US Land-based Casino Gaming Revenue Still Not Back to Pre-recession Levels

The June issue of Casino Journal magazine included a quick story derived from the recent AGA State of the States report.  The main point stated was that commercial casino (brick and mortar) gross gaming revenue (GGR), the amount won from bettors, was almost back to pre-recession levels.  To support that, a chart showing those revenues from 2003 to 2012 was published.  At first glance, it appears correct.  However, these numbers don't take into account the impact of inflation on the value of those dollars.  If inflation eats away the value of currency, a greater dollar amount in the future may not be truly more money if compared to earlier years.

I took the CPI data from those years and adjusted the annual gross gaming revenue to equivalent 2003 purchasing power, to see how much of the improved revenues are due to industry growth, or just the inflation of the underlying currency.  Here's the chart showing both sets of data:

Sources:  American Gaming Association, Casino Journal, US Department of Labor

So, you see that GGR is higher in either case, but when taking inflation into account, not that much higher.  In the AGA published data, GGR increases at a compound annual growth rate (CAGR) of 2.96% for the period 2003-2012.  That's not terrible given the recession.  When inflation is factored in, GGR CAGR is a measly 0.48% - much worse.  Gross gaming revenues are basically flat for the last decade.  That is not a sign of a thriving, bright industry.

Wait, there's more!

Going back to the 2004 and 2013 State of the States reports, the AGA reported 443 casino facilities in 2003 and 979 in 2012.  What that means is that in the last decade, the number of brick and mortar casino facilities in the US more than doubled, with overall GGR remaining flat in constant dollar terms.  Now do you see why the land-based casino companies are deathly afraid of more casinos and the dreaded online gaming operators?  If you have to spend tens of millions to a couple of billion dollars to construct a facility, how do you make back the money invested in an industry where profits are flat?  You have to take market share from competitors, who will not allow that to happen willingly.

In my opinion, those casino operators that have facilities the closest to major population centers will be in a much more survivable position than those located farther away.  I see this industry becoming extremely cutthroat in the future, particularly if online gaming becomes more established, further siphoning off revenues from the land-based casinos.

References:

AmericanGaming.org. (2004). 2004 State of the States, The AGA Survey of Casino Entertainment. Retrieved from: http://www.americangaming.org/industry-resources/research/state-states

AmericanGaming.org. (2013). 2013 State of the States, The AGA Survey of Casino Entertainment. Retrieved from: http://www.americangaming.org/industry-resources/research/state-states

Anonymous. (2013, June), Gaming industry revenues almost back to pre-recession levels, Casino Journal, p. 8.

US Department of Labor, Consumer Price Index 1913-2013, Retrieved from:
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

Federal Online Poker Legislation Reintroduced

New York Representative Peter King has reintroduced legislation attempting to federally regulate online poker.  This version is likely different than the version pushed by Senate Majority Leader Harry Reid of Nevada.  His preference is to have federal regulation and licensing, but biased toward the large Nevada casino companies being the only companies to be able to provide the games.

My view is that if the legislation can't be crafted to lock in the big Nevada casino companies as being the only online poker operators nationally, no federal bill will pass.  The fallback for the large operators will be a state by state approach, where the size of their checkbook will buy the licenses, keeping out competition, particularly foreign operators.

Foreign operators would be better served by trying to enter the US market by finding unique US-based opportunities to be their beachhead and not take on the large Nevada gaming companies head on.

The renewed efforts do show that online gaming and gambling is becoming more mainstream and as governments look for more sources of revenue, gambling suddenly becomes palatable.

The story can be found here.

How to Help Horse Racing Industry Sustainability in the US and Canada (Part 3)

This will be a longer post than the previous two posts on this topic, which can be found here and here.  To continue, we've determined a good demographic for new racing wagerers and identified three groups that might fit this demographic.

To recap, what would be a good demographic for racing?  One that had the following characteristics:

1. Younger, naturally...
2. Cerebral (handicapping is an analytical exercise)
3. Affluent (you can't bet money you don't have - preferably)
4. Willing to risk money (that's the ultimate desire - someone has to place a bet)

 What kinds of people would fit this demographic?  I'd look toward the following as a start:

1. Poker and blackjack players
2. Sports bettors
3. Fantasy sports players

We will now take a look at these with regard to the desired demographic as well as the ability to bring them to the track and convert or increase their pari-mutuel spend.

To get to the ultimate result, people of a desirable demographic placing new pari-mutuel RACING wagers, we have to clear some hurdles with them that act as barriers.  There are basically three (not in a particular order):

1.  Interest in RACING
2.  Ability to handicap a race
3.  Knowledge of pari-mutuel wagering

If we don't get a person to a capability in all of these 3 areas, the person won't bet in any appreciable amount, if at all.  You may say that we do this now with traditional marketing.  No, not exactly.  In the post that examined the various advertisements, which ones were the most effective?  The ones that had racing and wagering secondary to the food, beverage and social experience.  In other words, the party was the draw, not the racing.  That's why the cheap beer, hot dogs and music works to draw people to the track, but doesn't result in large increases in handle or persistent additions of a younger racing wagering base.

Inherently racing knows this, so the three hurdles that they attempt to clear with the customers in the "party" approach appealing to the mass market are:

1.  Interest in a party
2.  See some pretty horses
3.  Simple pari-mutuel bets where you have a chance to win something

There's a bit of a difference between how to attract a younger, cerebral, affluent, risk-taking demographic and the mass market.

So, racing needs to focus on the right demographic and move away from mass market approaches to just get people through the turnstiles at the racetracks.  With regard to the groups fitting the desirable demographic, the Horseplayers Association of North America (a pro-bettor group) did a simple survey on a chat board soliciting responses to sports bettors and poker players why they didn't bet the horses.  The post on that topic is here and the HANA blog post is here.  The three basic reasons were:

1.  Takeout is too high (remember the bets they generally make have lower vigorish)
2.  Conduct that impacts the integrity of the race (they think racing is fixed, if you didn't catch that)
3.  Not interested in the sport (no surprise)

So this great demographic needs to somehow get interested in racing, think they can win and learn how to handicap and bet a race.  Do you see how traditional approaches haven't been effective with regard to these folks?  The powers that be in the US and Canada aren't going to lower takeout by any appreciable amount anytime soon and they aren't going to do much about racing integrity issues except nibble around the edges.  As a result, interest in the sport shouldn't be expected to improve.  Appears racing is doomed, right?  Not so fast.  First a bit more background of what has to happen with regard to a successful conversion.

Assuming the new racing wagers have to occur at a facility (track or OTB), we have to get a person to the facility and then get them to make a pari-mutuel wager.  With the current situation, it doesn't seem like we'll be able to directly get a person to the track and bet the horses.  Like traditional racing marketing, can we just get them to the track?  Sure, we can do the mass market party approach or perhaps set up poker rooms at racetracks.  Unfortunately, we still have to clear those three aforementioned hurdles, even if those folks were playing poker at the track or OTB.

With regard to a potential path forward, I'm going to ignore poker players and sports bettors for now and focus on fantasy sports players.  Since sports betting is still mostly restricted in the US and Canada, there will have to be some legal changes to make that type of wagering widely available at racing venues.  Not so with fantasy sports.

The fantasy sports demographic is a great one for racing.  It is an $800 million industry now, with a total economic impact of over $4 billion.  There are approximately 32 million fantasy sports players in the US, 3 million in Canada.  The demographic is lucrative, being affluent, educated and approximately 85% male, 45% within the 25-49 age group, 53% with household incomes greater than $75,000 and 30% with household incomes higher than $100,000.  On average, they are about 15 years younger than the average horseplayer, making this demographic a fantastic one for racing.  A cool infographic on the fantasy sports player is shown below:

Source:  www.columnfivemedia.com

The reason we're going to examine this demographic is that with regard to fantasy sports, there are certain legal/regulatory advantages that allow fantasy sports to be played as a skill game for money that isn't legally considered gambling, although some call it a distinction without a difference.  Regardless, lots of money is risked on fantasy sports here in the US and Canada.  The state of New Jersey recently adopted regulations allowing Atlantic City casinos to offer fantasy sports games in their properties.  A post on that topic is here.  If racing had kept their monopoly going, these people likely would be horseplayers.  But they didn't grow up following racing, they grew up with professional football, baseball and basketball.  And that, folks, is key.

Let's look at something new.  Let's look at providing a fantasy sports pay-to-play skill game at tracks and OTBs that is based on pari-mutuel principles.  If the law allows in certain jurisdictions, we can provide outright pari-mutuel wagers with regard to professional sports.  Here's what a sample tote might show: 

Source:  YouGaming Inc

What would be the metric bet on?  It could be as simple as which quarterback has the most passing yards this week or as complex as some metric based on passing yards, touchdowns, completion percentage and interceptions.  Yes this picture is a bit dated, as Carson Palmer now plays for the Arizona Cardinals and not the Oakland Raiders.  Again, this would be something for a regulated wagering application, not a pay-to-play skill game.  What kind of wagers?  Anything that is offered now:  WPS, Exacta, Trifecta, Pick 4, Pick 6, etc.  Imagine a NFL Pick 6 per week (QB, RB, WR, TE, K, DEF) with a carryover.  Think that wouldn't draw some betting interest?

So, what would be the difference?  In the skill game variant, the player (punter, etc.) would pay the entry fee, which would give the player a certain amount of virtual currency, the same amount for each entry.  The player would then have a series of races that correspond to a particular position (e.g. quarterback, running back, team defense, etc., with regard to football) wherein the player would make various pari-mutuel wagers.  The pari-mutuel wagers are made with game currency, not actual currency.  That's where the legal safe harbor and separation take place.  At the end of the real-world games, stats are compiled, game wagers are paid and the players (punters) with the highest resulting virtual currency win prizes.

To be honest, just coming up with a new game doesn't guarantee people will play.  So any games of this type will have to have some level of attractiveness over and above current fantasy sports game offerings.  This one has a couple.  They are:

1.  Shorter timeframe
2.  Higher prize-to-entry fee ratio

Many fantasy sports games are season-long.  These new games can also last a season, if desired, or can just cover a slate of games or games occurring that day or week.  For the NFL regular season, blocks of games start at 1pm and 4pm Eastern (approximately).  So, you could have two games, each covering that block of games.  Or, you could do that and have games that just dealt with the stats generated each quarter of a four quarter NFL game.  You'll see that there are possibilities for quite a few games in a relatively short period of time compared to typical fantasy sports games.

With regard to prizes, prizes for fantasy sports games can vary from just bragging rights to hundreds of thousands of dollars.  For daily-type games, the predominant mode is head-to-head, so the prize-to-entry fee ratio is on the order of 1.8 to 1, giving a portion to the operator as an administrative fee or takeout.  Some of these games have a larger number of participants, but the general top prize-to-entry fee ratio is around 10 to 1.  

For these new pari-mutuel fantasy sports games, there could be not just top prizes but prize tiers, 1st, 2nd and 3rd.  The more people enter, the more entries will fall into the prize tiers.  Think of this like academic studies where the professor grades on a curve.  In a class with 30 students, the professor may only award 4 students an A grade, 8 B grades and 12 C grades.  If there were 60 students in the class, the professor may award 8 students an A grade, etc.  Same principle here.  So the prize-to-entry fee ratios for these new pari-mutuel fantasy sports skill games could be on the order of 50, 20 and 2 to 1 respectively, providing up to 1 in 4 entries the ability to win a prize.  This kind of game has advantages that could prove extremely attractive to fantasy sports players.  They can win large sums without risking large sums.  And since the entry fees may be in the $5 to $50 range, they could enter more than once in order to execute different wagering strategies.  

What you may be seeing here is that racing has tried to attract new bettors with racing.  What is being discussed is bringing in new bettors with something else, something that interests them.  A ha!

Let's revisit.  To get to the ultimate result, people of a desirable demographic placing new pari-mutuel RACING fantasy sports wagers, we have to clear some hurdles with them that act as barriers.  There are basically three (not in a particular order):

1.  Interest in RACING fantasy sports
2.  Ability to handicap a race fantasy sports
3.  Knowledge of pari-mutuel wagering

You see that if we want to attract fantasy sports players, provided we have an attractive game, all we need to do is teach them pari-mutuel wagering as they already have an interest in and ability to handicap fantasy sports.

Some may say that the concept of bringing in players betting on something else has been tried before, namely with slots at tracks.  I agree and disagree.  I agree that gambling on slots is different than gambling on horse racing.  I disagree in that slot gaming does not and never did have the potential to generate new horseplayers.  What is being proposed here does have that potential.

This new game concept could have utility with tracks and OTBs on a couple of levels.  The first level of course is the money generated either by pari-mutuel fantasy sports wagers or entry fees for skill game fantasy sports contests.  I won't discuss in depth, but the tracks might find these games attractive as the pari-mutuel takeout structure for a horse race won't be exactly the same for this game as certain takeouts that are primarily track or horsemen focused don't apply.  Potentially, a greater percentage of the takeout or administrative fees could end up with the tracks and OTBs.  If this was a regulated wagering game, very likely the person would have to be at the facility, so that might make the ADWs ineligible to offer a regulated wagering fantasy sports game, but could offer such a game in a pay-to-play skill game format.

Also, since tracks only have so many race days per year, there is a lot of time those tracks aren't generating lots of attendance (assuming that they are drawing well during race meets).  Yes, they can still operate as an OTB during their "dark" periods, but the patronage isn't likely that staggering.  But if they can attract sports fans that follow football (including college football), baseball, basketball, hockey, NASCAR, etc., improving their F&B revenues AND playing fantasy sports games for money (which is what drew them in), that may be very interesting.  Even if some days are race days, will the tracks turn these sports fans away?

What is important to note that in this scenario, racing is getting more revenue even though not a single dollar has been incrementally wagered on a horse race.  We've increased revenues via pari-mutuel, but in a different way, with a different game.  I think this path, even though counter-intuitive, is the correct one.  In theory, we got a desirable demographic to the track and got them to make pari-mutuel wagers.  In addition, with that new game revenue, we're helping to sustain racing with incremental pari-mutuel based revenue.

We're not done yet.  Assume we did get the above, we still need to figure out how to get some crossover racing wagering.  With regard to pari-mutuel racing wagering, we still need to clear those three hurdles.  That is a difficult thing to ask as some of the negatives espoused by players in the HANA post aren't going to go away.  Here is where the racing marketing folks need to earn some of their salary.  

My view is that is if current educational efforts on how to handicap could be tweaked some (or perhaps run as is), with this demographic that is at the track, you may get some crossover wagering while they are watching the games.  This crossover may manifest more during race meets, but at OTBs, they won't have the advantage of the fantasy sports players having the experience of the actual venue.  The advantage the racing industry will have is that they will have the right demographic at their property.

If a track/OTB has a loyalty program, perhaps they could modify the program to entice racing wagers from the fantasy sports players.  For example, if a player's club member accumulated $250 in fantasy sports wagers in a month, the next month any racing wagers would accumulate loyalty points at a 5x rate.  This might not only spur crossover racing wagering from the fantasy sports players but perhaps get some of the horseplayers to participate in the fantasy sports games.  A win-win.

By expanding wagering utilizing pari-mutuel principles, this should help the racing industry from a political and regulatory standpoint.  They could make the claim that pari-mutuel wagering is "their" gaming turf, and they have the right to expand pari-mutuel.  Where casinos could balk at tracks wanting slot machines and blackjack tables, their argument is weaker when it comes to just another pari-mutuel game.  In fact, there's no reason casino racebooks (de facto OTB) couldn't offer these games, so they get to participate as well.

To summarize the possible approach to help racing sustainability, the focus should be on expanding pari-mutuel wagering.  Given the current attractiveness of the racing product with people not familiar with racing, the key is to attract them to the tracks/OTBs with what does interest them, provide them pari-mutuel games wrapped around what interests them and then work to generate some crossover incremental racing wagering.

This in no way is a naked claim that what is proposed here is the single solution that will save racing in the US and Canada.  The title of this series is about how to help horse racing sustainability.  However, the offering outlined here does at least have the potential to achieve the result outlined in the previous post:

1. Get more people of a desirable demographic to the tracks, OTBs and ADWs
2. Get those people to place pari-mutuel wagers
3. Get all people to increase their pari-mutuel spend per visit
4. Have that increased pari-mutuel handle help sustain the racing industry

References:

Lamb, M. & Singer, D. (2011, August). Driving sustainable growth for thoroughbred racing
and breeding. Paper presented at the Fifty-ninth annual Round Table Conference on
Matters Pertaining to Racing, Saratoga Springs, NY. Retrieved from
http://www.jockeyclub.com/resources/selected_exhibits_1.pdf

Downes, David W., "Identifying New Pari-Mutuel iGaming Offerings in the United States" (2011). UNLV Theses/Dissertations/Professional Papers/Capstones. Paper 1145.
http://digitalscholarship.unlv.edu/thesesdissertations/1145/