After missing over two months of Thoroughbred racing at Aqueduct and Belmont this spring, racing returned to Belmont Park on June 3 with a bang.
The abbreviated 2020 Belmont meet, with 23 fewer racing dates than in 2019, had an average daily handle of $15,466,198, which was 42 percent greater than Belmont Spring/Summer 2019. Despite racing 23 fewer days, the 2020 all-source Belmont Spring/Summer total handle was only 4.4 percent less in 2019.
Please keep in mind that there have been no customers allowed on-track, so these handle numbers were achieved without any on-track wagering. Throughout the entire United States over the summer, there were no customers wagering on-track, and most off-track betting outlets were not open due to the pandemic. That is the good news, but also bad - as you will see below.
From a wagering perspective, the 2020 Saratoga meeting was perhaps a greater success than the abbreviated Belmont spring meet.
In 2019, the Saratoga handle set an all-source handle record of $705,343,949. There was an on-track attendance of over 1.1 million. Yet this year, all-source handle was $702,535,468, only slightly less than the 2019 record with no customers betting on track at all during the 40 days of the meeting.
Serious reductions
In fact, based on the 2020 handle numbers for the current Belmont meet, I am confident that NYRA wagering in 2020 will exceed the 2019 numbers despite missing over two months of racing in the spring and having no betting customers for nine-plus months.
This is not unique to NYRA, though. Year to date through mid-October, the all-source wagering numbers on all U.S. races is just 1.08 percent less than 2019 totals - despite the fact that in 2020, 7,523 (24.93 percent) fewer races were run than in 2019.
Clearly by year end, all-source handle on U.S. races will be greater than in 2019.
Pretty impressive, right? Wrong. The wagering activity replaced on-track wagering with Advanced Deposit Wagering (ADWs), which in many cases results in serious reductions in revenue for the racetracks and reductions in purse contributions.
To fully understand the economics of ADWs and racetracks, we need to go back a few decades.
In October 1978, the Federal government passed the Interstate Horseracing of 1978 (IHA), which provided the legal basis for individuals and racetracks to place and accept wagers across state lines by phone or electronic means.
This came to be further defined as the internet.
Joel Turner explained in this TRC article in 2015 why the IHA had to be modified to protect the racing industry, which was the reason for the legislation in the first place. The IHA allowed small tracks to take simulcast wagers on major tracks like NYRA and make substantially more money on the transaction than NYRA and their horsemen made. The result was that the simulcast transactions with major tracks doing simulcast deals with small tracks kept many, many small tracks in business for decades beyond what they could have done on their own.
Here is Joel Turner:
“Another history lesson is required to understand how the IHA has come to undercut purses. Once the act became law, racetracks and horsemen quickly moved to enter into contracts to facilitate interstate simulcasting. The rates charged by a track for its races to be sent to off-track locations were significantly lower than on-track rates.
“A simplistic, but realistic example: The takeout rate for an on-track W/P/S wager would be 15 percent, which would be split roughly 7.5 percent to the track and 7.5 percent to the horsemen in the form of purses. The track would be responsible for payment of all taxes related to the wager from its half of the takeout, with the balance directed toward operating costs and profit. Pursuant to their contracts with the tracks, horsemen would allocate a certain small percentage (usually less than half a percent) to funds for backside improvement, health and welfare, or related needs.
“Rates charged by the tracks for content varied somewhat by the quality of the content made available, but commonly a 4 percent simulcast fee was charged and paid 2 percent to the originating track and 2 percent to the originating track’s horsemen for purses. This rate was reciprocal among the tracks with the major racing states enjoying the most interest from simulcast operators in need of quality content.”
Simulcast deals
In practical terms here is what happened: Most racetracks viewed simulcasting as supplemental business from a market they could not reach. As a result, almost every simulcast deal that was done was for 3-4 percent, which was split 50/50 between the track and their horsemen.
The result was that any small track, like Suffolk Downs or Beulah Downs, could buy the signal for 4 percent, pay any related regulatory fees and make 12-15 percent on a major track’s signal - from NYRA, for example. While the simulcast fee has inched higher over the years, this practice has continued to this day with small to mid-size tracks receiving more revenue from wagers on major tracks like NYRA than NYRA and their horsemen are making.
So what does this have to do with ADWs? Illinois was the first state to pass legislation that allowed wagering on horses over the internet in 1999. Charlie Ruma owned two Ohio-based small racetracks, Beulah Downs and River Downs, and had agreed many simulcast successful contracts with larger tracks like NYRA at low rates.
Ruma had similar success buying content from high-quality tracks for his America Tab internet business for low rates. Total online internet wagering handle started slowly, with total revenues of $65 million in 1999 and $200 million in 2000. America Tab generated $21 million in 2001 and had many subscribers by the end of 2001. Clearly the model of selling high-quality racing signals to tracks for a small percentage of the takeout similar to simulcasting was once again restricting major tracks and their horsemen from receiving proper compensation for their racing signal.
Harnessing potential
One company that was clearly watching the growth of internet wagering and the attractive margins of that business was Churchill Downs.
Churchill has been a brilliantly managed company, which is clearly reflected by the performance of the company’s share price. In what has been a very volatile stock market, Churchill’s stock has increased in value over the past year with a return of 39.74 percent, and a three-year return on their stock is 153.48 percent.
Recognizing the potential that ADWs offered, Churchill launched TwinSpires, its new account wagering business, in May 2007, right before the Kentucky Derby. Reporting at the time suggested this had been successful for sign-ups for the Derby but little residual business. However, five weeks later, Churchill Downs, in two separate acquisitions, bought the aforementioned America TAB and the assets of Bloodstock Research Information Services (BRIS) and Thoroughbred Sports Network (TSN).
A little over two years later, Churchill Downs acquired youbet.com, one of the market leaders in internet wagering, and United Tote, one of the three major totalizator companies in the U.S. At the time of the transaction, it was reported that the online ADW business represented 14 percent of U.S. handle. Today, the ADW business is reported to represent 35-40 percent of U.S. wagering activity on Thoroughbred racing.
While Churchill Downs was aggressively buying account wagering assets, it is interesting to note what its activities have been in the racetrack business. On September 9, 2005, Churchill sold Hollywood Park to a land management company for $257.5 million. Churchill had purchased the property in September 1999 for $140 million. In July 2014, Churchill leased its Calder racing facility to The Stronach Group, and Churchill continues to operate the Calder casino. In July, 2020, Churchill announced that its plan is to sell Arlington Park.
Also, it is generally known that the Churchill-owned Fairgrounds Racetrack in New Orleans has been on the market for some time.
The point is that Churchill Downs management has been aggressive in purchasing and growing ADW properties and has been a seller of its racetrack properties. Clearly it would appear that Churchill views ADWs as a growing business with attractive growth and proper margins, with the racetrack business not having these attributes.
So, what does this have to do with a discussion about NYRA’s financial outlook going forward.
First NYRA has been aggressive in its efforts to grow its own ADW. It has invested in superior technology to replace the old NYRA Rewards online system with state-of-the-art functionality and rebranded it NYRA Bets.
Television capability
In 2016, NYRA hired Tony Allevato. He is its Chief Revenue Officer and President of NYRA Bets. Allevato was a senior executive at TVG and was a major contributor to TVG’s growth as the #1 ADW in the U.S.
Allevato and President David O’Rourke have aggressively pursued network television exposure and built a talented broadcast team to support NYRA Bets. In 2020 NYRA will have produced over 600 hours of network racing, primarily on Fox Sports, regional MSG and, to a lesser degree, NBCSN, with advertising support from America’s Best racing and with content partners Churchill Downs and the Breeders’ Cup.
It is this television capability that has played a role in partially replacing handle losses due to the pandemic. The real solution is that NYRA has to change its business terms to get proper compensation on its races and their purses.
This brings us back to the fact that major tracks and their horsemen are not getting compensated properly due to the legacy of inappropriate simulcast and ADW pricing and this has to change. In addition to improper compensation on their races and purses, I believe that the concept of source market fees and related legislation have been hijacked to the disadvantage of the tracks and horsemen.
As an example, in New York, a source market fee was created in 2014 called Market Origin Credits and it is available in detail on the Gaming Commission website under Horse Racing: ADW Market Origin Credit Reports.
New York State charges a Market Origin Credit for all non-NY ADWs that take wagers from New York residents.
Lost racetrack revenue
First, you can easily see that out-of-state ADWs had almost twice as much handle in August 2020 ($70,638,451) as in August 2019 ($37,629,543). Given the reduced margin to the track and purses from ADWs and simulcasting, the same revenue from ADWs will not match the lost live track revenue.
Clearly, most of that 2020 August increase from Saratoga despite no on-track customers went to ADWs. So we have racetrack revenue declines because of insufficient funds coming from ADW and simulcast customers.
Let’s now look at the Market Origin Credits that NYRA receives from the state. Here are breakdowns of the 5 percent payments of the $70,638,451 August 2020 handle that was made to the top payees:
- Capital OTB: $452,522
- Nassasu OTB : $399,059
- NY Gaming Com/Pari-mutuel tax: $353,192
- Purse enhance: $353,192
- NYRA: $353,192
Under what possible logic should two New York State OTBS and two state entities get paid more than NYRA and the purse account during Saratoga, which is without question the strongest financial performing race meet in the country. Remember, these are source market fees that the out-of-state ADWs are paying New York to compensate racing for wagers that New York residents make on their ADW platform.
In real numbers, NYRA and its horsemen should get somewhere approaching 80 percent of the fee as that is probably the percentage of the wagers that are bet by these NY customers on Saratoga.
The calculation and payment of source market fees vary wildly from state to state. The concept of the Market Origin Credits or otherwise known in the industry as Source Market fees is inconsistent and not transparent to racing industry participants. In a similar fashion, funds from the purse account can be hijacked to pay for costs that have nothing to do with how the purse funds are generated.
Full disclosure needed
Greg Avioli, President of the Thoroughbred Owners of California, had an interview in Thoroughbred Daily News and stated his displeasure that in California this year half the $18 million budget for the California Horse Racing Board, the state’s regulatory board, is paid out of the purse account, as are $3+ million for the California stabling and vanning fund and an undisclosed amount for workmen’s compensation for jockeys and exercise riders.
Finally, largest racetrack operators are three of the top four ADW operators in the U.S. ADWs represent a higher margin business as we can clearly see by the Churchill Downs strategy.
For the protection of all parties there needs to be full disclosure and transparency among all parties, including the state regulatory body.
The illogical but inevitable outcome is that there will be a strong and financially stable network of ADWs. The fact that the ADWs will make more profit than the racetracks and the purse account on each bet means there will inevitably be a serious decline in high-quality racetracks and a decline in the available owners and their horses. A successful Thoroughbred racing model requires proper compensation for the racetracks and the owners and their horses from the purse accounts.