffs in our win pools are up 17.1 percent this year to an average of $7.15 for every dollar bet. Our exacta payoffs are up 32% to an average of 131 dollars per bet. The tri pools are up 32% to an average $1,124 for every two dollars bet.

The intangible here is that we have had very positive customer feedback on this policy. They like the prices and results that are taking place. I believe we have made the right decision. I am not saying this will work for every track, but it has worked for Tampa this year. I think it was the right choice for our long-term growth. Every track that does sell their signal should be looking at pool dynamics to see if a similar policy can benefit them. One of the most valuable assets that a track has is access to their pools. Access should only be granted or denied based upon anticipated impact the network as a whole.  

Mr. Scherf: Chris McErlean from the Meadowlands, as a major simulcast exporter and importer, harness and thoroughbred, you have dealt with these issues from 14 different perspectives. What are your concerns and have you reached conclusions on what has happened and what should happen?

Mr. Chris McErlean: First I want to make a confession in terms of our current situation on this policy, we are addicted to the money and I think like a lot of brethren in our racetrack industry, once you get started it is hard to kick the habit. From our perspective, it is interesting to hear Peter’s discussion because everyone, especially larger tracks like us that have higher volumes, we are looking at this situation the same way Tampa did but on a larger scale from the dollars point of view. It is really a leap of faith in terms of what happens. The results at Tampa Bay Downs and Oaklawn Park earlier this year made a similar decision with similar results. It is interesting to see those results come about and we are very interested in them and are concerned in terms of short-term impact from our pool totals.

We have an average handle of $5.5 million on Saturday night about $3.5 million total day in, day out from our live total. There is obviously perceived values for players to be able to wager into those types of pools. The overall size of the pools is important, but as everybody is starting to learn, size of the pool is not all that matters. It is the quality of the pool and who is in that pool that is important and then how that pool is distributed. The issue may not be an issue for a small track, but it does affect your business.

Even if these particular organizations are not betting into your pools, if you are wagering on the Meadowlands, NYRA, other tracks that may have these participants in their pools, there are negative adjustments that are happening. We see it at the Meadowlands, again our volumes are much different than some organizations because we have a lot of in and out wagering, but our negative adjustments last year on about $530 million of total handle was close to ten million dollars that was shipped out of the Meadowlands. Going back over our history, especially for harness, we did have negative adjustments, but now it is more isolated where these adjustments are going.

We used to have the situation that Freehold Raceway used to be our biggest negative customer, mainly because that is where the horsemen are, in New Jersey, and you might say that is where the smart money was at that point in time, but certainly it was not at the levels that we are experiencing now. In New Jersey it was being recirculated within the state and had a good chance of being recirculated at our location.

The one thing that I have found very interesting that kind of shows you where the industry is headed is that these days anybody can get into this business. As you may have read in the Racing Forum, there was an announcement that a leading thoroughbred information provider is now hanging out their shingle and opening a rebate shop. Again, it just magnifies that we have created this upside down economic system. That may be a great outlet for them. I am sure if they are able to do what they think they can do, they are going to be generating a lot of handle and that might be to the benefit of a lot of tracks. For us personally at the Meadowlands it probably would not help because those are not harness players, but it is going to be a negative because as much as they say they don’t want to steal customers from the racetracks, that is not true. Customers are going to come from racetracks. They are going to come from my market and from Bill Nader’s market, specifically. That is where their market share is. They are able to provide this “service” to their customers based on the economic model that we have created. We basically have sold our product for pennies on the dollar and we have absorbed our costs on our economic model and they are able to sell our product basically cheaper than we can. In a way it has created a backwards system.

In the short term, it might be great for a track to have everybody go through a rebate shop. I pay NYRA three to five percent on the signal. It may be best if it all goes through a rebate shop on a higher percentage. If all the handle goes through them they are going to make much more money in the short term. It is going to suck money out of every market place. Everybody was afraid that simulcasting was going to be the end of live racing, that there would only be one or two super-tracks. It is not necessarily because of the simulcasting in that respect, but in terms of this economic model, it is very troubling from a large operators point of view. I think information is a good thing for the sport and some of the things that Steve mentioned from an operational point of view that computer programs and things like that are good for our industry in terms of access as our sport is an information based business, but the way it is being used now in terms of creating inequities and access for just a few select members is not correct and we have to do a better job in policing that.

In the short term, how do we replace and can we replace these dollars? These SPMOs or CROs contribute about 15-20 percent of our handle, an export handle of close to $800 million over the year from Meadowlands and Monmouth Park. How do we replace that money, or is it replaceable? Are we going to take a short term hit? I know everyone thinks in a short-term perspective. That is not unlike any other business, but I think we need to take a longer-term view.

As far as the theoretical results and some of the practical results have shown, it seems that there definitely is a benefit to looking at this closer and making changes in how that is done. I would think that many more tracks are going to be much more aware of this and you will potentially see much more of a shift in terms of how they address the matter. Everyone has got to do it individually. For certain reasons, it is not going to be done by one particular group, but I think as the panelists have shown it is one of the top two issues in the industry today. We are concerned. We are standing at the edge looking down, and seeing whether there is water in the pool and whether we want to jump in or not.

Mr. Scherf: I have a question. If you look to the future and we continue on this business model, is there any reason to believe that you won’t continue to have enormous growth in rebates, people going into the rebate business and offering this to the public, and if so, the question seems to be, can we afford to cut off rebating or minimize it or can you afford not to? I am wondering what you see for the future if we continue down the same path. Is it going to grow? I mean it seems that fans are not stupid, why would they pay more when they can pay less?

Mr. Mitchell: Good question. Certainly if the current trends continue in terms of those who are offering the rebates are not the racetracks, then more and more track customers are just going to move their business over to whoever is rebating. On that business model, racing is in trouble. 

Mr. McErlean: We offer incentives to our top players through a rewards program based on wagering and we do that within our current economic model. We can offer a certain amount of money or points for merchandise, and we can do that within our current economic model after we get done paying our infrastructure costs, our purse costs, whatever is left coming out of our profit. So, I don’t want to sound like I am talking out of both sides of my mouth that rebates are bad, but the model that we have created for outside of the racetrack is certainly one that has to be addressed in terms of the ability for other places to have a better competitive advantage over the producer of the product. Until that is taken hold of, you are going to see more of these operations. As long as they still have clients who want their product and they can offer it to them at that type of pricing level, you are still going to have them.

Mr. Berube:  Well, over at Tampa, we have been fortunate to pretty much get rid of the rebators out of our pools. There might be one or two left in there. The one thing they have done is open the eyes of the racetracks to become more aggressive in rewarding the players. If the rebators had never shown up, it would have been business as usual and the players would not be receiving the benefits they are now from the racetracks. It is incumbent upon the racetracks to continue to tweak their rewards program and educate their players about the economics of the game and the perils of going to these rebators, and also try to give them a good product and to service them and give them the rewards that the marketplace dictates.

Mr. Scherf: A lot of this is a pricing issue and I don’t think we should confuse the two, should be more creative with pricing. Are rebates bad or reducing takeout bad, or is it just the business model and the return that you get from this that is the problem?  

Mr. Mitchell: The host track itself, like many industries offering incentive programs and rewards, air miles, or whatever else, at the end of the day the entities that should, if there is anything to be done out there in terms of pricing for particular customers, volume pricing, offering that as the operator of the live race itself, they are the group to actually offer that. It is not up to a third party to take your product and start undermining and stealing your customers using that same particular game.  

Mr. McErlean: I think there is definitely going to be a greater examination, not singling out these organizations, but just in general there are some organizations that enjoy a greater percentage advantage than the host track, so maybe adjustments in their rates are in line as well. Some places pay very little taxes or purse fees at their host tracks or in their local market places. Should they pay a higher fee as well in terms of if they are not bringing back to their local markets some sort of fair percentage or the same percentage that the sending track is paying for their signal, should their percentages be raised as well? That is something we have looked at in addition. It came into play in a lot of the dog tracks and Indian casinos that we were dealing with over the past year. 

Mr. Scherf: All of your tracks are both exporters and importers, but now if we just talk about your on-track fans and their betting patterns, what percentage do they bet on your live product, what percentage do they bet on imported simulcasting? I think most tracks have had the wonderful experience of having fans sitting in their stands using account wagering of some kind, whether with rebators or somebody else, and then betting on one of your imported simulcasts from which your cut is absolutely zero. Getting to the question of tinkering with takeout, it is really the guests who are going to pay the price somewhere along the line and even in terms of churn with all the negative settlements, if you are feeding negative settlements for another track, there is an enormous thing, depending on how big the percentage is of your on-track patrons betting on imported simulcasts. Does anybody know what it is at your track, the breakdown of live races versus import simulcasts? 

Mr. Mitchell: At Woodbine, the on-track customers bet about 1/3 on live and 2/3 on simulcasts, a pretty significant chunk of money on the products. As you said, if they are betting on those products, which they often do in Canada, directly into a US pool, around us, then clearly we are not earning any money anymore. 

Mr. McErlean: Our percentages are about the same. I am sure we have all had the same experience of observing individuals doing that. In some cases they are horsemen or people involved in the sport, which once you let them know if they are betting on another track they are not going to get any of that back on their purse account it kind of opens their eyes a little bit. Again, some of that education on some of those issues is certainly very eye opening and it kind of makes you think about where we are going with it.  

Mr. Scherf:  Peter, at Tampa what is your percentage? 

Mr. Berube:  Our percentage is 60% on the live and 40% on the imported simulcasts. I have to agree with Chris. I mean, I have had an experience with a large bettor at Tampa who came to me with the rate sheets and said, “How can these guys do this? Why can’t you do this?” It is just a question of sitting down with these people and trying to educate them on the economics. Most of the time some of these larger bettors are part of the industry. They are either owners or trainers, and they need to be educated just like the rest of us out there. 

Mr. Mitchell: This year, we stopped doing business with a number of the SPMOs. In the past we have seen big bettors disappearing. Pretty soon after the change, we have had one of our biggest bettors come back into our fold, so there is clear evidence. You won’t see an immediate short-term fix when you do change your business activities, but in the long run we believe you are going to be better off.  

Mr. Berube: Steve, we had the same experience. This bettor that I was speaking of before, he left Tampa for three or four months. We continued to communicate with the person, continued to try to educate him, and he came back and is back to the level he was at prior to leaving. So it is just that education process with these guys. 

Mr. Scherf:  I have one more question then I will open the floor to questions and comments. Should we be differentiating between the issues of rebating and computerized wagering? Are they two different problems, one more serious than the other? 

Mr. McErlean:  It depends on defining computerized wagering as well. As Steve mentioned, our sport is perfectly designed for the use of information. When that information is then used to create an unfair advantage in terms of getting the bets in or streaming the bets or direct access to the tote, which a customer on track or betting through one of your other distribution systems does not have, that is where you run into the issue. I would love to see if we could offer on-track the abilities of value play through the tote system, or have some handicapping systems available for players. I think what Steve was getting at was the access point of view. That is really where the defining line is. Rebates are off to the side. That makes those type of systems much more valuable and profitable. Those systems make your edge a lot better and then the rebates put you over the top. Within the computerized point of view, access and how those are used. 

Mr. Scherf: I think when we are talking about computerized wagering, I just want to clarify, we are not talking about using computers to help handicap, we are talking about a computer that has a handicapping model in it and is geared towards getting value plays. It will dictate the bets and it also is sort of what negates the churn factor there. If the maximum value bet is an $11 exacta on this combination, or $13, it does not react like a normal patron, who if they just won $2000, they step it up. The computerized wagerer, if the model comes out and says the value is an $11 bet on this combination, that is what it is, so it does not react in a normal churn fashion. Any questions for this group?

While we are waiting, let me ask, is the issue the same for harness and thoroughbred or is there more impact on one breed than the other with the computerized wagering? 

Mr. Mitchell:  The data we have analyzed between thoroughbred and standard bred as far as the SPMO participation and the extent that they win is almost identical. 

Mr. Berube:  I think probably the pool size is the biggest determining factor.  

Richard Jacob, Flamboro Downs: A question for Peter, if I may. Once you made your decision to exclude the people we are talking about, how did you communicate that to your patrons? Were you proactive in that sense and was it framed in the context of being an integrity issue or protecting the public, and did it make any difference if you did that?  

Mr. Berube: We did communicate it to our public in terms of press releases, and in our newsletter we let the public know that we believed they were going to see higher prices this year because we were not letting these places into our pools. Again, I sat down and went through our theory with some people that could communicate this message to the masses, and it seemed to work. They came back and gave us a lot of compliments from day one when they started seeing the prices and what was taking place. 

Mr. Scherf: Before we go, because this is a touchy subject, and I have heard it before, “the pirates of the Caribbean,” I want to say when we are talking about rebate places that these people all have contracts. They are not doing anything underhanded or sneaky. We are talking about whether it is good business or bad business long term for the host tracks, but they all have contracts that have been approved by the racetracks, the horsemen, and the commissions. The Internet bookmakers or other bookmakers might be called the pirates of the Caribbean, but when we are talking about rebate people, they did not sneak into our pools. We have signed contracts with them, so I don’t want them to have the connotation that somehow they are doing something illicit there.  

Jerry Bouma, Alberta: Steve, I appreciated your analysis, and Peter, you really drove the message home in terms of the specifics. I guess the issue I see is that the issue is not rebates or whether we should be charging higher fees, the issue is an uneven playing field. When you have certain bettors that can earn 40%, and you demonstrated that rather clearly, where the normal return is one to two percent, we have an enormously inequitable situation here. Are we not measuring the wrong things? Just having a higher handle, big deal. If you have 7.4 on your case and you are paying out (8 million), that is just poor business. Does it not behoove the tracks to analyze their customers and say for those that are earning enormous amounts of return that has got to be dealt with? If that is not dealt with, it is like insider trading big time. The whole house is going to come down. 

Mr. Berube: That is exactly what our theory was and that is why we did what we did. We looked at it, we studied it, and we said, “This is wrong. There is a problem here,” and we corrected it this year. We took a leap of faith. It was not easy to walk away from the handle and the commissions, and I am sure it is a lot harder with the larger tracks, but we did it and I hope others follow suit. I think it is the right thing to do for the industry. 

Dick Feinberg, Pompano Park: I find Chris McErlean’s ambivalence on the issue a little intriguing. By example, we have a big bettor who predominantly plays the Meadowlands. Now, until a few months ago 100 percent of his action was coming through our windows. He has since been wooed away by one of the rebators. Like I say, 90 percent of his action was on the Meadowlands, with ten percent on Pompano and the others. As long as he sits in my building, I think Chris might be better off because of the arrangement of what he is deriving from this player. But, about the middle of April when he gets in his car and drives to New Jersey, sits in his grandstand, and is on the telephone with 90 percent of his action, then I think maybe it becomes a little different issue. I am just wondering how we are going to work through those things. 

Mr. McErlean: Multiply that issue by hundreds of thousands. I would not call it ambivalence. It is something hopefully people understand and I think based on all the discussions that are going on that this has risen to the top as the hot-button issue. In our eyes, from the standpoint of the customer being lost to a host track or a pari-mutuel track that is also supporting racing, we need those markets. We need as many markets as possible, but it is also in our best interest to have markets that also support live racing. When the gentleman makes the bet at Pompano that is supporting not only a percentage of money to the Meadowlands, but a large chunk to Pompano and the Pompano purses. When he makes the bet now through this new organization, Meadowlands will get a fee. I have to split half of that with the horsemen, and it is probably less than they would get if the bet was made on track or that we would get on track, so it is a leap of faith and it is something that tracks will be looking a lot closer at. It also comes into play that at this point that I have not felt the impact of that. It is not in my backyard yet. I know it is in my backyard maybe with other players. This is not going to cause a crashing halt to the business in one day, but it is going to be a gradual chipping away. I mean, we see the money room adjustments, we see the players being moved from our location somewhere else, or staying at our location and not making the bets through us. It is chipping away at our handles and our economic model, and it is going to be sooner than later that more places are going to have to really make a firm decision on it, but it is really difficult in the short term to give up that fix. I go back to that it is a fix and it is tough to give that up, and whether there is a positive result out of it, a lot of people are going to have to try it and see what happens. 

Karl Schmidt, Churchill Downs: I guess I will direct this at Steve since he is the one that addressed it. The computer betting, are you suggesting it is a bad thing in and of itself, or the fact that it is not available to everyone? It would seem to me as if we would want to welcome technology into our game as much as possible. 

Mr. Mitchell: That is correct. We do want to encourage the technology and that is why we don’t have a problem with the computerized handicapping systems. What we have the problem with is the uneven playing field in terms of those customers then taking that same system and gaining a huge edge by putting through masses of the best bets they can possibly make. We don’t have a problem with the computer selecting those bets; we have a problem with the customer in the SPMO situation then placing all of those bets in a much better fashion than a typical racetrack customer. That is where we need to take the action. 

Mr. Schmidt: So if we were to provide that type of a system to everyone, then that would be a good thing? Is that the logical leap? 

Mr. Mitchell: If it were available to everyone, at least it is a level playing field.  

Mr. Schmidt: And not that everyone would choose to bet that way, but if you had a place that you could plug and play on your racetrack for customers that chose to do that, the computerized betting would be a good thing? Is that where we want to get? 

Mr. Mitchell: If everyone bet on that basis, there would be no point of putting any odds up on the board because there would not be any other than the morning line until one second to post.  

Mr. Schmidt: There are a lot of stock transactions that are done that way, but not everyone chooses to do it that way.  

Mr. Mitchell: The bottom line is if 99% of the customers all did it on that basis, there would be no point in having the system because you are not going to get an edge at that stage. If everyone is waiting until the last minute to analyze what has gone into the pools, then you can write off the benefits of having the system, period. 

Mr. Schmidt: I guess I am just having a hard time with discouraging the use of technology.  

Mr. Mitchell: I am not trying to discourage the use of it. What I am trying to say is that if you are going to use it, you need to use it in an environment where every customer can benefit equally.  

Mr. Schmidt: The second question is regarding when you were suggesting increasing rates to the SPMOs, how does that help the customer?  

Mr. Mitchell: What I do believe will happen over time is that if there is a higher fee charged to the SPMOs, those where it is warranted, and certainly at least the live racing is being funded fairly by those same SPMOs. The current basis is certainly not the ideal model at all. 

Mr. Schmidt: I want to thank the panel for some very good thinking.  

Mr. Scherf: I want to join in that and I will say there was one vital component to our industry that we did not address on this panel, and that was on purpose because it is the next panel, and that is the customer. David Wilmot will chair that. We have some of our players and they have a stake in this debate, so we will hear from them next.