California Horse Racing Committing Suicide?

California is in the final stages of approving two major changes to the horse racing industry in the state. The first is an increase in the takeout on pari-mutuel wagers known as "exotics." To simplify, wagers that include more than one horse (e.g. exacta, trifecta, etc.) will have the takeout increase by a couple of percent. I'm not sure how bad or good that change is, but my personal bias is that takeout is high enough already, and increased takeout (think tax) is likely to decrease handle (wagers), thereby making the net takeout revenue unchanged or perhaps reduced.

The second change is the most controversial and in my opinion could spell the demise of racing in California if not squelched. That is the allowing of exchange betting. Although touted by its major proponent, Betfair, I haven't seen a definitive study that shows how racing is benefited in any jurisdiction where Betfair can offer exchange wagering on races.

The way in which this bill added exchange wagering is highly suspect. One surmises that behind the scenes hanky panky was at play. This again is refuted by Betfair - equally and vehemently claimed by opponents that said the addition of exchange wagering only was inserted in the bill just two days before the deadline for amendments. Very fishy if you ask me. In my opinion, the Betfair doth protest too much.

If exchange wagering operates similarly to how it operates in other jurisdictions, the result will likely be the cannibalization of wagers from the pari-mutuel pools (at approximately 20% takeout) to the exchange (at approximately 5% takeout). Good for bettors, but bad for the industry. You see, if the industry now has problems distributing the revenue from 20% takeout, how can it survive dividing up 5%? Doesn't make sense.

Here's one way to describe a potential future. Assume that all the takeout on California racing now is 5 bets of $1 each. At 20% takeout, that gives 5 20-cent takeouts to divide up among tracks, ADWs, horsemen, purses, taxes, etc. Also assume a typical distribution of bettors where the high-rollers are conducting 3 of those bets, with the rest of the horseplayers conducting the remaining 2 bets.

Enter exchange wagering with a 5% takeout. For a $1 bet, only 5% is retained. Given that scenario, it is more than possible that the high-rollers will transfer some of their wagering activity from the 20% takeout pari-mutuel pools to the 5% takeout exchange pools. Let's assume 2 of their 3 bets move that way. What will result is that the 5 20-cent takeouts are replaced with 2 5-cent takeouts and 3 20-cent takeouts. An overall reduction in revenue to the industry by 30%. How in the heck does that make any sense?

For exchange wagering to provide MORE money, overall betting would have to increase by around a factor of 4 times just to be even. Do you really think that will happen? If it did, Betfair would have had that information published all over the place, and this legislation wouldn't have to been snuck in at the last minute.

If the Governor signs the legislation as I think he will, the only way to save California racing is to make sure the tracks and horsemen stick it to the exchange wagering companies to increase their takeout on exchange betting to EQUAL amounts to the current pari-mutuel pools. This way, any cannibalization of pari-mutuel wagering won't hurt the industry - the money will just be coming in from a different source.

Let's see how cooperative Betfair is then when faced with that takeout structure...

Update...the California Horse Racing Board has a press release discussing the bill here.