Advance Deposit Wagering and the Economics of Racing
Introduction
Alan Marzelli Alan Marzelli - President & COO, The Jockey Club

Ogden Mills Phipps: With the advent of simulcasting, the economics of racing has changed dramatically over the course of the last two decades. We've read a lot about ADW recently. Alan Marzelli, the president of The Jockey Club, will now introduce that segment and our three speakers. Alanů

Alan Marzelli: Thank you, Mr. Chairman. Good morning, everyone. As the chairman mentioned, everyone in this room has probably heard and read a lot about advance deposit wagering and the "turf wars" that have erupted over the course of the past year.

But we didn't get to where we are overnight or even in the past 12 months. Indeed it has been a steady and gradual downward spiral to this point.

In a perfect world, the allocation of the wagering dollar would provide the racetrack operator that hosts the show and the horsemen who provide the talent, both equine and human, with a proper economic return. The perfect allocation would also leave enough money in the pools - either in the form of lower takeout or incentives - to maximize churn and attract new fans.

Sound idealistic? Well, based on the history of our industry, it is.

The reality is that the economic balance between providing an adequate return to those who put on the show, the middlemen who distribute the product and the consumer is out of whack. If you really want to zero in on the root of these problems, look no further than the advent of satellite technology and, more specifically, the birth of simulcasting in the 1970s.

Sending a video signal to a location well beyond the gates of your racetrack and accepting wagers from customers remotely wasn't going to hurt on-track attendance or handle, much less change the overall economics of racing.

In fact, however, simulcasting represented a fundamental shift in the business, which left 17 percent of an average 20 percent blended takeout in the hands of the simulcast receiving site and only 3 percent in the hands of the host track and the horsemen. The predictable result, for those of us who are masters of the obvious, is that racetracks and horsemen began selling their product below cost.

The problem was further exacerbated with the advent of advance deposit wagering - or ADW - and the borderless nature of the Internet. Historically, an ADW operator could buy a signal for the same 3 percent as a bricks and mortar simulcast site and market that product to a customer right in the track's backyard. As a result, over the last decade, the economics of pari-mutuel wagering have changed dramatically. And not for the better.

By way of example, let me highlight one day of racing at Aqueduct racetrack that I first presented last year to the Ad Hoc Committee on the Future of Horse Racing when I was describing the broken business model here in New York. For every on-track dollar bet on a race at Aqueduct in 2006, the New York Racing Association received 9.3 percent of the wagering dollar, and 5.9 percent went to purses.

But for every dollar bet off-track, NYRA received a blended rate of approximately 2.5 percent, with the same percentage going to purses.

I used the following example from a typical day at Aqueduct to illustrate the wagering activity and revenue splits to the Ad Hoc Committee.

On track handle for the day presented - January 13, 2006 - was less than 7 percent of total wagering on New York racing that day. Intrastate handle, which includes OTBs and harness tracks within the state, was 31 percent and total handle generated from out-of-state sources was 62 percent.

Now, because of the difference in revenue splits between on- and off-track wagering, NYRA received just $179,000 of revenue out of a total of $6.5 million of revenue that was bet legally on NYRA races that day, a mere 2.8 percent of total wagering dollars!

Horsemen fared only slightly better: They got $187,000, or 2.9 percent.

Had they both instead received the on-track commissions from all of these wagers, they would have instead received $605,000 and $386,000, respectively.

Now this is just one day of racing in one state - a small piece of the $15 billion that is wagered legally, let me say that again, on North American racing in 2006.

To solve this problem, I think everyone in this industry needs to be mindful of those with an investment in this sport, and I don't just mean the racing associations, horsemen and ADW operators.

I also mean every fan that places a legitimate and legal wager on our sport. They have invested their time, their interest and their leisure dollars, and they are caught right in the middle of the current ADW crossfire.

Today, we're going to hear the viewpoints and business philosophies from three prominent stakeholders that are in the middle of this issue. We are grateful to Bob Evans, Joe Santanna and David Nathanson for being here today to share their viewpoints with us.

Bob has brought a wealth of experience in manufacturing, business consulting and technology to Churchill Downs, and he just completed his first year there this week. He is also a Thoroughbred owner and breeder. Bob, welcome to The Jockey Club and the Round Table Conference.

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