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Friday, February 4, 2011

Report on Exchange Wagering Panel from Recent National Council of Legislators from Gaming States Meeting

by Joe Santanna, National HBPA President and Chairman
I wish to share with you the information that was presented at the recent National Council of Legislators from Gaming States (NCLGS) 2011 Winter meeting, along with my related reactions and reflections.
The theme of the meeting was focused on gaming expansion and competition and explored three very topical issues: exchange wagering, internet gaming, and intrastate gaming.
Framing each topic within what I consider to be a basic economic and financial premise – there is a finite pool of wagering resources – I cannot help but defend the horse racing industry by asserting that the addition of either (or all) exchange wagering, internet gaming, or intrastate gaming will cannibalize pari-mutuel wagering.  The wagering pool will not expand.  Simply my point of view, what do you think?
Betfair informed the attendees that it has three million customers who produce eight million transactions per day - more than the New York Stock Exchange.  Betfair charges a “commission” only to the winner of each bet.   This was a revelation to me.  As you well know, pari-mutuel wagering charges “take-out” on every bet; both winners and losers contribute to the racing industry’s revenue base.  So our parallel revenue streams are a blended 20% takeout on all pari-mutuel wagering compared to a yet-to-be-determined percentage on perhaps a 5% commission from only the winning wager.  Thus, naturally, we must ask: where do we “break-even,” the point at which the lost pari-mutuel wagering at much higher rates of return to the industry equals wagering volume created by exchange betting at much lower rates of return to the industry?  Interestingly enough, no such pro-forma financial data exists. Nevertheless, California has passed exchange wagering legislation, and New Jersey is in the process of also doing so.  Isn’t this the proverbial cart before the horse (pun intended!)?
It was also reported by Betfair that “in-play/in-game” wagering (the wagering concept new to the pari-mutuel model) represents approximately 25% of all wagers.  Is that where new wagers will occur?  Will this be our net gain”?  Can we re-think how we process this new wagering within the confines of our existing concept of wagering integrity and security?  Is this how we capture the younger age group into our fan base?  Is this how we convert wagers that contribute less to racing into wagers that will contribute more to racing?  Lots of questions, some with hopeful outcomes.
The California legislation has not yet been launched because the California Horse Racing Board (CHRB) has been given until May of 2012 to write the regulations for exchange wagering.  Surely all racing stakeholders in California will be involved in that process.  The bill sunsets in 2015 and tracks (and presumably the Thoroughbred Owners of California and California Thoroughbred Trainers) have veto rights to engaging in exchange wagering (opting out) once the regulations have been written.
It was also reported that during the New Jersey examination of exchange wagering legislation, that state considered single pool wagering, off-track betting (OTB) in bars, instant racing, and other similar wagering opportunities.  New Jersey's gaming and racing industries are under the pressure of a five year, 37% decline in Atlantic City gambling and a very possible elimination of the New Jeresy casino subsidy of purses that has endured for the last ten years.  An interesting side note to the “in-process” exchange wagering bill is a pari-mutuel wagering revenue sharing allocation formula based upon breed specific wagering whereby wagers on Thoroughbred racing, no matter where taken in New Jersey, benefits the Thoroughbred racing industry, and similarly so on the Standardbred side.  Finally, New Jersey may only start with win, place, and show wagering in its exchange wagering platform before it considers adding in-play or “wagers to lose.”  On the lighter side, my handicapping skills could be considered “wagering to lose” within our pari-mutuel system.
The CPA in me wonders how legislation in one state has already been passed and in another state is seriously being considered without any pro forma financial projections to support it.  If the premise is that there is no precedent on which to base it, then once again the industry will be asked to “trust” that it will result in a “net gain.”  Certainly,  a U.S. dominant pari-mutuel based wagering platform cannot be compared with a UK dominant “book” based wagering environment.   
I keep an open mind about exchange wagering because anything that improves the economics of our industry is worth considering.  Furthermore, my many conversations over several years with the Betfair management team have been positive and relatively transparent.  If it attracts a younger fan base - a notion we all agree has been elusive yet important to the future of our sport - it has merit.  If it promises a “net revenue gain” that is measurable and sustainable, then a careful examination and the conduct of due diligence should precede - not follow - legislation.  We should have learned from the simulcast “more is better” hypothesis that scrutiny of the long-term effect is essential and paramount to this decision making process.
We have learned from the OTB and advanced deposit wagering (ADW) expansion to our sport that while the promise of new players was the impetus to embark into those areas, we simply made it more convenient for the “on-track” player to wager closer to home or at home.  In essence, we have substituted the most profitable revenue source to the industry, the on-track wager, for the least profitable revenue source to the industry, the off-track wager.  It is no wonder that the emergence of exchange wagering is met with trepidation.   Should racing accept yet another form of wagering that becomes the next “only growing revenue source” in the industry where the “increase” does not positively affect the very sport that produces it?
We should be able to disagree at this point and use the uncertainty that exists as the impetus to work together to solve the mystery that surrounds the issue.
Will exchange wagering drive more fans away from the magnificence and excitement of the “live” race at the track?  What do you think?
I will address the other two gaming expansion topics - internet gaming and intrastate gaming - in a future blog post.  Thanks for taking the time to read my recollection of the presentations from the panelists and my interpretation of their remarks.
We need to be sure that as we stand on the track and look into the tunnel that it is the other end of the tunnel that we see, and not the train a 'comin'.

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