Tuesday, December 30, 2008

Question: How Do You Spell Failure? Answer: Montana Sports Action

The NFL regular season is over, and so is the first NFL season for Montana Sports Action. The weekly handle is shown in the chart above. It doesn't look very pretty. Problems with this game have been discussed in previous posts. You can read those posts here and here.

For the entire season, Montana Sports Action didn't even generate $100,000 in handle. The estimate, based on prize amounts, is approximately $87,510. If you read the hype regarding the revenue potential of this game, it should have been generating $87 thousand per week in wagers. Not even close. The results are so poor, that it is likely that the total amount held back for horse racing, the lottery and the retailers wasn't even enough to offset the costs of the fantasy sports statistics feed. However the cost of the statistics feed can not be covered by the fees to the retailers, or by the fees given to the Board of Horse Racing, so the network operator (Lottery) has to cover an approximate $20,000 charge with their gross revenue of about $5,250.

There is nothing positive with these results. Even the trend is in the wrong direction. If handle was low, but steadily increasing, you could make the claim that the future looks brighter. Not with Montana Sports Action. The trend is downward, with lower handle as the season progressed.

The total revenue amounts to the various entities after paying prizes are approximately:

Montana Board of Horse Racing (MBOHR) - $14,000
Montana Lottery - $5,250
Retailers - $3,500

Assuming 150 retailers, each one generated on average a whopping $23 in commissions - $1.37 per week.

As stated in a previous post, probably only the statistics supplier made money on this game.

On a related topic discussed in a previous post, if this game is truly a lottery game, and not a pari-mutuel game, as the Lottery seems to be moving their positioning toward, why pay MBOHR any money? If the game is a lottery game, that game would be outside the purview of HB 616; therefore no need to pay MBOHR. Quoting Forrest Gump, "stupid is as stupid does."

Keeping with the topic of stupidity, the Montana Lottery is looking to launch a similar game for the NASCAR racing season. Recent research from the Fantasy Sports Trade Association estimated that there were about 4 times as many fantasy NFL participants as fantasy NASCAR participants. Given the poor results of the NFL game, which by far is the most popular fantasy sport, it is fair to estimate that the NASCAR game will generate about 1/4 the handle. Even Forrest Gump would be scratching his head at that.

Given this assumption, and the assumption that the Montana Lottery or their vendor partner isn't bright enough to make sufficient changes to the core game, a similar handle chart is expected. Some initial interest, realization that the game is poor, and a steady gradual decline in handle. Albert Einstein defined insanity as doing the same thing over and over again and expecting different results.

There are rumors of legislation that will be proposed in the new year to put an end to this insanity. Let's see if the Montana Legislature has more sense than the Montana Lottery and the Montana Board of Horse Racing. Time will tell.

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Saturday, December 20, 2008

Las Vegas Gaming Revenue Still On Downward Trend

As described in earlier posts, here and here, Nevada and the gambling industry are not recession-proof. The gaming win has been declining, but in October the decline was huge. Really huge. October gaming win in Las Vegas was down 26% from the previous year. Nevada overall was down 22% from a year earlier. The link to the Reuters article is here.

With the housing crisis and higher gasoline prices, people aren't spending their cash heading to Las Vegas. Gas prices have abated a great deal, but the damage to the economy has been done. With the housing crisis not nearly over, and with the US Government printing tons of money to keep the economy going, this is going to get worse before it gets better.

The excessive bailouts will, when the economy stablilizes, spur a large spike in inflation. Too much money after too few goods. We're quite possibly going to do a replay of the late 1970s -- not a good time for the economy, working class and retirees. Everything will get more expensive, but those groups won't be able to adjust their incomes sufficiently to compensate. They are going to get squeezed.

And it is exactly those groups that Las Vegas needs to get back on track. I don't envision that happening anytime soon. Perhaps for a short rebound, but when inflation kicks in, that rebound will vanish. For those economy watchers, keep alert to signs of inflation when the bailout money impacts the economy and the high-water mark of the mortgage crisis occurs, and begins to diminish.

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Tuesday, December 16, 2008

Delaware Looking To Parlay With Sports Betting

When the Delaware Legislature convenes next month, figuring out something to help their racinos counter increased gambling offerings from Pennsylvania and Maryland will be on their list of "to do" items.

How do you counter gambling? MORE GAMBLING! As Sarah Palin might say, "you didn't see that one coming, you betcha!"

Delaware is one of four states that is grandfathered under the Professional and Amateur Sports Protection Act to legally offer sports gambling. If bigger states offer more slot machines to keep their gambling citizens within state borders, how does a small state like Delaware compete? Offering something Pennsylvania and Maryland can't is probably a good idea. The Forbes.com link to the Associated Press article has more detail on the subject.

The outgoing governor is against the idea, but who cares? She's leaving so who gives a hoot about what she thinks? The incoming governor is facing a revenue shortfall to the tune of about 500 million dollars, and the increased gaming competition from nearby states isn't going to help. He could opt for the Beatles' "Taxman" approach, but that won't be too popular. But adding more gambling? A win-win! (except for the people that lose money gambling) The choice is, do you let those gamblers lose money in someone else's state, or do you want them to lose money in Delaware? If you're Delaware, that's a no brainer.

If Delaware adds sports gambling products that are popular and profitable, Delaware could totally counter what her neighboring states are doing. To those that are scratching their heads, yes, you can offer a sports betting product that loses money. Check out my recent posts regarding Montana Sports Action.

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Tuesday, November 25, 2008

Montana Sports Action: Pie In The Sky From The Big Sky

Montana Sports Action (MSA), the fantasy sports wagering game instituted by the Montana Lottery, has been in operation for three months. There is enough data to perform some analysis.

MSA allegedly is an attempt to implement a fantasy sports wagering game in accordance with Montana HB 616, which authorized pari-mutuel wagers on fantasy sports. A previous post discussed the potential regulatory issues with MSA.

This new wagering game was predicted to deliver big revenue. During the legislative process in 2007, the Governor's Office of Budget and Program Planning estimated annual wagers of approximately $12 million ($11,985,600 according to the documents). More recently, an article by Online Casino Advisory.com quoted the Montana Lottery Director as expecting "the game to produce between three and five million dollars annually." That may not be the case as published results from the MSA website show.

At the top of the post is a chart showing the amount of wagers per week so far this NFL season for MSA. You are reading it correctly. After 12 weeks, the game that was supposed to generate millions in wagers has barely topped $65 thousand dollars total, with the highest weekly handle a paltry $6,800. You would think that the Montana Lottery and its vendor could figure out how to make a popular GAMBLING game. Obviously not. Don't think that new sports like NASCAR and golf will help these folks either. Fantasy football is the largest of the fantasy sports by a good margin. These other sports are very likely to make LESS than this. Montana Sports Action needs to be renamed More Suckers Anyone.

So, how is this "plethora" of cash broken out? By law, any game that is operated under the authority of HB 616 needs the following revenue split:
  • 74% - Winning Bettors
  • 16% - Montana Board of Horse Racing
  • 6% - Network Operator (Montana Lottery)
  • 4% - Retail Outlets
So, after 12 weeks, $48,753 has gone to the winning bettors, $10,541 to the Montana Board of Horse Racing, $3,953 to the Montana Lottery and $2,635 to the retail outlets. Who is making money? Let's start with the retailers and work our way up.

There are about 150 of the retailers, who had to pay $75 for a license fee to offer Montana Sports Action. In return, they get 4% of the fantasy sports wagers as a commission. To break even on that investment, the retailers will need to sell $1,875 worth of fantasy sports wagers. Assuming each of the retailers sold an equal amount (unlikely), after 2/3 of the NFL season, each one on average has sold only $440. Remember, fantasy football is the most popular of the fantasy sports. Other sports should generate far LESS revenue.

It gets better (if you have a warped sense of humor). Assuming that the betting terminal consumes 150 watts of power, is on for 12 hours a day, and electricity costs 10 cents per kilowatt hour, the terminal will cost the retailer $5.40 per month in electricity. The average retailer earns a whopping $5.84 in MSA commissions. So, each retailer earns enough to cover the electricity costs plus turn a monthly profit of 44 cents. Wow. But remember, that is only if the retailer is performing at the retailer average. Those that are underperforming likely aren't generating enough in MSA betting to even cover the cost of electricity for the betting terminal.

Retailers? NOT making money on Montana Sports Action.

The Montana Lottery is acting as the network operator for the game. So far, they have pulled in just under $4,000 in MSA revenue. To put on the game, they need marketing labor to push the terminals on the retailers, put up the website, etc. But, let's assume all that costs zero. They still need a statistics feed to run the game. Based on the typical rates for these kind of statistics feeds for fantasy sports games, a ballpark assumption is that the cost for fantasy stats for the NFL season would be around $20,000.

Montana Lottery? NOT making money on Montana Sports Action.
Stats Supplier? MAKING money on Montana Sports Action.

The Montana Board of Horse Racing was hoping for this big revenue to keep the horse racing industry alive in the state. To date, they've pulled in approximately $11,250 in retailer license fees and $10,500 in MSA wager revenue, totaling $21,750. Unless jockey insurance drops dramatically and horsemen like race purses around $100, I don't think they are going to get the money they need.

Montana Board of Horse Racing? NOT making money on Montana Sports Action.

So, of all the entities involved in a GAMBLING game, only the stats supplier seems to have a valid profit on Montana Sports Action.

But what if the Montana Lottery's motivation was not really to push the fantasy sports game but really to push lottery ticket sales? We'll examine that possibility in an upcoming post.

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Thursday, November 20, 2008

With Implementation of UIGEA Regulations, the Government Upholds the Law of Unintended Consequences

The Kansas City Star queries on their gambling blog if the government actually made internet gambling more likely with the implementation of the Unlawful Internet Gambling and Enforcement Act (UIGEA).

I think that the trend to liberalizing online gambling laws is well in place and that just implementing some regulations won't do much to speed or slow the process. With the economy the way it is, politicians are going to "get religion" and figure anything that can generate more revenue without raising taxes is a good thing. However, I do think that the poorly drafted nature of the legislation coupled with the sleazy way it was passed did help cement the ultimate path of liberalization rather than prohibition.

The Global Gaming Expo trade show was in Las Vegas this week. I attended and saw a smaller show than last year. I definitely noticed a smaller crowd and noticed more than a few empty booth spaces, where exhibitors were scheduled to show, but didn't. A much more somber show than last year's. The press said attendance was down 7%, but to me it seemed a much larger decrease. Last year, lines were long and it was difficult to move from booth to booth. This year, you could move quite easily and not stand in very long lines for anything, if you had to stand in line at all.

At the show, the head of the American Gaming Association opined that legalization of internet gambling will be a hot topic in the next Congress (which will be controlled by Democrats). With a Democrat in the White House, legalization may come sooner rather than later.

If you remember, in the past year or so, several online gambling companies cut deals with the US Department of Justice and paid fines to cover activities before the passing of UIGEA. These companies had departed the US market with that bill becoming law. You know why? Because they want in when the US legalizes online gambling and don't want to be shut out. Those online gambling operators that still service US customers? I think they made a bad bet.

The table is set for the big brick and mortar US gambling firms to move with a passion if internet gambling is legalized, followed quickly by the publicly traded internet gambling firms overseas. A good thing for gamblers as you will be able to work with legit, above board operators. No need worrying about putting money in or getting your money out.

Sports gambling on the internet? Don't count on that portion being legalized soon, but who knows?

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Saturday, November 8, 2008

Montana Lottery Fantasy Sports Betting In Trouble?

In 2007, the State of Montana passed House Bill 616 (HB 616) which authorized pari-mutuel wagering on fantasy sports. On August 31, 2008, the Montana Lottery began operating a fantasy sports wagering game (Montana Sports Action) under an inter-agency agreeement with the Montana Board of Horse Racing. If you're thinking that it is a little strange that a lottery would be running a pari-mutuel game for an agency well entwined with pari-mutuel wagering, you're not alone.

On September 12th, the Economic Affairs Interim Committee of the Montana Legislature discussed the implementation of HB 616. As a result of that discussion, they requested a formal audit of the Board of Horse Racing. The key excerpt from that request is below:

The Economic Affairs Interim Committee respectfully requests an audit of the Board of Horseracing and its implementation in 2008 of statutes related to fantasy sports gambling in Title 23, chapter 4. Specifically, the Committee is concerned that the approach taken by the Board of Horseracing in its rules and the use of an intra-agency agreement with the Montana Lottery Commission may run counter to the intent of House Bill 616, which authorized fantasy sports gambling in Montana to be conducted by a “pari-mutuel facility licensed by the Board of Horseracing.”

There has been some back and forth between the Lottery and the Legislature on this, with the request for an audit being the latest salvo. This is interesting enough but the game, Montana Sports Action, isn't generating the level of wagering as was predicted during the deliberation of HB 616. In addition, there is the underlying issue of whether the Montana Lottery has the statutory authority to offer this kind of game at all.

Montana Code 23-7-102 states:


  • (1) The purpose of this chapter is to allow lottery games in which the player purchases from the state, through the administrators of the state lottery, a chance to win a prize. This chapter does not allow and may not be construed to allow any game in which a player competes against or plays with any other person, including a person employed by an establishment in which a lottery game may be played.
  • (2) The administration and construction of this chapter must comply with Article III, section 9, of the Montana constitution, which mandates that all forms of gambling are prohibited unless authorized by acts of the legislature or by the people through initiative or referendum. Therefore, this chapter must be strictly construed to allow only those games that are within the scope of this section and within the definition of "lottery game".
  • (3) The state lottery may not: (a) operate a slot machine or carry on any form of gambling prohibited by the laws of this state; or (b) carry on any form of gambling permitted by the laws of this state but which is not a lottery game within the scope of this section and within the definition of "lottery game".

Montana Code 23-7-103 (4)(a) states:

  • A "Lottery game" means any procedure, including any online or other procedure using a machine or electronic device, by which one or more prizes are distributed among persons who have paid for a chance to win a prize and includes but is not limited to weekly (or other, longer time period) winner games, instant winner games, daily numbers games, and sports pool games.

The key here is the meaning of chance. Generally, chance is viewed with regard to lottery and other numbers games in the spirit of pure chance, randomness and equal probability, such as the odds of a coin flip, roll of a die or lottery numbers. In a game conducive to pari-mutuel wagering, although each contestant in the field has a non-zero probability of prevailing, it cannot be said that each contestant has an equal chance of prevailing.

This difference is important and tends to question the ability of a fantasy sports game to be viewed as a lottery game, where the wagering public has the ability to place bets on players with unequal chances of winning. For example, it is not realistic to assert that a quarterback that is on injured reserve or on a bye week would have an equal chance of having the best statistics for the week compared with quarterbacks taking the field. The case of chance would be stronger if the only option of betting was a random "quick pick," where the wagering system randomly selected the wager.

According to 23-7-102 (2), the chapter must be strictly construed to allow only those games that are within the scope of this section and within the definition of "lottery game".

Assuming the meaning of chance is what likely was intended when the Montana Lottery was authorized in 1985 (pure chance), if the Montana Lottery is claiming that Montana Sports Action is a pari-mutuel game, how does that align with the statutory restriction of the Montana Lottery to only offer certain games of chance (pure chance)? As any horse handicapper can tell you, horse racing (pari-mutuel wagering in the USA) isn't a game of pure chance.

Neither is fantasy sports.

When the Lottery came to the Board of Horse Racing in May 2008 and offered to implement a pari-mutuel fantasy sports wagering game, you would think they had to be aware of the restrictions they were under with regard to games eligible to be offered?

Montana Code Section 23-4-301 8(a) states that it is unlawful to conduct pool selling or bookmaking or to wager on a fantasy sports league other than by the parimutuel system and by being physically present at the licensed parimutuel facility.

By observing the evolution of the documents from the Montana Lottery regarding this game, the phrase "pari-mutuel" is dropping out of sight. The June 2008 Montana Sports Action "How To Play" document had 3 mentions of the term "pari-mutuel." The July 2008 Montana Sports Action "How To Play" document had no mentions of the term. Also, an August Wall Street Journal article reporting on Montana Sports Action referred to the game as a "fantasy football lottery game." That article was also mentioned in the same terminology on the Montana Sports Action website.

If the Montana Lottery is claiming that Montana Sports Action is a lottery game, how does that align with the prohibition of 23-4-301 8(a)? Why the change? Hard to say with certainty. Could it have something to do with the Legislature questioning the authority of the Lottery to operate a pari-mutuel fantasy sports wagering game?

It seems that the Montana Lottery might be blowing hot and cold on the same set of facts. That may work temporarily, or with audiences with short memories, but possibly not with audiences that are focused on the issue and have a strong bias toward proper implementation of statutes, like the Legislature.

What if the audit finds that the Montana Lottery is not allowed by statute to offer fantasy sports wagering? Would that mean that any fantasy sports wagers made with the Montana Lottery were illegal and void, and that all wagers need to be refunded? Not sure how any finding of this kind, if ever pursued, would turn out, but it would indeed be interesting to watch.

In a future post, we'll examine the financial performance of the game compared to estimates and attempt to determine who (if anyone) is making money with Montana Sports Action.

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Saturday, October 25, 2008

Gambling Analyst Crunches Numbers To Cast Doubt On NBA Donaghy Claims

On October 2nd, NBA Commissioner David Stern had a press conference to discuss the Pedowitz Report, which supports the assertion from the NBA that referee Tim Donaghy was the only referee gambling on games, he did not affect the outcome of games and he acted alone.

Well, affecting the outcome of games, Mr. Stern was likely referring only to the official scoreboard outcome, not the gambling outcome. If a referee doesn't do anything that has one team win that shouldn't (e.g. the "Tuck Rule" NFL playoff game), but does do things that impact the point spread result, I suppose you could claim that the referee didn't affect the outcome as the actual winner of the game didn't change. Gamblers, however, may not see things the same way.

RJ Bell of pregame.com did some analysis and found out some very interesting information. Here's a quote from his post:

"The first 15 games of the 2006-07 refereed by Tim Donaghy that had big enough betting to move the point spread by at least 1.5 points were UNDEFEATED against Las Vegas - meaning that the big-money gamblers won 15 of 15 times on his games. The odds of that happening randomly are 32,768 to 1."

For those not mathematically inclined, how did Mr. Bell come up with those odds? In spread betting, the theory is that the spread will be such that equal betting will occur on both teams. If that occurs, the assumption is that each team would have a 50% chance of prevailing, even if in real life one team may be much better than the other. The point spread tends to provide a positive handicap to the perceived weaker team. So, if each team has a 50% chance, then it is similar to a coin flip.

What are the odds of heads coming up on a single coin flip? 50% or 1/2. How about heads coming up on three straight coin flips? The probability is P = 1/2 * 1/2 * 1/2 or 1/8 or 1 out of 8. Another way to say this is that the odds of three straight heads is 8 to 1.

What Mr. Bell discovered is that for those 15 games refereed by Tim Donaghy that had such heavy betting on one of the teams, such that the spread actually had to be shifted by at least 1.5 points, the big-money gamblers were on the right side of the wager every single time. Think of it as you knowing heads will come up 15 straight times. What are the odds of that? P = 1/2 to the 15th power or 1/32,768. The odds of this are 32,768 to 1. The NBA Commissioner states that referees didn't impact the outcomes of games. That is not the same thing as not having an impact of any kind.

Tim Donaghy also made calls to another referee in this time period. RJ Bell looked into that and found 10 games refereed by that person had heavy betting on one of the teams such that the spread had to be shifted by at least 2 points. The big-money gamblers were on the right side of those wagers every time. The odds of that happening were P = 1/2 to the 10th power, or 1,024 to 1.

You really think that these gambling outcomes were random? What are the odds that 15 games by one referee went one way and 10 games by another referee went one way (in favor of the heavy betting action)? P = 1/32,768 * 1/1,024 or 33,554,432 to 1. What actually happened only had a 1 in 33 MILLION chance of happening randomly. Hmmm...you know what I think? I don't think this was random chance. Do you?

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Saturday, October 18, 2008

New Legislation Introduced to Regulate Skill Games

Senator Robert Menendez of New Jersey introduced S 3616, the Internet Skill Game Licensing and Control Act. This bill aims to legalize skill games such as poker, bridge and mahjong. Since the passage of the Unlawful Internet Gambling Enforcement Act (UIGEA), there has been calls for the relaxation of restrictions on games that have high skill elements, such as poker.

Although the hope would be that this bill is worked on during the lame duck session of Congress, after the November election but before the new year, my guess is that this bill will not be addressed, due to the seriousness of the recent turmoil in the financial markets and economy. Nonetheless, this does show that the desire is there by some in Congress to undo some of the draconian elements of UIGEA.

PoketFives.com has more details on this development, plus some quotes from the Poker Players Alliance. With governments looking for new revenue sources, it only makes sense to regulate these games, which now are being run from jurisdictions outside of easy US reach. Let US players play these skill games, which they enjoy, and allow them to be run in the US, via operators that are regulated and licensed. In this scenario, everyone "wins."

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Wednesday, October 15, 2008

Casino Robbed? Yes, But Not By Ocean's 11...

A bit of an old story, but yes, a Las Vegas casino did get robbed. Actually, it was the sports book at the Las Vegas Hilton. The Las Vegas Sun story talks about the heist in the early morning of Friday, September 26th.

If you've been to the Las Vegas Hilton sports book, you know it's located next to the buffet. The robbery happened at 6:15 am, which is before the buffet opens for breakfast. This buffet isn't a 24-hour operation, which was probably known to the criminals. It could have been much more dangerous if this had occurred while there was a big line of patrons just feet away waiting to get in.

With all the security, it does seem improbable that casinos can be victimized in this way, but it did indeed happen. Now the sports book is near an exit, whereas the casino cage tends to be in the middle of the property, which likely made it (sports book) more attractive as a target.

Let this be a reminder to always be aware of your surroundings. Even casinos, with large security staffs and systems, can still fall victim to thuggery.

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Tuesday, September 30, 2008

Australian Professional Sports Linking to Online Gambling Firms

As opposed to the stance of professional sports in the US (see related post), in Australia, teams are actively working partnerships with gambling firms -- and earning extra cash. They do have limits on the scope of wagers offered, such as limits on whether the teams can profit or loss from a single match, and limits on wagers on political or other non-sporting propositions.

The cash isn't large, but $2 to $3 million (Australian dollars) per year isn't insignificant. Professional sports leagues' salary structures in other countries are generally not as large as their U.S. counterparts. For 2008, the Australian National Rugby League has a salary cap of $4.1 million (Australian dollars), which is approximately $3.25 million U.S. dollars. So, adding $2 to $3 million in easy revenue when you're only paying out $4 million in salaries (hopefully getting revenues in excess of costs), just adds to the profit picture. The Canberra Times article has information on the gambling deal just struck with the Gold Coast Titans of the NRL. For the Australian Football League, their 2008 salary cap is $8.5 million (AUD) / $6.75 million (USD). So, $2 to $3 million would be a material boost to that league as well. The Australian Football League has the highest salary cap of the professional sports leagues in that country.

Two excerpts from the article are very informative and show the different (and rational in my opinion) perspective of sports leagues in other countries and the leagues here in the U.S.

The Gold Coast Titans CEO was quoted that he anticipated criticism of the club's move into gambling but argued that bookmaking organizations were making money from betting on sport, including the NRL, so they might as well profit.

The best quote is, "while we accept that sports betting is a reality and that clubs are looking to build revenue streams, we will retain the right to examine each proposal on a case-by-case basis," NRL chief executive David Gallop said.

Huge. The chief executive (i.e. commissioner) of a professional sports league accepts sports betting as a reality and accepts the desire by clubs to tie into that to build revenue, but reserves the right to intelligently review and regulate such activity. Seems to make sense to me.

The gambling entity has agreed as part of the deal to implement safeguards to protect the integrity of the game and players and in addition the team signed a betting integrity agreement.

When will the U.S. sports leagues figure this out?

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Thursday, September 25, 2008

NFL and Gambling Linked? Say It Ain't So!

Online Casino Advisory has an article discussing the linkage between the founders of NFL and gambling. History is history so that isn't really big news. However, the NFL's stance opposing gambling does seem more than a bit hypocritical, if not outright schizophrenic. Gambling interest helps drive NFL viewer interest.

The NFL does have communications with the Nevada sportsbooks, so that unusual betting patterns can be quickly discerned and action taken. In that sense, legal sports betting helps protect the integrity of the game. The NFL needs to look at the recent NBA officiating scandal and make sure that that kind of thing doesn't happen.

I don't think players are the weak link. With the high salaries of professional atheletes in the US professional sports, the players aren't the people likely targeted by bad guys -- it's the officials. They don't have the publicity or notoriety and they don't get paid nearly as much.

College is a different matter. My opinion is that college sports wagering needs to be properly controlled. It would be naive to think it is only happening in legal Nevada sportsbooks. You still need the few legal books to help detect unusual wagering patterns. College players are vulnerable due to NCAA rules with regard to income.

I think the professional leagues' opposition to legal sports gambling is misplaced. They should embrace it. What needs to happen is that the leagues need a cut of the wagering. For typical fixed odds wagering, if a book is balanced, the sportsbook should gross approximately 4.5%. So, the leagues get 10% of that, or 0.5%. If approximately $1 billion is wagered illegally each week of the NFL regular season, and that wagering was made legal and regulated, the NFL would pull in an additional $5 million. For a 17 week regular season, that's $85 million. Figuring just an additional $15 million for the playoffs and Super Bowl, a round $100 million in additional revenue every year. Not chump change.

With that, they could easily pay officials more and ensure proper security and game integrity with beaucoup cash left over. Not that officials won't make bad calls, but the public would be more sure the bad call was just that and not something worse.

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Friday, September 5, 2008

Gambling as Entertainment?

Is Gambling entertainment, or just gambling? The Southtown Star article mentions that leisure activities are getting more costly and a gambling outing can be just as enjoyable, with the bonus of possibly winning some money in addition to having a good time.

The author does mention that gambling can get out of control, and become a huge problem in one's life. No argument there. Moderation and responsibility are important. The anti-gambling crowd uses the examples of people that fall into trouble as a means to try and outlaw or limit gambling expansion, but Prohibition ultimately shows the pool logic of trying to stop people from doing what they want to do that doesn't directly impact others. If 6% of the population has a drinking problem, and we don't outlaw alcohol, why outlaw gambling if 1% of the population has a gambling problem?

What I found interesting in the article is the implied comparison between an "entertainment" night out and a "gambling" night out. Could they really be similar in terms of cost? What follows below is a hypothetical comparison of an evening for two. One evening is a typical movie date and the other is a gambling date.

The movie date consists of a dinner for two at a casual dining restaurant, followed by a movie and a nightcap of a couple of drinks at a local pub. The gambling date consists of a dinner for two at a tribal casino buffet, followed by two hours of slot wagering on a 5-line nickel machine (each person playing one machine), ending with a nightcap of a couple of drinks at a local pub. I don't include the cost of gasoline to and from the venues, but we'll treat them as equivalent for this exercise.

Movie Date

Dinner for 2 (incl tax/tip) $60 - 1 hour
Movie Tickets for 2 $15 - 2 hours
Movie Snacks (1 popcorn, 2 sodas) $8
Nightcap (2 drinks each) $20 - 1 hour

Total cost $60+$15+$8+$20=$103
Total time: 4 hours

Gambling Date

Buffet Dinner for 2 (incl tax/tip) $45 - 1 hour
Gaming Play - 2 hours
5-Pay line nickel slot machine
5 lines played @ 6 plays/minute
Payback - 92%
Theoretical loss / minute - 12 cents
Theoretical loss / hour / machine - $7.20
Each person plays one machine
Nightcap (2 drinks each) $20 - 1 hour

Total cost - $45+($7.20*2)*2+$20=$93.80
Total time: 4 hours

So, yes, it is possible to gamble at a higher wager level and for a longer period of time, but given this scenario, a gambling evening can be as lengthy of an escape as typical leisure activities, at a comparable cost. And with the gambling activity, the possibility exists that you can actually win something, possibly making the gambling date very inexpensive indeed.

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Saturday, August 30, 2008

Support for US Online Gambling Continues

Online-Casinos.com reports on a recent poll conducted by the Las Vegas Advisor.com site. As the post title suggests, the poll shows that support for legalized online gambling remains. This poll was more detailed in that the answers available were more than a yes or no. Respondents were allowed choices that nuanced their yes or no positions.

Of the approximately 4,800 votes, the yes/no split was 68%/32%. Being an open, online poll, the result is unscientific but since the poll was conducted on a site that has a Vegas bias, it is still interesting. If any locale would be opposed to widespread online gambling, it would be Vegas.

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Sunday, August 24, 2008

The Ultimate Fantasy Football Magazine

As discussed in a previous post, this is the time of year where fantasy football touts flood the magazine racks with their wisdom, claiming that they are the gospel leading you to fantasy glory or redemption, as your case may be.

The magazines are basically the same. They offer the same core product content:
  • How to play
  • Fantasy league schedule
  • Pro (or college) schedule
  • "Experts" picks
  • Performance projections/player analysis
  • "Cheat sheet"/ranking (for a particular scoring methodology)
  • Page to write down your draft selections
  • Advertising for other fantasy football offerings

All this for $5.99 - $7.99! (US dollars)

Not to plug a particular vendor, but I did get a copy of Fanball.com's "Just Cheat Sheets." This magazine has player rankings based on about a half a dozen different scoring schemes. It is very light on projections and analysis, but it is true to its word as a cheat sheet publication.

But what if you could combine this with some of the standard fantasy football magazine content? Now, that would likely be something you could see paying $10.00 - $12.00 for. With a magazine like this, you wouldn't need to make sure you had two magazines to refer to during a draft preparation or the draft. One magazine you could roll up and stick in your pocket (assuming you wear cargo pants). That, a pen and highlighter, and you're ready! The only thing you would need to worry about is the accuracy of the projections. Over time, the better prognosticators would (hopefully) be able to document their accuracy.

On a separate topic, I have changed my opinion on experts. At first, I enjoyed looking to see where experts viewed players. Over time, I noticed that generally there were few times where the experts radically disagreed, so just like political pundits, they all say pretty much the same thing. I suppose experts picks can be used to make you feel better if you made an early round choice that fizzled. You could point to the experts and say, "see, they all had this guy going in the second round." Forget experts unless the experts were winners of high-stakes contests where they put up their own money to compete. No more experts where they are merely guys who blog (like me) or work for these same publications they want you to buy. If you laid $1,000 of your good money down and won $100,000, I would be interested in your opinions.

If I was starting up a competing magazine, or wanted to increase my magazine's popularity, I might take a hard look at this format and price point. Having several scoring methodology player rankings helps as not every league operates the same. Make it easy for customers to determine your magazine is a good fit for their league, informational and hopefully entertaining. Charge more than a typical magazine, but less than if you purchased two.

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Wednesday, August 20, 2008

Casinos Should Stick to Knitting

Online Casino Advisory has an interesting article describing how the dip in Las Vegas casino revenues may be linked to the venue's deviation away from gaming as the primary source of revenue. In other words, Las Vegas' attempt to diversify away from gaming to help recession-proof itself may have had the opposite effect.

Recently, Las Vegas is struggling while Macao is strong. Each venue is at different ends of the spectrum with regard to diversification. Las Vegas casinos has a substantial majority of their revenue come from non-gaming activities. Macao has a substantial majority of their revenue from gaming -- like Las Vegas used to be.

If Las Vegas wanted to go back to basics, it will be difficult. There's been so much money spent to make Vegas a destination resort, it would take much more pain than this to force a sea change. However, some of the smaller off-strip properties, downtown and second-tier Strip properties might be able to adjust and try a return to the "good old days."

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Wednesday, July 30, 2008

Slot Machine Sleight Of Hand

Do you think that when you "almost" win a jackpot, the machine is "due?" Think again. It's all part of the designed illusion to entice you to stick around. The Ottawa Citizen has a great article that explains the operation of modern slot machines. The good thing about newer machines is that there is the potential of huge jackpots. The bad thing is that there are a lot more losing plays.

The sea change in slot machines came with the Telnaes patent in 1984. His description of the invention says it all: "It is important to make a machine that is perceived to present greater chances of payoff than it actually has within the legal limitations that games of chance must operate."

What does that mean? Well basically, when you play, the microprocessor in the machine determines if you win some, lots or nothing. What's so bad about that, right? Well...there's a kinda bad and a really bad. The really bad you won't see in North American casinos, but the kinda bad you will.

The kinda bad is that modern machines program the non-winning symbols (usually blanks, but they count as symbols) to show up much more than winning symbols. For example, lets say the machine you're playing has 3 strips with 22 symbols on each strip, half of them blank. Assuming random chance, you would think a blank would happen 50% of the time on each strip, which would be correct. What if you knew the blanks were programmed to happen 90% of the time on each strip? The visual representation, however, lets you make the logical mental assumption that each symbol has an equal chance of occurring. Nope.

The really bad is when you play, the microprocessor determines if you win some, lots or nothing. If nothing, then the microprocessor tells the machine what symbols to stop on. That's not really bad. The really bad is that the microprocessor programs a loss to look like an almost win to make you think you just missed. That's really bad. Again, no North American jurisdictions allow this kind of machine. However, even with the kinda bad, you tend to get a lot of "near misses."

So why do this? So you will play longer. Read "play longer" as "lose more money."

"Near-misses create an "Aww, shucks" effect that keeps slots players glued to their stools. Studies have shown that frequent near-misses lead to significantly longer playing times. As one researcher put it: 'The player is not constantly losing, but constantly nearly winning.' "

So, if you know that, and keep that in mind while playing, you hopefully will continue to enjoy playing, but not get caught up and let your play get away from you.

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Tuesday, July 15, 2008

University Study Recommends Legalizing Online Gambling

A Reuters article discusses a new research study jointly conducted by the University of Western Ontario and the University of Nevada Las Vegas. In the study, the researchers provide the breathaking finding that even though that internet gambling is predominantly illegal in the US and Canada, it is "readily accessible." (Wow, that's a newsflash)

The key take away is what's discussed later. The study recommends that governments encourage large corporations "like those that run the major Las Vegas casinos" enter the online gambling market. That is the news here. You see, it's all part of the dance.

The US Government and the big casino operators want in on the online gambling business (i.e. $$$$). Since the major operators were outside the US, the IRS wasn't getting any cash (i.e. $$$$). So, they outlaw "bad" internet gambling. But to get that cash, they just can't turn around and legalize it. You first have politicians seek to have a "study" to see if online gambling can be regulated. There's a bill in Congress to do just that. You also add a university study that recommends legalizing the industry and the stage is about set.

If Congress does pass a bill to study online gambling, what do you think the results will be? My guess is that the results will be something like, "if properly regulated, online gambling can be conducted safely, minimizing risk of problem gambling and underage gambling, etc." Now, the government line is that you can't do this safely, but if a "study" says so, then I guess that makes all the difference.

Then having online gambling illegal is just a ploy to clear the decks of offshore (i.e. non-$$$$ paying) competitors before the gambling big boys come to play. All companies that ran afoul of the Unlawful Internet Gambling and Enforcement Act (UIGEA) won't be able to play unless they pay big bucks to the US Government (i.e. $$$$). Do you wonder why Party Gaming is rumored to be in negotiations with the US Government with regard to liability for internet gambling before UIGEA passed (i.e. $$$$)?

The trend is clear. The move is afoot to "study" internet gambling. The big brick-and-mortar casino companies are just waiting and the big-name internet gambling companies that pulled out of the US after UIGEA passed will reach agreements with the US Government (i.e. $$$$) so they can play too.

Won't happen overnight, but watch for Congress to pass a bill authorizing a "study" next year. Don't be surprised if internet gambling becomes legalized in the US in the next few years.

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Tuesday, July 8, 2008

Pre-Season 2008 NFL Super Bowl Odds

Don't you like football? It's just around the corner. Who's going to win the Super Bowl? For those of you who like to put down a few dollars, pre-season odds are out. As would be expected, the New England Patriots and Dallas Cowboys are early favorites at 7/2 and 6/1, respectively.

An article from Online Casino Advisory has more details as well as discussing the hypocrisy of the professional sports leagues in the US that publicly proclaim their disdain for all things gambling but enjoy the increased popularity that gambling provides.

The key quote of the article is "the true engine that drives pro sports in general, and football in particular, is gambling. The NFL was propelled past baseball as America's sport because of interest in gambling, and the ease with which football is gambled upon."

Unfortunately, the longshots are only around 100/1. However, I don't think you really want to put down too much money on the Atlanta Falcons or Kansas City Chiefs winning it all this year.

There are several sites for odds - do shop around for the best payout if you are so inclined to wager. Good luck!

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Friday, June 27, 2008

Fantasy Football "Silly Season" Approaches

The NFL Draft is ancient history, mini-camps have just completed and training camp is fast approaching. Fantasy football "silly season" is here! On email inboxes, websites and magazine shelves, you are beginning to see ads and mags claiming Dominate Your League...#1 Draft Guide...BE a Fantasy GOD, ad nauseum.

All these entities claiming:
  • Superior knowledge - don't listen to those dummies, subscribe to my service!!!
  • Superior content - rankings and projections for 4,576,394,109.62 players!!!
  • Superior accuracy - buy me now even if your draft isn't until September - it's all good!!!

Being a bit facetious, but we've all seen these kind of claims. You know what I haven't seen? I haven't seen a publication that evaluates itself honestly and publishes how accurate its previous year's projections were. Wouldn't it be refreshing to read an ad stating that "our projections on average were only 35% off from reality?" Of course, that might not generate much in buying enthusiasm. They would be more likely to claim their competitors are evil incarnate before they would actually do a bit of public self-reflection.

Many of these folks compensate by having "expert" rankings of the top ten or so at each position and have "consensus" picks. Gee, do I really have to spend $7.95 to find out LaDanian Tomlinson, Tom Brady and Terrell Owens are good? If the experts wanted to provide some real value, how about having those people accurately rank #20 through #50 at each position? Also, is having the average opinion of six people that really don't know any more than anyone else that valuable?

Of course if there was someone that could predict player stats either weekly or seasonally within 5%, they wouldn't be selling that information to us, they'd be in Vegas making a killing. I guess that in itself may be the best barometer of what "silly season" materials are worth.

Scour the web for free info and if you buy a magazine that has some info you can use and perhaps a page to fill out your roster and scratch off who has been chosen, maybe that's the best use of your $7.95. If your league stakes are low, and you're really in it to have fun, make your own estimates and have fun! That is what fantasy football is about anyway.

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Tuesday, June 17, 2008

Lady Luck Can't Afford Gas to Go to Las Vegas?

A sign that high gasoline prices impact everyone can be seen by the impact on the Nevada gaming industry. Reuters reports that Nevada April 2008 gaming win was 5.1% less than April 2007's gaming win.

Now when the gambling industry talks about "win," they're not talking about YOU winning. They are referring to the money YOU leave with THEM. That said, they didn't take as much from you in April compared to April last year. Why? Well it could be that you got lucky, but the better answer is that less of you went to Nevada and if you did, gambled less.

The Las Vegas strip April gaming win only dropped 1.3% to $524 million. As Dr. Evil would say, "Yes, Mr. Bigglesworth, 524 MILLION DOLLARS." (That's enough money to build a factory that makes minature models of factories) The strip accounts for half of Nevada's gaming win, which tells you that Reno, Tahoe, Laughlin, Downtown Vegas, etc., are getting hit worse.

Does that mean that people are gambling less? Perhaps. But the Reno/Tahoe area in particular has been feeling the impact of Tribal casinos in California for a few years. Why travel all the way to Reno when you can stay close to home and play, especially if gas prices are over $4 per gallon?

Nevada's problem is that the large nearby population base (a few hours drive away) in California, has a great deal of Tribal casinos, which offer basically the same gaming experience, but much closer to San Francisco, Los Angeles and San Diego. The allure of the Las Vegas strip is being hampered a bit by high airline ticket prices and the price of gas in general, as well as increasing competition for Asian players from Macau.

So if you want to gamble in the era of high gasoline prices, you gamble closer. Gambling venues very close to large population centers should perform a bit better. That is borne out by the recent numbers from Atlantic City. Another Reuters report shows that May 2008 gaming win was up 1.6% year over year, to $415 million. Assuming that Atlantic City hasn't substantively added attractions, it is a fair hypothesis that gamblers may be sticking closer to home.

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Wednesday, June 4, 2008

"Greedy" MLB Gets Shutout by Fantasy Sports Leagues

You thought baseball was greedy? These guys even tried to take over fantasy sports by claiming that fantasy sports leagues had to get a license and pay money for box scores! The same ones you see in the newspaper every day, baseball wanted money for. Of course, baseball was claiming that they players "right of publicity" was being infringed - because fantasy leagues weren't paying them for box scores. Yeah, right. It's one thing to put up player pictures and game footage without permission or payment; this is just player names and statistics.

For about 20 years, baseball and the other leagues (yes, they were supporting baseball in this) thought of fantasy sports as a bunch of geeks worthy of scorn. Then, fantasy sports got hot and profitable. Then they claim they are being harmed and try and take over! If baseball had their way, if you didn't pay the license fee, or if baseball didn't feel like allowing you to have a license, you couldn't operate your fantasy league website.

Well, one small fantasy sports website took baseball to court - and won. Won at the District Court level, the Appeals Court level and the Supreme Court level. Actually the Supreme Court declined to take up baseball's appeal, leaving the other decisions in place. For you scoring at home, the series between Fantasy Sports and MLB was a 3 game sweep by Fantasy Sports. Justice for the little guy, I say.

As mentioned earlier, the other sports leagues jumped on baseball's appeal and wrote supporting documents trying to sway the Supreme Court to take up the case. Didn't work. Regardless of all the legalese and twisted logic from the sports leagues, common sense prevailed. If something is in the public domain, like statistics and facts, such as Barry Bonds went 2 for 4 yesterday with a home run, single, walk and strike out, it doesn't make sense that one person doesn't have to pay for that and another person does.

The Sporting News has the full story for those who want to read more and gloat.

What does this mean for fantasy sports? At minimum, the small guys will be able to continue to offer games for you and me to enjoy. You want to get into the industry? You won't have to worry about paying beaucoup dollars to millionaire atheletes (unless you want to).

It's not like fantasy sports doesn't help the leagues. Who really wants to watch the Lions vs. Dolphins unless they have some fantasy players in the game (If you have any of those, I feel really sorry for you) or, you have a bet on the game (same sentiment).

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Saturday, May 31, 2008

Montana Plans to Offer Fantasy Football Wagering

Now this is cool. Coming soon to the state of Montana - pari-mutuel wagering on fantasy football! A law passed last year authorized this as an attempt to raise enough money to keep Montana's horse racing industry going. They've been having problems with stagnant wagering and increasing costs, slowly killing the sport in the state. The Helena Independent Record article has the full details. Horse racing in the US in general has issues, which you can learn more about by reading other posts in the blog.

The Board of Horse Racing was having problems launching the game working with private industry sources, so the Montana Lottery has come in and will develop and operate the game, taking the piece of the action that is authorized for that component. Fantasy football will be the first game, hopefully followed by other sports, such as baseball and NASCAR.

The fantasy sports industry has been historically leery of being confused with gambling, as some with a particular axe to grind have been prone to promote. This application, although based on fantasy sports, is not the same as typical fantasy sports games, which are contests. This game is being structured as a regulated, legal wagering game.

KFFL has a nice short article regarding fantasy sports and gambling which helps to highlight the differences and eliminate confusion. Now this is just going on in Montana. What if this expands to Vegas? If you don't think fantasy sports is hot, you haven't been paying attention!

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Friday, May 9, 2008

Fantasy Sports Attracting Investment

A good sign an industry is "hot" is when venture capital investment flows into it. The Fantasy Sports industry is one such industry. Fantasy Sports can be considered a subset of the Media and Entertainment industry. With over 15 million Americans participating in fantasy sports, and major players like Yahoo, CBS and the major sports leagues involved, the industry is hot - and venture capitalists are zooming in faster than cheetahs on motorcycles, and have been for a couple of years.

Venture deals involving fantasy startups such as Atomic Moguls, Rotohog.com and Yardbarker attest to the attractiveness of the industry to venture capital firms. In addition to VC funding of fantasy sports sites, related sports-themed sites, such as PicksPal, NBX, FanIQ and PROTRADE also have obtained funding.

Knowing that the space is hot is a good thing, but VCs operate in a herd mentality, and what is hot and fundable can change in a heartbeat. As someone who back in 2000 founded a startup and received a $14+ million Series A from a Sand Hill Road VC, I know well the spectrum of emotions and machinations that take place when deciding, pursuing and obtaining venture funding. My startup got its funding right before the tech bubble burst. A couple months of delay and no funding would have been available.

If you decide to pursue venture funding, be aware that it will be very similar to applying for credit. The more you need it, the less available it will be and vice versa. The more you need it, the more expensive (i.e. more ownership percentage and control) you will need to turn over to the venture capitalist or angel investor. However, if you've done a good job, and your need for investment may in fact be better served by a loan, you will be in much better shape to negotiate a good venture capital deal, if you decide to go that route.

With my new startup, I am not looking at venture funding first. In fact, I'm not looking for it at all. So far, the progress to date has been done by bootstrapping. That's not to say that no money has been required. So far, easily $100K+ has been spent, similar to moving up to and through an initial Angel round. The more you can do on your own, you'll be in a better position.

There are some that take VC money because they need to ramp up fast to capture market share in their particular space. That may be a very legitimate approach. My personal bias is that if the industry niche being pursued has low barriers to entry and the winners may be determined more by marketing "carpet bombing" to reach critical mass quickly, I'd be looking for something else to pursue. All else being equal, VCs prefer companies that have sustainable competitive advantages. I agree with that perspective. In a gunfight, what do you prefer to have - a pistol or a tank?

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Friday, May 2, 2008

Michigan Horse Racing Industry Files Suit Against Michigan

In another lawsuit involving the horse racing industry, the Detroit News reports that several horse racing interests in Michigan have sued the state claiming that competition from the state lottery and casinos are killing their industry. In other words, other gambling businesses are bad for their gambling business. They also claim that restrictions passed into law by ballot initiative are not fair because it hurts them, but not casinos.

The horse racing industry has taken a big hit in wagering in the 10 years since casinos opened up in the state - from $474 million in 1997 to $261 million last year. With the closing of Great Lakes Downs last year, there isn't a thouroughbred race track operative in the state. However, there are plans for a new thoroughbred track in the Detroit metro area. There are still harness racing tracks operating.

To get new gaming approved, both a state and local referendum are required. Casinos apparently are exempt from these barriers to entry. The racing industry may have a point, but horse betting has been declining for years and the ballot initiative only passed in 2004. There are likely some structural competitive deficiencies or change in consumer gambling preferences that won't be cured by a successful lawsuit.

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Saturday, April 26, 2008

The Horse Racetrack Industry Analyzed Using Porter's Five Forces Model


Professor Michael Porter of Harvard first postulated the Five Forces Model to help explain the influences that shape industry competitiveness. The diagram above depicts the forces and their source. The entities that can impact an industry participant are:

New Entrants

Others analyzing the Porter model identify that entities such as complementers and governments are missing. In this exercise, complementers will be discussed along with suppliers. Governments, particularly in any wagering business, need to be considered.

We’ll study the US horse racing industry viewed from the perspective of race track operators (tracks). Each entity will be examined to determine the extent of the entity’s leverage upon on the tracks. The objective of the analysis will be to assist the tracks in positioning. The concept of positioning is the key point of Porter.

Suppliers and Complementers

Suppliers provide the inputs which the firm uses to create its product or service. In horse racing the key input is, of course, horses, provided by breeders (horsemen). The majority of horses used in US horse racing are Thoroughbreds and Standardbreds. Other horses used include Quarter Horses, Arabians and Palominos.

The power of horsemen is lessened to the extent that:

§ horses of sufficient quality are plentiful;
§ tracks can offer wagering on the races of other tracks; and,
§ tracks have additional revenue streams, such as slot machines.

The power of horsemen is increased to the extent that:

§ horsemen exercise their right under law (Interstate Horseracing Act of 1978) to restrict the ability of tracks to offer wagering of races across state lines;
§ tracks providing economically viable purses are plentiful and accessible; and,
§ horsemen have the ability to forwardly integrate into the track business.

Typical complementers to the tracks are the off-track betting (OTB) establishments, Advance Deposit Wagering (ADW) providers and race information services such as Equibase. With regard to OTBs and ADWs, these entities can also be viewed as competitors, particularly if they cannibalize patrons that would ordinarily travel to the track to wager.

Buyers (Customers)

Buyers are the wagering customers of horse racing. Horse racing enthusiasts attempt to analyze various factors in an attempt to predict the winning horses. Handicapping allows skilled players the ability to increase their chances of selecting the winning horse. Unlike other gambling activities like lotteries, slot machines and craps, there is an element of skill in predicting the outcome of a horse race. That cerebral activity is an attractant and a detractor from horse race wagering, depending upon the customer preference.

The power of buyers is increased to the extent that:

§ buyers are large or few in number or purchase (wager) in large quantities;
§ buyers wagers are a significant portion of the tracks selling revenue; and,
§ tracks provide a standardized offering such that buyers can find alternative tracks and switch at low or no cost.

Pari-mutuel wagers, either on- or off-track, are the key driver of track revenue. No wagers, no need for tracks or horses. Some tracks have incorporated slot machines and have become racinos, but the horse race wagering remains the lifeblood of the industry.

The amendment in 2000 of the Interstate Horse Racing Act of 1978 permitted betting on horse racing over the internet. This spawned the emergence of ADWs. ADWs generally offer wagering on many racetracks, both in the US and internationally, allowing buyers the choice of alternative tracks at zero cost of switching.

New Entrants

If an industry is lucrative and the entry barriers are low new entrants may enter, increasing the level of competition. For this industry, new entrants can include other tracks, off-track betting (OTB) facilities and ADWs.

Substantial barriers to entry exist with regard to creating a new track. There are significant capital outlays as well as various governmental land use and gaming regulatory permissions required. Depending on the jurisdiction, referendums may be required as well.

Tracks have the following revenue streams common among them: on-track wagering, off-track simulcast wagering on other tracks’ racing, parking, admission and concessions. For those with approvals, slot and table casino game revenues are also available.

Tracks have several revenue streams and high barriers to entry. They seem to be in a good position, but it is an illusion. Of the common revenue streams, the pari-mutuel wagering is the item of interest. Any new entrant only needs to craft a solution to capture pari-mutuel wagering. The large capital outlay to build a track is not necessary to capture pari-mutuel wagers.


Substitutes are products and services that are similar in customer benefit, but are not just the same product provided by a competitor. Substitution can become more prevalent as:

§ buyers find available alternatives;
§ legal and regulatory barriers are removed;
§ technological change reduces the benefit of the product or service; and,
§ buyers’ behavior changes.

Substitute products to horse race gambling are other gambling products such as lotteries and casinos, both physical and online. Since horse race handicapping applies a certain level of knowledge and skill, online sports betting may be considered a substitute. With the takeout or “vigorish” on sports wagers generally less than that for horse racing, sports betting may be an attractive alternative.

There are US statutes that severely restrict the offering of sports wagering by firms in the US. However, several offshore firms continue to offer sports wagering to US customers, regardless of US law. Online gambling may become more prevalent if US law is liberalized, increasing any substitution effects.

Competitors (Rivalry among Tracks)

Rivalry among tracks tends to be regulated by state racing agencies. These agencies divide the available racing days among the various tracks in the state. In many cases, tracks do not have a close physical competitor offering races at the same time. Or, if they do, it may be a “fair circuit” track that generally offers lower quality horses, of hopefully lower wagering interest.

Tracks in general offer the same basic product, horse race wagering and OTB horse race wagering, with the exception of those tracks that are allowed to offer casino games, such as slot machines. With respect to rivalry for off-track handle, tracks with history of high purses tend to attract better quality horses, which tend to stimulate more wagering interest. However, there also is a correlation between the number of horses in a race and the wagering interest on that race. With field sizes of less than 8 horses, the wagering handle tends to drop off quickly.

There is an aspect of indirect rivalry, which is more lack of coordination rather than rivalry. In the US, tracks do not coordinate their race start times such that bettors can have the opportunity to bet on all races. Many races in the US may run within a minute or two of each other, not giving bettors a chance to cash winning wagers on a race on Track A and then betting on the upcoming race on Track B, for example. In other countries, such as Australia, tracks coordinate their start times to maximize the availability of races for betters to reinvest their winnings, maximizing overall wagering handle.

Who Has Power in the Value Chain


Buyers have great power. With the advent of ADWs, buyers have a wide selection of racing, both domestic and international, with no switching costs. In addition, buyers can gamble on state lotteries and patronize land-based casinos in many states. Buyers can also use the internet and patronize dozens of online gambling websites that cater to US customers.

Unlike the old days, horse racing isn’t the only game in town when it comes to legalized wagering. Other forms of US gambling have increased in sales, where horse wagering handle is flattening. Although not true in all cases, on-track wagering handle is stagnant to declining. If inflation is taken into account, overall wagering handle growth looks even worse.


Horsemen currently have moderate power, but potentially have great power. Horsemen provide the core input. They also have statutory power to allow various interstate outlets access to track signals and pari-mutuel pools.

Until recently, horsemen have not been aggressive in utilizing this power, but that is changing. They may run the risk of becoming too aggressive if their demands for a greater portion of the horse wagering takeout extend to areas such as track parking, concessions and slot machine revenue. Horsemen also have the ability to move the highest quality horses between tracks to enhance and/or detract various tracks’ race offerings or boycott tracks with substandard purses, amenities, etc.

Horsemen have the potential to forwardly integrate into ownership and operation of race tracks and ADWs. As the manufacturer of the core input, horsemen have the potential to construct a completely vertically integrated offering – horses, venues and wagering outlets. The only barrier to this vertical integration is governmental regulation and antitrust restrictions.


Depending upon jurisdiction, amount of nearby tracks and served population area, tracks have low to moderate power. Tracks provide the venues that horses need to race. Tracks and horsemen provide the key inputs to the industry.

Tracks have the ability to limit the access to other outlets to wager on its races. Generally, that isn’t done as off-track wagering is much greater than on-track wagering. Tracks do have the ability to forwardly integrate into the ADW space, which has occurred with Magna Entertainment and Churchill Downs. Tracks theoretically can backwardly integrate into the horse breeding space as well, but complete integration will not be able to compensate for a track located in a market that has a small population, nearby competition and onerous government regulation.

New Entrant OTBs and ADWs

OTBs and ADWs should have minimal power. The current structure of the industry allows OTBs and ADWs to enjoy more power than they may deserve as they are in reality nothing more than a retail channel. OTBs and ADWs have no role in the actual manufacture of the racing product.

ADWs are just websites that tie to the various track pari-mutuel pools. They do need to be approved in the various jurisdictions which they desire to offer wagering services and they do need to pay simulcating and other fees to tracks. Offshore ADWs may or may not be licensed to operate in the US, but may do so anyway. In addition, offshore ADWs are more likely to offer rebates to large-volume wagerers. An ADW is more expensive to develop than a typical website, in the hundreds of thousands of dollars versus hundreds of millions for a racetrack.

ADWs can offer convenient wagering from a customer’s home or office, allowing the customer to avoid having to travel to a track or OTB facility. If the ADW is an off-shore entity, they may offer rebates to large-volume customers. ADWs are new entrants that are a threat to tracks’ on-premises business. It is likely that they do not have as high a margin as tracks, but their overhead is significantly lower, which may make them potentially more profitable.

OTBs are location-based, so they are only as powerful as their overall attractiveness. If an OTB is just a place to wager on horses, it is less attractive than an OTB located at an Indian casino, or Las Vegas casino race and sports book.


Mishra, Sam. (2006), Michael Porter’s Five Forces, Retrieved April 26, 2008, from:

Porter, Michael. (2008, January), The Five Competitive Forces That Shape Strategy, Harvard Business Review, Retrieved April 26, 2008, from: http://harvardbusinessonline.hbsp.harvard.edu/hbsp/hbr/articles/article.jsp?value=BR0801&ml_subscriber=true&ml_action=get-article&ml_issueid=BR0801&articleID=R0801E&pageNumber=1

Silbiger, Steven. (1993), The Ten Day MBA, William Morrow, New York, 319-323.

Tiffany, Paul. (2006, March), Corporate and Product Strategy, Product Management Program 2006, UC Berkeley Center for Executive Development.

Wikipedia.org. (2008, April), Horse racing, Retrieved April 25, 2008, from: http://en.wikipedia.org/wiki/Horse_racing.

Wikipedia.org. (2008, April), Online gambling, Retrieved April 25, 2008, from: http://en.wikipedia.org/wiki/Online%20gambling.

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Thursday, April 24, 2008

Churchill Downs Files Suit Against Horsemen's Group

Today, Churchill Downs, Inc., the operator of several racetracks, filed a lawsuit related to its dispute with the Florida horsemen's group and its negotiating agent, the Thoroughbred Horsemen's Group. This dispute centers around money - as in who gets how much. The link to the bloodhorse.com article is here.

The horse racing industry has had problems for quite some time. It was really only a matter of time before all out civil war commenced. Not counting the regulators, the three key parties are the horsemen, the racetracks and the wagering outlets. Each party is "jockeying" (sorry, had to put that in) for the biggest cut of the pari-mutuel takeout. Depending on jurisdiction and type of bet, the takeout for pari-mutuel wagering typically varies from 15% to 25%. With approximately $15 billion in annual horse racing betting, there's over $2.5 billion in money to be divided up among the parties.

The horsemen have the legal ability to withhold permission for racetracks to send their track television signals to out-of-state outlets (to include wagering outlets, known as Advance Deposit Wagering or ADWs). The vast majority of wagering on a races occurs off-track. So, approximately 18 state horsemen's groups have formed the Thoroughbred Horsemen's Group (THG), which is acting as a negotiating agent to form a uniform sharing mechanism for revenue from ADW wagers. That doesn't seem so bad at first glance, but frankly, this industry is screwed up.

A couple of the largest racetrack owners, Magna Entertainment and Churchill Downs, formed a joint venture, TrackNet Media Group, which negotiates on behalf of both companies and their ADWs, TwinSpires.com and XpressBet.com. Churchill Downs seems to have no problem having TrackNet Media Group negotiate on its behalf and, on occasion not allow other ADWs to wager on its races, as Youbet.com was denied access to the Kentucky Derby last year. However, it seems to have a problem with the Florida and other horsemen's groups using THG to negotiate on their behalf, such that it filed suit.

It will be interesting to see how this plays out in the courts, but the real losers will be the horse racing industry in general. Customers, you see, can spend their money betting on races outside of the US, or use off-shore wagering providers that do not share any revenue with horsemen or the tracks.

A future post will apply Porter's Five Forces Theory to the horse racing industry to determine which participants in the value chain have power and which don't.

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Sunday, April 13, 2008

Is Online Poker Sustainable?

It is an understatement to say that poker has become much more popular in recent years. The online version helped spark a new wave of growth in the online gambling industry. One online company, PartyGaming, catapulted to a multi-billion dollar market capitalization at its IPO and joined London's FTSE 100 index.

With the passing of the Unlawful Internet Gambling Enforcement Act (UIGEA) in the US, a large portion of the internet gambling customer base was put off limits to online poker operators (at least those that someday have hopes of legally serving US customers). These operators have refocused on European and Asian customers and are expanding to other games; however, the US impact is still large.

This is not the only challenge facing online poker operators, regardless of whether they still take US customers. At minimum, three major challenges face online poker operators: legal/regulatory, competitive, and game security. With these challenges, the question is whether the current online poker industry is sustainable.

A key point regarding poker is that the majority of the players don't win. For online poker, the estimate is that 90% lose. So, for an operator, the need is to maintain a sufficient inflow of inexperienced players ("fish" in poker slang) to feed the existing base of experienced players, either to grow the business or just to maintain the business. This is somewhat similar to a pyramid scheme, where approximately 90% of the participants lose money. As poker players become more experienced, it can be viewed that they move up the "pyramid." Unlike the pyramid scheme however, those at the top of the poker pyramid are expected to stay and receive a recurring payout, rather than receiving a terminal payout and exiting. This increase of experienced players increases the number of inexperienced players required, which puts a greater strain on the system than a typical pyramid scheme. A good description of pyramid schemes is found in this link to Wikipedia. Each of the challenges to the online poker operators directly impacts the number of new players available.

Legal/Regulatory Challenges

The US UIEGA statute was a huge blow to the online gambling industry, costing publicly-traded online gambling companies billions of dollars overall in market capitalization. Other highly publicized prosecutions of online sportsbook operators and payment processors also chilled the online gambling sector. Up to 2006, the US was approximately half of the online gambling market. This activity has not totally disappeared, but only a fraction of online gambling companies still actively service US customers. For the poker operators that have exited the US, all are competing for the smaller European and Asian markets.

Competitive Challenges

As discussed previously, most poker sites are now competing for European and Asian customers, rather than US customers. Additionally, there isn't a barrier to entry for other poker sites to emerge. So, a larger number of poker sites are competing for a given customer base. Typically, marketing efforts become more lucrative to the player and/or the operator marketing affiliate, reducing operator profitability. The operators need to address the reality of facing more competitors all vying for the new players required to feed the experienced players that generally profit from playing.

Game Security Challenges

The online poker sites have done a good job at identifying players operating in collusion, which was the initial massive game security threat. The current poker sites with upgraded software and oversight are better at detecting suspicious behavior. However, being an online game operator facing off against intelligent human adversaries, it would be impossible to say that all collusion is extinguished from internet poker.

The newer and more serious threat to game security is the increasing use of sophisticated automated software programs that play nearly flawless poker. These programs, known as "bots," turn the advantage toward the bot user and for a price of less than $100, can turn a "fish" into a "shark." This, if not countered, could be the issue that brings the end of the current online poker craze. Actual cheating software won't be discussed, but that is available as well. For an example, see http://www.dtdistributing.com/.

A bot, unlike a human player, does not tire or play based on emotion. Also unlike a human player, the bot can make thousands of calculations per second in order to play more efficiently than a human. If programmed properly, the bot doesn't make mistakes. In addition, bots can scale -- simply obtain more computers and computing power.

Assuming a bot that can generate a profit of $10 per hour per table, the bot can handle four tables simultaneously and a computer that can run two bots concurrently. At full capacity, that computer player would generate a profit of $80 per hour for as long as the bot was up. Want more money? Add another computer. This is a huge problem for online poker operators. What's the counter for the player? You get your own bot.

Software upgrades will come on the scene (if not already) that will analyze for perfect play and use that as an indicator that a bot is being used. The easy counter that operators use to scan a computer hard drive for bot software is beaten by having a second computer with the bot software that reads the poker software on the computer that is actually logged into the game. How bot users will beat the play analysis is that they will program inefficiencies into the bot as a governor, to diminish the profitability of the bot and to masquerade as a human player.

Using technology to gain an advantage is really a big flaw with online casino games that aren't random number generator-based (slots, etc.). In a physical poker game, you easily detect collusion and someone pulling out a laptop would be a bit conspicuous. But in the online world, with hundreds of poker sites, bots can flourish. This is what will likely cause the big decline in online poker and be another impact to the online gambling industry.

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Friday, March 21, 2008

Quick Analysis of Magna Entertainment's 10K

In a previous post, it was mentioned that Magna Entertainment's (Nasdaq: MECA) stock price was near a 52-week low, at 35 cents per share. It would seem at first glance that a gaming company that owns several horse racing and racino facilities couldn't be in such bad shape as to have its stock price fall 90% in a year.

To explore MECA's situation further, its recently filed SEC Form 10-K was reviewed for a few selected metrics dealing with liquidity, solvency and profitability for 2006 and 2007. The results are shown below.

With regard to liquidity, the three metrics evaluated were the current ratio, acid-test ratio and working capital.

Current Ratio: 2006/0.62 2007/0.58
Acid-Test Ratio: 2006/0.56 2007/0.54
Working Capital: 2006/($94.201M) 2007/($162.221M)

MECA's liquidity situation wasn't good in 2006 and got worse in 2007. At the end of 2007, MECA only had 58 cents of current assets to cover every dollar of current liability. Also, its working capital was over $162 million in the red. A healthy company wants current assets greater than current liabilities.

With regard to solvency, the three metrics evaluated were the solvency ratio, debt-equity ratio and the number of times interest earned ratio.

Solvency Ratio: 2006/1.47 2007/1.41
Debt-Equity Ratio: 2006/2.11 2007/2.42
NTIE Ratio: 2006/-0.50 2007/-1.18

It appears that MECA does in the aggregate have more assets than liabilities. The debt-equity ratio indicates that MECA is becoming more leveraged, with total liabilities almost 2.5 times that of the shareholders' equity. The NTIE ratio is also troubling, with the number not only negative, but becoming more so. A healthy company would have EBIT high enough so that earnings would cover interest expense. Not in this case as earnings are negative.

The final set of metrics deal with profitability, specifically EPS and cash and cash equivalents.

Earnings per share: 2006/($0.81) 2007/($1.04)
Cash and cash equivalents: 2006/$47.655M 2007/$34.315M

MECA is losing money and losing cash.

Overall, Magna Entertainment has issues with liquidity, solvency and profitability. Given the approximate 90% drop in share price over the last 12 months, these issues appear to be known by the street and have been factored in.

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Saturday, March 15, 2008

Horse Racing fans are old? So what else is new?

It is fairly well accepted that horse racing followers are getting older. There is a rumor, albeit unsubstantiated, that a valid AARP card is required for admission to racetracks. A couple of students at the University of Arizona did a survey of account wagering (ADW) providers back in 2005 that does put some academic rigor to the age distribution of horseplayers.

According to the survey, almost 60% of ADW customers are 46 and older, 30% are 56 and older. For a gaming industry that is facing increased competition from land-based casinos, internet casinos and lotteries, having an aging customer demographic isn't a good sign.

So it is not surprising that a couple of major horse racing companies, Churchill Downs and Magna Entertainment, have stock prices near 52 week lows. Churchill Downs (Nasdaq: CHDN) closed yesterday (3/14/08) at $42.64. Magna Entertainment (Nasdaq: MECA) closed yesterday at 35 cents (that's right, cents).

The industry has been working on measures to keep up, such as installing slot machines and becoming racinos. Depending on the venue, this has resulted in additional revenue. Some efforts, such as upgrading facilities and increasing purses, may have less correlation to increased revenue. ADW remains the key driver of any increased pari-mutuel handle.

Some tracks have made efforts to attract a younger demographic with lower admission, $1 hot dogs and beer, etc., but that appears only to have an impact on attendance for particular days, and not generating customer stickiness. On the ADW side, some have partnered with mainstream media websites to enhance the sport's visibility. Again, the improvement in the horseplayer demographic is debateable.

What is needed is something that can draw a younger and economically valuable demographic to the sport. This demographic shoudn't be just a spectator, but a wagerer as well.

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Saturday, March 8, 2008

Nevada Gaming Revenue Down Slightly From Year Earlier

A news article from MarketWatch.com references new data from the Nevada Gaming Commission that shows statewide, gaming revenues fell about 5% in January 2008 compared to January 2007. This is the first decrease in gaming revenue since 2001.

In 2001, we had an economic slowdown, exacerbated by 9/11. Since then, Nevada gaming revenues had been increasing until now. It is very likely that the cooling economy is partly to blame, fueled by the mortgage crisis, but it would not be surprising that the expansion of gambling globally, not just in the United States, is beginning to take its toll.

Asian gamblers, common to Las Vegas, may be headed to Macau instead. Other US customers, feeling the pinch of the economy, higher gasoline and food prices, etc., but still desiring to gamble, may be staying closer to home.

To stem this trend, Nevada establishments need to focus on differentiators to draw customers. Las Vegas has been focusing on non-gaming elements to draw customers for some time now. Large luxury hotels, spas, restaurants, entertainment, etc., are pulling in a larger share of overall revenue, relying less on gaming.

However, gaming is still a major draw and if new, innovative gaming products could be developed and deployed, it could serve as an attractant.

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Thursday, February 28, 2008

Gaming Spectrum Explained

This graphic was taken from one of YouGaming.com's presentations. There are probably innumerable ways to segment the gaming spectrum. I organized the overall gaming spectrum into three components:
  • Entertainment
  • Skill
  • Wagering

I then mapped various types of games from the ones most commonly associated with entertainment, moving to the types of games most commonly associated with wagering. Of course, you can wager on just about anything, but some games are more commonly associated with wagering (roulette, blackjack, etc.), and some are more commonly associated with entertainment (Monopoly, checkers, etc.).

The colored ovals tried to encompass the general scope of the particular high-level segments by the types of games common to that segment. In general, there tends to be a more firm demarcation between entertainment and wagering, as you either have a wager or you don't. The skill segment tends to reach into both entertainment and wagering segments.

Overall, the graphic is fairly useful in visually depicting the gaming landscape and where various games and types of games fall into that landscape. By examing the landscape, game areas that may be underserved, or new game types potentially could be envisioned.

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