Andrew Beyer -- Charging More to Wager on Horse Racing Is an Ill-Conceived Bet

By Andrew Beyer
Thursday, February 12, 2009

Imagine the following discussion in the executive suite of a modern-day corporation.

Executive 1: "The economy is killing us. Customers are deserting us. Our business is terrible. What are we going to do?"

Executive 2: "I've got an idea. Let's raise our prices!"

Executive 1: "Raise prices! Brilliant!"

Surely no business -- not even the Detroit auto industry -- would be foolish enough to do this when the country is plunging into a deep recession. But there is one industry that believes raising prices makes economic sense.

Last week, an executive of the Maryland Jockey Club appeared before the state racing commission with a request to raise the takeout on Pick Three and Pick Four wagers at Laurel and Pimlico from 14 percent to 25.75 percent. Takeout -- the amount the track retains from every bet -- is the price of a wager. According to John Scheinman's report in the Thoroughbred Times, the commissioners didn't even debate the request before approving it to go into effect March 1.

Dennis Smoter, vice president of the Maryland Jockey Club, said that the low takeout rates had been an experiment that hadn't significantly stimulated betting on the Pick Three and Pick Four. With the increase, he said, "Maybe we can grind out a few dollars in these tough times."

The Maryland tracks think they can take extra dollars from their customers' pockets without adverse consequences, and this view is widely shared in the thoroughbred industry. Last year, when the ill-managed New York Off-Track Betting operations were having problems, the state legislature imposed a 1 percent takeout hike that will cost horseplayers more than $20 million a year.

Invariably, the people who make these decisions say that customers won't notice a percentage point here or there. Maybe the bettors at Laurel won't be aware when a Pick Four payoff of $860 becomes a $742.40 payoff after March 1. But even if they don't notice the change, bettors are affected by it. Maury Wolff, an economist and gambler from Alexandria, published a definitive study on the subject years ago, and found that when tracks increase takeout significantly, their wagering totals almost always decline in the long run.

"People get less money back, so they bet less, and business goes down," Wolff explained.

Whenever I visit tracks in other countries, I observe the relationship between the takeout and the health of the sport. Gambling-mad Hong Kong and Australia produce per-capita wagering that dwarfs the United States. Their takeout rates are around 16 to 17 percent, and in both places I met pros who bet astronomical sums and make a lucrative livelihood beating the game by a couple of percentage points. By contrast, when I visited Argentina last spring, I did not hear of a professional horseplayer in a country with a rich horse tradition. The takeout rate of 28 percent made serious betting impossible. Somewhere between 17 and 28 percent is a crucial tipping point.

According to statistics compiled by the International Federation of Horse Racing Authorities, the overall takeout rate in the United States has reached 21 percent. Considering that it is difficult for smart handicappers to beat pro football when bookies may have only a 4 percent edge, this is a formidable number. High-end players can overcome the takeout by betting through "rebate shops" that return to them several percentage points from their total wagers. But a 21 percent take will erode the bankroll of the majority of players and knock many of them out of action altogether.

Playing the horses in the United States is still a compelling enough game that the sport remained reasonably healthy, with betting totals fairly steady, from 2000 to 2007. Over the last two years, however, the industry has made life even more difficult for its customers. Racetracks, horsemen and various betting providers (such as online services and off-track wagering sites) have battled about how they will divide the proceeds from wagers, and their issues have roiled the industry.

Amid the disputes, major tracks were pulled off the most-watched television channel, TVG, and the big online site, Las Vegas race books were prohibited from showing the signals of many major tracks. Tracks hiked the rates they charge rebate shops, which in turn reduced the rebates they give to their best customers, making the game less attractive for those high rollers.

These factors would have been significant under any circumstances, but at a time when the U.S. economy has collapsed, they have been devastating. The U.S. horse racing industry has considered itself recession-proof ever since it managed to prosper during the Great Depression, but that notion has been disproved. The industry's business collapsed in the final months of 2008; total betting in December was a stunning 20 percent below the previous December. Wagering for the entire year was the lowest since 1998.

And 2009 is likely to be a worse year for racing -- much worse. Most other American businesses are slumping, too, but at least they are responding in a manner that can be seen in every shopping mall and auto showroom. They are cutting prices, because that is the best way to attract customers in tough times. Without the will or the ability to cut the prices it charges its customers, the racing industry is about to learn some hard economic lessons.

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