Why Reducing Takeout Won’t Save Horse Racing

Anyone interested in truly understanding the business dynamics, history, and opinions around takeouts (cost of wagering) in horse racing should read Alan F. Balch's blog, Pricing the Future, prior to reading this post.

The decision by the California authorities to raise the takeout on any type of wager, either a single race or multi-race wager, is probably the most misinformed and dangerous move possible. In the internet era where products from all markets are available and competing for the wagering dollar, there is no doubt the decision will reduce the appeal of the California product. It will reduce the amounts bet in California and ultimately reduce the takeout in absolute dollars.

Further, I agree that in horse racing like all other businesses, takeout or prices should be dictated not by regulatory bodies but by market demand. The internet has removed all geographic boundaries and created a true competitive environment, allowing the consumer to make buying decisions based on value, or more importantly perceived value. Each jurisdiction should be able to price their product based on its quality in order to maximize their revenues and profit in a true global market.

On the other hand, the argument that reducing takeout will fix our problems is also misinformed and dangerous. In all other businesses it is analogous to stating that reducing prices increases demand. This is simply not the case. In fact, pricing in a true competitive environment is set based on demand, driven by a need to maximize profit.

To understand the impact of changes in takeout, you must first understand the difference between takeout and the true return on investment (ROI) available to the consumer. At What Wins we calculate a monthly rolling ROI based on the Morning Line and a mix of exotic bets at all Canadian Standardbred tracks. While the average takeout is around 21%, the ROI is generally around -30%. What this means is that industry insiders and very knowledgeable gamblers are driving down the ROI available to the average consumer.

I wonder, if the takeout is reduced, how much of that reduction will actually reach the intended target market?

Photo Credit: U.S. National Archives

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