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SBJ/June 18 - 24, 2001/Opinion
Give the sport of kings a sporting chance
Published June 18, 2001
An economic crisis in California is getting a good deal of attention these days. And I don't mean the energy crisis.
Live thoroughbred racing in California, long a major hub for the sport at such legendary tracks as Santa Anita and Golden Gate Fields, is in a relative decline in popularity and purses across the state. And this is notwithstanding a recent 50 percent cut in thoroughbred racing's tax burden. As a result, more and more California horse owners are rightly looking to run their horses in heretofore-foreign territories, like Delaware and Florida. Talk about suffering a loss in local horsepower!
The plain fact is that pari-mutuel thoroughbred racing in California and elsewhere is perhaps the last industry in America subject to comprehensive economic regulation. It's not just regulation for the sake of integrity and safety. California, and virtually every other state with thoroughbred racing, regulates the economics of the sport, to wit: when and where racing takes place, prices for pari-mutuel wagering — that is, the precise percentage of the pari-mutuel wagering pool, or "takeout rate," retained by the track (and the state government) — and how the product will be distributed to racing enthusiasts, if at all, in addition to the live gate. This includes simulcasting, off-track betting, account wagering via telephone and Internet, and other licensing and revenue sources.
Looked at another way, thoroughbred racing may be the last remaining enterprise where states make sure there is no head-to-head competition in a metro area on the same dates and times, and also make sure that businesses don't cut prices to attract customers.
To be sure, all of this regulation was put in place at a time when racing was the only betting game in town, unless your town was Las Vegas. Aside from a possible general policy of limiting the extent of gambling among the local populace, economic regulation arguably controlled the thoroughbred racing "utility," just as it controlled the electric, gas and telephone companies.
But times have changed in three important respects. First, wagering opportunities may not be ubiquitous in all states, but there sure are a lot of them these days. States themselves have become prime competitors of the horses via the lottery, freely varying pick-and-scratch games, prices and distribution channels. Casinos of one form or another are far more accessible to virtually every metro area, with huge entertainment and dining attractions built into the proposition of a trip to the blackjack tables.
As a result, thoroughbred racing, which 30 years ago accounted for nearly a third of all gambling dollars in the United States, accounts for only about 6 percent today. That translates into a paltry $3.5 billion out of the gaming industry's present total of $60 billion.
Second, your local racetrack isn't the only pari-mutuel betting opportunity in town anymore. Simulcast betting today accounts for fully 80 percent of wagering on thoroughbred racing, with betting on live races at the track down to 20 percent. As recently as 15 years ago, the numbers were heavily reversed, closer to 10 percent for simulcast and 90 percent for live gate. So there is no longer a need to control the market power of racetracks: the market itself can do that very nicely, thank you.
In these circumstances, economic regulation is a pure drag on the ability of racetracks to compete for consumer dollars by dint of creative pricing, marketing and distribution. To put it more bluntly, everyone — the racetracks, horse owners and certainly the betting public — would be better off if racetracks were subjected to the discipline of consumer demand rather than to the judgments of regulators and legislators. If the past 80 years have taught us anything, it is that markets are far more nimble than the brightest and fairest bureaucrats.
But there is also a third change, one that could affect thoroughbred racing just as it has so many other American marketplaces. It is the rise of the high-speed, networked computer. With these information systems, racetracks now could have the ability to change their prices — that is, takeout rates — and keep their customers informed up-to-the-minute, much as most businesses do to attract customers and thereby increase profits. For example, tracks could reduce prices on non-featured races early in their daily cards — often maiden and claiming races — while keeping higher prices on the highly popular Triple Crown races and other features. Tracks could improve their ability to distribute, as well as compete with, simulcast racing taking place across the state, or across the country.
The issue is not simply that present racetrack fans — and potential new fans — would be better off if racetracks could compete fully and fairly for the wagering dollar. It is that they will be clearly worse of if regulation continues. Regulators simply can't hold back the rising tide of "rebates" and other favorable treatments now being offered to large bettors, ultimately at the expense of smaller bettors. Nor should they. If the cost of servicing large bettors is lower today, then the competitive price they pay should be lower as well. The situation is no different than it was in the 1960s, when fixed commission rates on stock trades led first to "givebacks" to large institutional investors and then to deregulation of commissions.
The time was right then, and large and small investors benefited from that deregulation. The benefits came in the form of generally lower prices for all and, more important, a great diversity of the mix of brokerage services and investment information available to investors from discount brokerage, full-service firms, and all stops in between.
The time is right now for racetracks to compete on their own merits, for the chips to fall where they may, and for racing fans to reap the ultimate benefits.
Louis Guth is senior vice president of National Economic Research Associates, a global economic consulting firm. The National Thoroughbred Racing Association is a client of NERA.