BREAKAGE - OUTS - PAPER OR PLASTIC?

Fixing a Broken Pari-Mutuel Model
Second in a series of guest posts on the business of horse racing.

By Vic Harrison

Last week we discussed video displays. This week’s issue we consider:

Breakage (the rounding-down of payouts to the nearest nickel or dime) – never has a concept been more passé.

Outs (uncashed winning tickets) – never has there been a more striking difference between betting at a racetrack and betting on a slot machine. Let’s start bridging the gap.

Plastic Bet Cards or Paper Tickets – Let’s count the advantages of plastic over paper.

As a discussion starting point: One fundamental industry problem is retainage, commission, take-out… call it what you will, but it’s a pari-mutuel model that’s broken and in need of deconstruction and reconstruction. Industry leaders need to tackle this major issue head on. I will address some of its component parts, or lack thereof, here with my pea shooter.

In racing jurisdictions around North America both breakage and outs become the property of the track, the horsemen, the breeders, the ADW companies, the regulators or some other related organization. The money is, I’m sure, put to good use: Here in Virginia, 30% of the breakage goes into a backstretch benevolence fund. We all have our hands out, and we won’t easily relinquish our claim to that money. But, breakage and outs are without a doubt the property of the bettors.

Breakage and outs are the hidden take-outs: In Virginia in 2007 wagering handle in-state was $167,684,685 and breakage was $643,967 -- or .38%. Outs totaled $883,330, or .53%. The blended take-out on all pari-mutuel wagers was 21.27%. You’d think that 78.73% would be returned to the winning bettors. Not so fast…when we add back the breakage and the outs, the effective take-out is 22.18% - only 77.82% is being returned to the bettors.

Breakage – rounding-down a payout from, for example, $7.49 to $7.40 -- made sense in the old days because it sped up the throughput at the mutuel windows by eliminating the handling of pennies if not nickels. Today, the true growth segment of our industry is account wagering – no tellers, no windows. Perhaps we could break to the smallest amount possible, return the additional money to the rightful owners – the winning bettors. I guarantee you they will bet that additional money back into the wagering pools. We’re talking increased handle here. Even breaking to a penny will result in some breakage amount - any breakage money remaining can be redistributed in a creative way to the bettors towards the end of a specific period such as a race meet.

Outs – Here’s a radical idea: Do away with paper tickets. Scenario: You walk in to your race track/OTB. You get a card (anonymous or player-tracking). You put your betting dollars on the card. You bet; you hit a winner. You get credited the winnings automatically, even, say, a convoluted Pick-5 bet with late scratches and post-time-favorite substitutions. How simple: You automatically are credited the winnings. You think you’ve a losing wager but the convoluted consolation payout is nonetheless awarded to your account. You are happily surprised the next time you check your balance and you didn’t have the opportunity to have ripped up a valuable paper ticket in disgust and in error. (For those of us that must absolutely have the security of holding a paper ticket in our hands, paper receipts can be issued with our bets – receipts that have the look and feel of a live ticket but without the bar code/ID number.)

This is an area where slots have an obvious advantage over pari-mutuels: On a slot machine we hit PLAY and the winning result is a bunch of squiggly lines onscreen. The average slot player has no idea how he has won or the meaning of the lines but is totally confident that he is being credited his winnings. He had no opportunity to unwittingly toss his winnings in the trash. As with the breakage, the additional outs money is being returned its rightful owners, the winning bettors, and they will bet that money back into the wagering pools, resulting in increased handle; and some of those subsequent bets will be winners, and those winnings too will be bet back.

Ancillary issue: Tellers – I’m all for job creation and retention, but not when its part of a paradigm that has brought an industry to its knees. (Ask your teller about the concept of “dropping” – not unique to pari-mutuels but certainly prevalent here.) Nonetheless, if you have tellers, there’s no reason why bettors can’t bet at a window with a teller and present the teller with the card instead of cash. In a perfect (and not totally unattainable) world there would be enough card readers at your betting facility that quickly show the balance on the card and most recent wagers.

Circling back now to the much larger issue of pari-mutuel take-out: If outs and breakage are reduced to insignificant levels, we must address the loss of these sources of income to their current recipients: the tracks, horsemen, breeders, ADW’s or regulators. It’s part and parcel of the aforementioned deconstruction and reconstruction. Eventually, it will become a problem the answer to which will be critical to the survival of our industry.

Until next time...

-- Vic

For information about Vic Harrison, see Contributors on the About tab.