Rebates and Takeout: Can
Racing Satisfy Its Biggest Customers and Still Survive?
Mr. Stan Bergstein: The next panel is discussing rebates and takeout and the issue is can racing satisfy its biggest customers and still survive? We have two of its biggest customers to answer the question from the customerís point of view. Maury Wolff is not only a player, but is an economist and a former executive assistant of HTA. David Cuscuna is known as one of the most intellectual players of the game in the business. David Willmot is Chairman and CEO of Woodbine Entertainment. Bennett Liebman is a former member of the New York Racing and Wagering Board and now is teaching racing law at the University of Albany Law School, and is also well known as a commentator and a writer on all racing subjects. For technical guidance on the issue, I have asked Steve Mitchell to sit in on this session. To start it off, here is David Cuscuna.
Mr. David Cuscuna: Basically I am going to start off by saying that rebates help your business and make your racetrack and horsemen more profitable. You are better off as a racetrack with the current structure than without it because, as I am going to try to show, it brings new money and new revenue into the business.
The first way I am going to do this is by showing a computerized pick six program that I run when I am betting into carryovers. There are going to be a lot of numbers on the screen, but the way it works is I put in the odds on the horses, how much is in the carryover, tell the computer what kind of return I want on my bet, and the computer tells me how much to bet. Now this first thing, the key number to look at here, or two key numbers, is what I am circling around with the mouse. I am asking the computer for a return of $1.01, and if you look down to the bottom box, it tells me to bet 1,078 $2 tickets into this pick six, a total of $2,356.
Now, what would happen if I were getting a rebate? Suppose I were getting a $.09 rebate. I could then afford to run this program down to $.92 on the dollar because the nine-cent rebate would get me to the same point. Well, in that environment, at 92 cents, my program tells me to bet 6,719 $2 tickets, a total of $13,400, almost six times as much money.
So, the point I am trying to make is that as a big player, I am very sensitive to the rate of return. Just as a point, if I ask for a much higher rate of $1.14, my program would tell me, ďNo favorable bets today.Ē I donít think as a racetrack operator, you want it to say that.
Another example of how rebates create incremental sources of revenue is from a large bettor named Tim that has gone on the record in a magazine. He has published his handle. When he was betting without a rebate, he bet $3.5 million in 1999. In 2002, with a rebate, his handle was $24 million. In 2003, it was $27 million. Again, another huge difference.
There is also a guy on the NTRA players panel with Maury and me that bets and he plays a couple of tracks, but he also gets picks from a computer program to bet on tracks that he never would have looked at. He takes those picks and has generated $918,000 in handle at what he says is an eight cent on the dollar loss, but he gets a nine cent rebate, so he makes himself nine thousand dollars and generates 900,000 dollars in extra handle.
Another example of incremental handle is that a per capita daily handle at one rebate outlet shows constant and steady, now remember this is per capita, so it shows again how the amount being bet per customer continues to grow, lower prices, people bet more money.
One of the issues that has been discussed today and previously is the issue of handle being up and purses being down, or handle up one percent, purses down one percent. I am going to present a little bit of an alternative scenario, but first I want to show a little bit of history, and that is the California handle on-track by fiscal year going back to 1990-1993. What you can see almost looks like a downward staircase of continual three to five percent declines. This decline started on this graph well before the advent of rebates, which didnít come into being until the mid-nineties. Probably if I had the data, you would find that this decline would go all the way back to the decade or two before that. There was a trend of people moving off track before rebates when simulcasting came into play. I can speak for myself personally, my business left on-track for simulcasting outlets due to service and convenience issues. It had nothing to do with money. The interesting thing is, looking at this graph, can anybody show me exactly where all the handle left California to go to the Nevada casinos when they started paying rebates, and when California shut Nevada off, where did it all come back? So I think what happens is you have an industry trend of slow decline and people want to blame it on one source or the other, but the reality is it is just an industry trend.
Now the alternative scenario that I want to present to handle up one percent, purses down one percent, is if you take the rebate money, most of which is new money generated by incremental wagering and new people in the game, you might get this headline instead, ďHandle down ten percent, purses only down four,Ē and I donít think as an industry that we are better off with that scenario.
Another thing I want to mention is, are we really sure that handle is up? Somehow it seems like tracks report live and simulcast handle in different ways so they can be double reporting. I would think as an industry that we need to have a much better database, one that is accurate and verifiable so we know exactly where the numbers are coming from.
Another issue that was discussed this morning was the issue of commitment to live racing and that the rebate outlets donít have the same commitment to purses or commitment to live racing that the tracks do. If you look here, these are host track fees paid by only two rebate outlets since the year 2000. Now you are looking at a number of almost $150 million. A good portion of this, probably close to 50 percent is finding its way into the purse account. When you say you donít have a commitment to live racing, the fees paid on the high handle sure seem to indicate otherwise.
What we are really moving towards is a changing model with simulcasting and new distribution channels. There is a trend not just for gamblers, but also for racetracks to be moving to higher volume and lower margins. A good example of this, and a track that has embraced it successfully is Mountaineer Park. They didnít export their signal until the year 2000. Handle went from $19 million in 1999 to $200 million in 2001 to over $300 million in 2003. Rather than eliminating or cutting off the rebate customers, they have embraced them, and because of this there have been many winners.
Horsemen are getting larger purses at Mountaineer Park. Remember this is purse money from betting handle only, it does not include anything to do with the slot revenue there, you can see it has gone from $3 million up to almost $8 million. It has gone up about 2.5 times. Horsemen have done well. You say, ďWell, has this come at the expense of the live handle?Ē It has always been an issue about if there is cannibalization. Well, at Mountaineer Park, if you look at the live handle, you can see that it has gone down by the same three to five percent that you saw in California and probably a lot of other places, yet the handle just from three rebate outlets in this period of time has had dramatic increases to the point where it exceeds the handle at Mountaineer Park before they started exporting the signal.
So rebate handle growth is not a myth, it does not always come at the expense of live handle, it does add new money to the game. The interesting thing about Mountaineer Park is, like Tampa, they have benefited from an expanding distribution network, but by embracing the rebate outlets, they have created much more money in host track fees for themselves and their horsemen.
Again I just want to say that a lot of these dollars are new dollars. Originally I had prepared this for a group involving horsemen, but what this shows is rates versus revenues. Now the numbers that I used, that percentage to purses of 4.89 was based on the optimistic California ADW rate, which in reality a lot of off track bettors are betting into something where the guest site is paying a three or four percent fee, so a lot smaller percentage is going to purses. But, again, looking at this model, the amount of extra handle generated due to rebates just generates a lot more revenue. You can see the revenue produced by Tim on his incremental handle is $675,000 versus $171,000. On that one pick six example that I showed, it produces $336 versus $115. It is at a lower rate, but it is more revenue. Of course the program bettor that was not betting those tracks before, his $918,000 brings more money into the pools.
There are also a couple of large computer groups that were not in the business a few years ago, that have brought a new source of handle into it. I used to be an options trader, and in that world, when people came in to do program trading, they were embraced because of the new source into the business, rather than it seems like in this business they are being pushed away.
If you need one more piece of evidence that the money is new, think of the issue of the late fluctuations of odds in the tote board. This did not happen a long time ago. Obviously, it is the result of new significant money. It is not money that is just coming from a racetrack.
Finally, the last thing that I have to say is that if you operate a racetrack, you should probably ask yourself if you are better off selling your signal at two or three percent to a large OTB network or a casino and having unions and operations cost, pocket the large profit margin between the rate and the takeout, or are you better off selling that to a rebate outlet at five percent and having that margin put back into the customers pocket that is likely to repurchase your product.
Mr. Bergstein: Without objection, I am going to suggest that the format be that Maury speak next, David Willmot then gives his response or his opinion, and Bennett Libemanís role in this panel will be to suggest a formula for rebates at racetracks that he thinks it is a proposal that racetracks could work with. So if that suits you all on the panel, Maury, you are next.
Mr. Maury Wolff: Thank you, Stan, it is a pleasure to be here and to see everyone again. When I started working for Stan close to 20 years ago, what got his attention in the first place were some articles I wrote about takeout elasticity in horse racing, namely that I thought that horse racingís prices at that time were considerably higher than they should have been if you did an analysis of optimal pricing.
At the time, once I got involved in the business, I became quite aware of why it was that this was true, namely because of racingís former status as a monopoly business and the regulatory structure that was left over from that status as a monopoly business, that racetracks really had no flexibility on prices, indeed that they had the worst pricing model a business has ever devised. Nothing I saw in the time I was with Stan and nothing subsequently, changed my opinion on that. This was a business that had almost no control over its pricing mechanism.
Few situations existed where racetracks could actually go through the cumbersome procedures to lower takeouts. Then along came simulcasting and along came the new methods of distribution with relatively low prices charged to the tracks simulcast partners.
As one of the laws of economics will tell you, if you try to sell a product to one person for ten dollars and another person for five dollars, the guy who is being charged ten will sooner or later figure out that he can make a deal with the guy who is being charged five. That is what happened in this business model, and suddenly because of something that was no part of the industries design, we had the emergence of rebates, first in Las Vegas, later in other places, which changed the business model for at least a few patrons.
The question is does price matter? I think we have seen that price matters a lot at least for a certain group of patrons. As Dave said, the two computer groups that get all the attention were not getting attention before rebates came into existence. The tote boards were not going down the way they go down now. Those people were not existing racetrack customers. If they were, they were on a much smaller scale. This is new money. As Dave was showing with that example of Tim, there are certain players at the high end that are extremely responsive to changes in price. He is probably at the tail of the curve in terms of how responsive, but these guys are out there.
I have certainly heard from enough racetrack people that it does not matter what takeout you charge, the guy with his $200 is going to bet his $200. Well I think you can look at a billion and a half dollars of rebate handle and it is just not true. That is just not the way racetrack customers are any more than it is the way that customers in other businesses are. There are different price sensitivities throughout peopleís experiences. You know that in your own lives, you know that in the lives of your girlfriends and wives, that people respond differently to price changes in different times and in different circumstances.
The other thing about rebate customers, we believe that there are fewer than one thousand of these customers according to some research we did as part of our players panel study. You have a relatively small number of people betting a lot of money and it is the most price sensitive people that ended up at these shops. We donít think they are the only answer. In other words, people bet a lot of money in different frameworks. There are people who are very successful businessmen, people who own horses, and so forth, who really are not that bottom-line oriented and who are perfectly happy to go to the racetrack and if you just give them the kind of customer service they expect, they will stay good customers. The people who have been the most attracted to rebates are the people who are trying to make a living betting horses. For those people, these margins are very important. If you are betting ten million dollars a year, or if you are like Tim betting $30 million a year, one percent is a lot of money. These are the kinds of people who have been turned from people who were making a living, but maybe not a great living, to people who are betting a lot more money taking lower margins and making a better living. Everybody is winning. They are betting a lot more, so handle is up. They are betting a lot more, so that money is going to the purse account. The rebate shops are often paying more than other people are for signals and this is just a win-win situation for the player and the business. It may not describe everybody, but it certainly describes a subset of the active rebate population.
Finally, I would just like to make one comment about Peter Berubeís presentation. When I see takeout rates of the kinds that Tampa charges, as a customer, I donít think that is a business operator who is looking out for my best interests. When I hear someone with those takeouts tell me he is looking out for my best interest, my reaction is to reach for my pockets. Those are extremely high takeout rates and if I were playing Tampa, I would not feel terribly protected.
Mr. David Willmot: Stan, I am not sure how you got me on this panel, but I feel like I am on CNN Crossfire. Just as an opening comment, this is a very broad issue and there are at least ten subsets to this issue. Is it new money? Is it shifting money? Is it 15 or 18 percent dollars becoming three percent dollars in terms of income to the tracks and the purses? Is horse racing a viable business? Does it have a right to charge a price that pays for the cost of production? Is the player guilty of narcissistic entitlement? I am, therefore I deserve.
I would like to buy a Mercedes for ten thousand dollars, regardless of the price of production. Mercedes at the moment is not foolish enough to sell it to me for that price, nor are they foolish enough to sell it at a third of their cost of production to a rebator who is going to sell it right back into the Mercedes dealerships markets at a fraction of the price that the Mercedes dealer sells the car.
We all, as consumers, would like to buy our product at the cheapest possible price and have the greatest choice of that product. As we said earlier, horse racing is an expensive activity. It is the most expensive means of determining a winning bet.
Horse racing has had an unbelievable ability to operate in an environment of unreality. We were completely unrealistic about the coming competition in the 1970ís and the 1980ís, which is why there was a trend line of dropping handle. We did not respond to it. Today we are completely unrealistic about the pricing and distribution structure in which we are operating as it relates to the cost of production of the product. The last time I walked into a casino, I did not walk up to the manager and say, ďIf you will change the rules of the blackjack game, I will bet more money.Ē Casinos are infinitely more profitable than racetracks, but I donít see the players all saying, ďI want the rules changed. I want your whole pricing structure changed, and I will bet more money.Ē Of course, I think that is true with anything, but as a wise businessman once said to me, there is no sense increasing your revenues if on every unit you sell you are losing more money.
Racetracks are among the worst businesses in the world. On a basis of return on investment, return on capital employed and return on equity, they are not profitable businesses. We talked earlier about all the expenses that go into horse racing. If you take out the box seats, the ticket sales, and the TV revenues for Churchill Downs on Derby day, I can tell you they are not a viable parimutuel business. We have all seen Magnaís last numbers. I defy anybody to show me a pure parimutuel wagering operation that is a racetrack and say it is a great business and that is where they would like to employ their capital. Racing has been here a long time. In many ways it is not competitive with other forms of gaming, and we all recognize that.
What can we do to reduce the costs? As businesses, we have all tried, but there are purses to pay. Horsemen in general, their expenses are higher than the purses they are paid. What we have here is a money shifting issue. I hope we can acknowledge the players as well, the customers, that the industry must make enough money to pay for the cost of production, and on top of that, a small profit margin where possible so that the capital employed will remain employed.
Davidís comments about handle up a little bit, purses down, the NTRA is announcing today a formation of a wagering systems task force to deal with that. Whether you want to call it leakage, redirecting money, whatever it is, if you take out the slot money contributions to purses in North America, it is more like wagering up one or two percent, purses down ten percent. Conveniently those purses reflect a large amount of slot money in them, which is a different form of income. What we have is a shifting dollar. We have movement, there is some new money in terms of the rebating shops, and there is a lot of redistributed money that was previously on track or within track distribution models money at high takeout levels. I would argue that takeout levels are perhaps too high, and I donít think any of us doubt that lower takeouts result in greater churn and handle. Regarding moving customers, I heard the fellow from Youbet up here earlier say, ďYoubet customers, who are they? They are all ex-racetrack customers.Ē They have just shifted and the dollars have shifted. The 18 percent dollar has become a three percent dollar to the racetracks. That is why purses are down and racetrack income is down.
What we have to look at is a pricing structure. We have a player reward system at Woodbine. I can tell you our very biggest customers get ten percent on win, place, show bets. On win, place, show, we are as low as ten percent takeout. Why donít we go down to where the rebates are at 5 percent? Because below ten percent, given the cost of processing the bet, the cost of operating, purses, and everything else, it does not make any sense for us to take that bet. I must say we have thousands of account holders who benefit from player rewards. We believe in player rewards and we believe in racetrack operated account wagering, racetrack player rewards, and lower takeout as a general statement, we believe in that. What we donít believe in are opportunistic, parasitic operators that have come into this business and now claim that these are their customers, and say that they are doing us a service offering a Porche Boxster to one of our biggest customers to move his wagering over from about 12 percent on our player rewards program to three percent. As Chris said earlier when we were talking about the pirates of the Caribbean, they are not doing anything illegal in the sense that they are coming into our pools, but when they walk onto our racetrack and overtly poach racetrack customers, it may not be illegal, but it sure is unwelcome. We as an industry have got to address that. What we should not be having is dollars going out to opportunistic, third party operators who donít operate racetracks unless they pay an appropriate price.
If you take a business like the car business, where obviously the reason you canít buy a Mercedes for ten thousand unless you bought it out of a container because it was stolen somewhere, is because Mercedes does not sell that hard product for less than the cost of production. They wouldnít, they donít. We are like the music industry. We have a soft product, but we have one advantage over the music industry, we at least have access to our mutuel pools as something that is going for us. The benefit that we have is we have our parimutuel pools, which the big players need access to in order to get their payoffs, and the rebators need access to.
What we are doing wrong is we are taking an antiquated, self-defeating distribution and pricing model and we are selling to the SPMOs with the subset of what are called CROs (cash receiving organizations) which are the ones that constantly win, usually because of the computer arbitraging programs or the batch betting and that sort of thing. We are fools as an industry to be selling to those organizations on the same pricing structure that we sell to each other as racetracks. In no way are we reflecting the cost of producing the product as we reflect with each other when we do intertrack wagering. Why on earth do we allow four or five points to be taken out of the betting dollar and put into the hands of an opportunistic third party operator? I mean, Maury, if you want to come and start betting through our account wagering system, I am sure we can do a hell of a deal for you. But why on earth we would sell to a third party operator at three or four percent so that he can charge Maury the eight percent and pocket four or five percent in the middle and then claim that he is a legitimate member of the parimutuel community and has a right to exist, and is going to sue us if we engage in price fixing, is ludicrous. It is a self-defeating distribution and pricing model that we have today.
I believe the big players are entitled to a special rewards program or net takeout adjustment. That is the reality of volume discount. What we should not be doing is allowing this to be happening through the rebate shops on a pricing model that is making a bunch of guys who have no investment in the industry, compared to the investment that we have in the industry.
Again I say that the redistribution of these dollars, if in fact the income on those dollars wagered is being reduced, the income to racetracks and to purses is being reduced, while the volume of handle is going up, then we are an industry that is losing money with every additional unit sale. Increased handle, David and Maury, is not in isolation necessarily a good thing, nor is your ability to buy at the lowest possible price necessarily a good thing. What is a good thing is for horse racing to try to service our biggest clients with the least takeout that we can afford to provide you and still remain in business.
Mr. Bergstein: I am not sure if those positions are reconcilable, but is there a way out? To answer that question before I give Maury or David the ability to respond, Bennett Liebman thinks there is a way out.
Mr. Bennett Liebman: I am the comic relief part of this. I think we need a break, so I will provide the comedy, I hope. I want to thank the HTA and the TRA for having me back here and I promise not to take up much of your time. As we have seen today, rebates are an especially major topic for racing. I think we need to compliment Maury and Dave for their work in this area. Think of it. They are major, highly skilled bettors wagering with rebate outfits. Most people in their positions would join what I would call the ďDonít say a word school.Ē They would hide, recognizing they have a good thing, and they would stay far out of sight. Instead they have gone public and have as much as possible documented the issues and the extent of rebates. They need racingís commendation and not its condemnation.
Now while rebates are a serious subject, there are numerous reasons not to take me seriously. First of all, I was a racing commissioner for over a decade. As my chairman well knows, in the course of recorded human history, nobody has ever taken a racing commissionerís point of view seriously. Secondly, I work as a teacher in a law school. Everyone knows that those that canít do, teach. Third, before I became a racing commissioner, I basically did legal ethics work in state government. Everybody should know that in law, those who canít practice, practice ethics. So my views on racing are thrice damned. They are, in the words of Hamilton Berger, the losing prosecutor in the old Perry Mason show, ďIncompetent, irrelevant, and immaterial.Ē Worse for racing in this case, my views are undoubtedly naÔve.
I can confess to a limited role in the birth of the rebate system. Nine years ago I was sitting at my desk in downtown Albany when I got a call from one of the higher-ups in the state division of the budget. He was ecstatic. Wonder of wonders! They had a friendly, productive meeting with the New York Racing Association. When the issue of takeouts came up, the NYRA guy said, ďWe raised them in Florida and nobody knew the difference.Ē
Based on this wonderful understanding, the legislature raised the takeout at NYRA. The larger NYRA bettors complained and they ended up in Nevada getting much more in return than NYRAís three percent point increase in multiple handle.
My other involvement came at the behest of Suffolk County OTB. They had a bettor named Ernie Dahlman who was reputed to be the biggest single bettor in America. Racing board intelligence pegged him as betting $12 million per year at Suffolk OTB on NYRA races. I recognize that some of you out there regard racing intelligence as an oxymoron, but the information was likely correct. Suffolk wanted to know if it could indirectly pay him for his wagers. Now we may be naÔve, but as normal, cover-your-ass bureaucrats, we certainly were not going to sign off on a government job that involved paying someone for his wagers. That simply led Ernie to Las Vegas and leading to where rebates are today.
Where are we today? We donít know. We are not in Kansas anymore, but we are not in the Emerald City either. We know some things. We know that rebates are out there. We know that nearly all our big bettors utilize them and we know that the handle on rebates in enormous. Even if you donít buy into all of Maury and Daveís figures, you need to know that these numbers are huge. Last year, the Lewiston, Maine, Hub, which is regarded as the major site for most rebate locales, bet $135 million on NYRA races. It is more than any other single source besides on-track wagering at NYRA and NYC OTB. It is more than Nevada, it is more than New Jersey, and it is more than any of the non-NYC OTBs. Chris McErlean gave a figure of 20 percent as the share of Meadowlands handle coming from rebate shops. Racing Services Inc., the North Dakota firm currently under indictment, bet $214 million in 2002. They were betting up to ten million per week in 2003 before this scandal broke. Back in 1995, we used to marvel at Ernie Dahlman. He was racingís $12 million man. Now we have whales that dwarf that amount. One, Peter Wagner, was betting an estimated $130 million per year before the Racing Services downfall. You canít find that racing handle has not benefited from rebates.
Secondly, the tracks have largely not participated in the rebate system. Sometimes they have been unable to participate due to interpretations of their governing legislation. Other times it has just been too difficult to work out a pricing system that still pays back decent value to the horsemen and the tracks. They have seen a cottage rebate industry flourish while they have sat idly by.
Beyond that, there is so much that is not in the public record. In large part, it is because the media coverage of this issue has been limited. We have had good coverage from a few, but others have been missing in action. The New York Times has mentioned horse racing rebates in a grand total of two articles. Even in those two articles, coverage was very limited. What we donít know and what is not in the public record is just tremendous. I know a lot of the people here are not in the public record. They know more, but we donít know if rebates have hurt purses, and we donít know why so many of the major gamblers still reside in Nevada, when Nevada outlawed rebates 6 Ĺ years ago. We donít know why Nevada parimutuel wagering reached its peak in the year after they banned rebates. We donít know for certain if there is a direct connection by some arbitraging bettors to the tote system. We donít know the extent of batch betting. We donít know if organizations have diverted bets in such a manner to make it appear that they were wagered at locations that pay smaller simulcast fees. We donít know if these are rebates or simply dividends to investors.
In short, the racing industry knows nothing on the subject of rebates. My suggestion is a simple one. Letís legalize rebates everywhere, fully disclose them, and regulate them. I am rephrasing one of Woodrow Wilsonís 14 points, open rebates, openly arrived at. Rebates are here to stay. Letís make sure they work for the entire industry.
Here are the five goals that a coherent, rational rebate system ought to fulfill. A rebate system should demonstrate openness, fairness, flexibility, mutuality, and integrity.
Opennessóletís develop a system where everybody knows where the rebates are. Letís make sure that the rebates are open and available to all eligible customers. Letís fully disclose the extent of the rebates to enable tracks and horsemen to make intelligent use of their simulcast decision-making status under the Interstate Horse Racing Act, and letís disclose the rebates to the customers so they know which rebate service or which track they should be betting at.
FairnessóLetís begin by recognizing that the free market has come to horse racing. Maury and Dave and others have just taken their business to Wal-Mart instead of Woolworthís. They are buying their Calvin Klein jeans at Samís Club, not from the CK store. Under these circumstances, governments setting the takeout rates need to react so that racetracks donít just turn into Woolworth. Fairness to bettors, who are also taxpayers, requires lower takeout rates. We have established a system where horse racing is largely uncompetitive with casino gambling. As casino gambling spreads throughout urban and eastern America, racing will need to lower takeout rates. They have to realize that a fair parimutuel system is one that does not gouge its customers.
Flexibilityóoverall legalization of rebates allows racetracks to be flexible. As I have said before, the market is now in control of racing. If racetracks want to be in the rebate game, there is no longer any reason for them not to be. It is absurd to see casinos and racinos offering rebates to their casino customers through player reward cards while being unable to offer rebates to their racing customers. Letís at least get our tracks in the game.
Mutualityóand I have not heard anyone discuss this. The reason for our parimutuel system is mutuality. All bettors are supposed to be treated equally. This has legitimized and distinguished our system of wagering from the old bookmaking system where bettors were not treated equally. In fact, there is an element of unfairness in offering rebates to a select few. My suggestion is to realize that mutuality does not require arithmetical, exact treatment. All it requires is that all people are eligible to have the opportunity to receive rebates. Make it the Discover card for racing--bet $100, get back two percent, bet $1000, get back five. Everyone canít participate. Their level of participation determines the reward. What is wrong with that?
One thing that might be wrong is the criteria for a rebate. Now if I am running a track, and I can do anything I want to with a rebate, I am giving them to horsemen and owners. That will keep them racing as many horses as possible at my track. I am giving rebates to friends and contributors to the governor and leaders. Unfortunately, that is not what we want. That would be wrong. The criteria for rebates should be limited to the amount of wagering, the types of bets, and the tracks on which the player is betting. Again, the point of a responsible rebate system should be to preserve mutuality. Every bettor ought to be potentially eligible for the same rewards.
Finally, integrityóthis open mutuel system lets us see what is going on. We can tell if someone is sending their wagers through different hubs. We can track bets. We know what is happening. A rebate system with these elements can give players more confidence in the system and can help regulators track suspicious wagers more efficiently.
I think it is simple to call this plan open rebates, openly arrived at. In an industry that canít determine whether racetrack is one word or two words, which canít figure out how to spell parimutuel, nothing is going to happen easily. What I am talking about here, I certainly donít have the answers, but the free market has come to racing and racetracks need the ability to compete. There is no reason for the racetracks to keep playing Hamilton Berger to the rebate shopís Perry Mason.
Is it unrealistic in terms of working? I donít think so. It allows for the flexibility of the market and it respects the concept of mutuality. Every track and OTB can offer rebates. Every bettor can be treated equally. There will be a level playing field. Open rebates, openly arrived at can work for everyone. It realistically recognizes the syndrome that, ďWe raised the takout and nobody knew the difference,Ē no longer works in the best interests of horse racing. Thank you.
Mr. Bergstein: If there are any questions, we will entertain them, but I want to mention one other thing. Bennett discussed all of the things that we donít know in racing, but there is one thing that we do now for certain. If horse racing coverage continues to diminish and evaporate, all of this technical stuff, all the rebate talk, will not make any difference. If people donít know about racing, where it is, when it is, and what is happening, everything else is incidental. So the next panel that you are going to hear from is going to consist of professionals whose job is either to report racing in the media or to try to get it on the media. That essentially is going to be the real determining factor of where racing goes from here. If you have any questions before we entertain that media panel, now is the time to do so. If not, I want to thank the panel.
Question: Mr. Leibman, if hypothetically you were on the racing board in New York and the question and analysis of an economist, highly credentialed, stood up to the racing board and presented to you the facts that there are a thousand customers that are outside of the state of New York betting a substantial amount of money, receiving rebates, and creating the statute takeout rate to effectively change and be more to the New York customer than it is to the customers out of state betting, how would you approach that from a regulators standpoint that effectively the statute is actually being broken because of contractual relationships with companies that rebate back to their customer?
Mr. Liebman: I donít have any problem with it. Why is that different than what Woodbine and Meadowlands have done in terms of their rebates? Why is that different?
Response: It is different because they are betting there. They are betting at Woodbine.
Mr. Liebman: Frankly, how do I distinguish that as a racing commissioner in New York from NYC OTB or Capital OTB wanting to have rebates?
Response: But is that fair to the customer, that is the $2 bettor, that makes up the balance of the rest of the betting?
Mr. Liebman: It is certainly fair. They have the eligibility to play those places, so it is fair. As long as they can play those other tracks or use that, I donít see any problem.
Response: As two reasonable people, we can disagree.
Mr. Bergstein: Anyone else.
Mr. McErlean: David Cuscuna, you mentioned your previous life as an options trader. What other analogies can you bring from that business to the current issue with rebating, program trading, or any of the business model aspects of it?
Mr. Cuscuna: Well, I think one of the things is that it seems like there is a big component to rate versus revenue that seems to be fueling the debate. I know in the Wall Street model, there has been a trend in stock transactions from the full-service, high commission brokers at Merrill Lynch to the E-trades of the world that has substantially increased volume and in theory been good for that industry. What I donít understand is what difference does it make what the rate of return is if the overall net revenue ends up being a positive profit generator for the industry. That would be one of the parallels that I would show.
Mr. Willmot: David, your examples were static pictures of one bettor, one location, or one racetrack. When you look at the entire industry, what you have is money shifting. Of course the rebatorsí volumes are going up dramatically because money is being shifted from racetrack distribution systems to that. The total handle in the industry is not going up at all in the percentages you are talking about. In fact, one would argue that we are killing the everyday customers at the racetracks by allowing the cash receiving organizations, which are the subset of the SPMOs that win consistently because of the batch betting that we talked about earlier, that makes the effective takeout on-track, the effective takeout for the track customers go up. We are losing our everyday customers. We are losing the ability to attract new customers because we have been foolish enough to create an environment in which whales, like yourself, can bet through a rebator at less than any other business would charge for its product given the cost of production and given everything else that is in there. The only reason that rebate shops exist is because we allow them to. We allow them into our mutuel pools on a pricing basis that is completely self-defeating. It does not recognize the difference between expenses of tracks and the non-expenses of rebators. As I said earlier, we all agree that this business about the handle going up and being good for everybody is not true. We are shifting dollars and third parties are pulling hundreds of millions of dollars out of this industry and not reinvesting a nickel of it.
Mr. Cuscuna: How is it shifting handle when we show that somebody that bet $3.5 million bet $27 million? How is it shifting handle when we show that I would bet $13,000 on a pick six instead of $2,300? That is new money. What about the two new computer groups that were not in the business? It is new money that is being brought in. It is not shifting handle. That is out and out wrong.
Mr. Willmot: Yeah, but the totality is.
Mr. Cuscuna: No. How about that the handle might just be down a lot? The declining trend in handle started way before the advent of rebates. So maybe rebate money is just keeping handle static as opposed to where it would be without it.
Mr. Willmot: But there is a big difference between handle and income, which is necessary to support the industry, unless we want to end up betting on donkeys and jumping frogs. The bottom line is that when someone who bets three million dollars a year moves to a rebator, is poached and moves to a rebator, because we are stupid enough to sell our signal to the rebator at three percent, when he moves to the rebator, and the 18 percent that we were making from that customer now becomes three percent. He can increase his wagering by 6 times, but are our horsemen and our purses any better off? Is our income any better off? It is playing a shell game of moving money around from existing racetrack customers to rebators. I cannot hold any fault to any customer who moves to the lowest pricing model. I hold fault with our industry for allowing that structure to exist.
Mr. Cuscuna: On one hand you talk about 18-cent dollars, but on the other hand you talk about all the expenses. There are no expenses caused by receiving a rebate dollar. But you are right, it does cost money to service your on-track handle, so maybe 18 percent is not the accurate margin to measure what you are losing on-track. Not to mention when you are talking about $3.5 million becoming $27 million, that does happen to be more than a multiple of six, so even in that scenario...
Mr. Willmot: One example, you gave me one example.
Mr. Cuscuna: Yes, and I gave you another example of my computer model. These are the decisions that people like us make and we make them every day. It is not hypothetical. You say you have heard of these computer groups. I have a computer too. I bet mostly pick sixes, but on my model there was a case where $2,300 became $13,400.
Mr. Wolff: There are all kinds of different responses to changes in prices. You seem to think that they are zero, because you are saying it is 18% dollars versus 3% dollars. No it is not. It is how much at 18 versus how much at 3. What we are saying is there is price response here and price matters. Right now the people to whom price matters most are the ones who are being targeted.
Mr. Willmot: Well I made it very clear that in our distribution system, in our Horseplayer Interactive, that we have significantly lower takeout for the bigger players, so I am not doubting that. What I am saying is your mutual abilities to do precisely what you are saying you feel you have a right to do is happening only because the rebate shops that you are betting through, we allow to exist. I donít think that is a wise pricing structure. That is all I am saying. I am saying that the movement of a customer from here to here, which increases handle by 6 times, which does not happen with everybody, is still not any better incrementally for the industry. Now I can satisfy your wants. I can offer you what you are getting from the rebate shops. I can offer you that as a racetrack. Now, letís agree that the racetrack is just a facilitator between the horseman, who has to have income to pay his expenses, and the bettor, who wants to be able to bet on the product he wants at the lowest price. The racetrack is the facilitator, which one hopes can make enough money to stay in business. We can change it. We can offer you what the rebates offer you by way of takeout so that your computer programs work better, and we can do that by cutting purses by 20 percent. That is how we can do it. We are just the facilitator, but we can fix it up really good. We can offer you the same kind of deal, ignoring the costs of production of horse racing, with fully half of our income going to purses, we can get competitive with casinos real fast by cutting purses in half.
Mr. Liebman: You are a casino.
Mr. Willmot: No we are not. We are infinitely more expensive. The casinos do not pay fifty percent of their income to purses and they do not operate backstretches.
Mr. Liebman: What percentage of your purses now come from your casino?
Mr. Willmot: Forty percent, and sixty percent from pari-mutuels, so parimutuel is still very important to us. We can do what the players want by way of takeout.
Mr. Liebman: That is not a realistic figure that you gave Dave and Maury.
Mr. Willmot: I am giving very realistic figures on the cost of operating horse racing, Bennett, except that cost can be reduced to provide the players with a much lower takeout.
Mr. Bergstein: We are going to continue this tomorrow.
Mr. Willmot: Stan, I want to say one more thing. You said if media is not there, the rest of this does not matter. I could not disagree with you more and I love you dearly, but the integrity issues donít matter, the media issues donít matter, nothing matters if the basic fundamental business structure on which horse racing tries to exist gets so perverted that we go out of business. You sure as hell donít have to worry about reporters writing about horse racing if horse racing can no longer afford to produce itself.
Mr. Bergstein: I agree with that. I certainly, on the record, agree with your comments on integrity, but the issue is if people donít know about the product, it wonít make much difference. That is the only place where we differ.
Mr. Willmot: Well, if there is no product, it does not matter if they know about it.
Mr. Bergstein: We are going to discuss situations where we are not getting the coverage that the product entails, and that the product is entitled to, in our next panel coming up right now.
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