Racing Depends on Bettors — Here’s WHY

In a recent blog posting on the Blood-Horse, Tom LaMarra called for a “Tea Party” for horse racing, a grass-roots effort to fix the problems in racing headed by a “Sara Palin”-type outsider.  I tend to agree that somebody needs to shake up the industry in a big way, and though I’m personally not the Palin/Tea Party type politically, I have to admire their ability to grab headlines and followers.  What I found most interesting about the blog, however, were the comments.

About half of the comments came from people who said they loved racing and the horses but never, ever bet when they went to the track.  As much as I appreciate and can relate to them, they are naive about the way our sport actually works.

I used to be one of those people, who loved the horses and the sport and the history but would never think about actually betting on it.  Then, I went to the track for the first time, and “just had to play along” and placed a few $2 bets.  After winning a couple of those bets, I could see why people enjoyed wagering.  But I could take it or leave it; just seeing the horses race was enough for me.  Not too long ago, I began to wonder where the money came from for the purses.  I had a vague idea that they were paid out by the track, but that was about as far as my understanding went.

Boy, was I clueless!

Here is how the pari-mutuel system works.

Pari-mutuel is the French term for “betting amongst ourselves”.  This means that the odds are set, and controlled, by the amount of money that goes into the pool from the bettors.  The track does not set the odds*.  The players do.  The track acts as a clearing house for the bets that the players make.  The track hosts the tote system that does the calculations for the odds and payouts, which makes for a fairer, consistent game. All of the money that is wagered is called “handle”.

Of course, anything that has to do with wagering is an interest of the state where it occurs; states use wagering as a revenue stream, like a “sin tax” on cigarettes and liquor.  The state itself is not the only stakeholder in racing.  There are also breeders, horsemen and the tracks themselves.  The state legislates a percentage of the handle must be taken out as a sort of fee for the privilege of wagering.  The average “takeout” in the US is 20%.  It varies from jurisdiction to jurisdiction and even between wagers.  Some straight w/p/s bets have as low as 16% takeout and some exotics (like ex/tri) have as high as 25% takeout.  For this blog, I will use the average 20% rate.

This fee is taken when the bet is placed.  This means that the player pays the fee, and the track gets its share, before the race is run.  The track does not care what the outcome of the race is, because it has already gotten its fee.  Winnings at the track come from the other 80% of the handle that bettors have contributed.  This is THE big difference between casinos and race tracks; the casino player only pays the takeout when he wins, and the winnings come from the “house”.

So, the race is run, the 80% in handle is paid out to the winning ticket holders.  What happens to that 20% takeout?

In this example, 1.5% of the handle goes to state pari-mutuel taxes.  Another 3.5% goes to a state breeders’ fund, which goes toward year-end awards and other benefits for the horse breeders in the state.

The remaining 16% is split 50/50 between the race track and the horsemen.  That means 8% goes to the track, and 8% goes to fund the purses.

The 8% is the MAJOR source of funding for the prize money the horsemen win when they enter their horses.  Some of the breeders’ fund may go to state-bred purses, and there may be funding from Breeders’ Cup or sponsors for stakes races, but the majority of purse money comes from handle directly wagered on-track.

If you think of it in dollar terms, only 8 cents of each $1 bet goes to the purses.  The track only gets 8 cents to run the facility.

The admission and concessions and souvenirs and programs that are sold at the track are a fraction of a track’s revenue.  Something around 95% of the track’s revenue is from handle.  Tracks depend on handle to stay in business.

What about simulcasting?  The way the handle is split in that arrangement is even more convoluted.

The track where the race is run is called the “host” track.  The track where the simulcast player is watching on TV is called the “guest” site.  When a bettor places a bet at the guest site on the host’s race, he pays the host track’s takeout, because the pool of wagers is “commingled”, or, bets from the host track and all of its guests are combined.  This makes it easier to calculate odds and payouts.  It also increases the number of bettors and the amount of money wagered, which can make for higher win payouts.  The same 20% takeout is done at the guest site, and it is split in this way:

1.5% to guest site’s state

3.5% to guest site’s breeders

4% to host track

12% to guest site’s track/horsemen = 6% track/6% horsemen

The difference in the simulcasting example is the 4% paid to the host track for the privilege of broadcasting its races.

That 4%, in turn, is split even more by the host track:

2% to host state/breeders

2% to host track/horsemen = 1% to track/1% to horsemen

As you can see, it pays to be a guest track in the simulcasting business.

OH!  But this is not the end of the story — what about TVG and other advance deposit wagering outlets, called ADWs, like youbet.com, you ask?

Those distributors of racing also pay 4% to the host track.  They also may pay a small percentage in state taxes and to breeders’ funds.  But TVG and other ADWs get to keep the remaining 12%.  These outlets do not have horsemen, they do not have large facilities, and so they generate an enviable profit.

The majority of handle is wagered off-track, via simulcast outlets or ADWs.  The host track, which puts on the show, is earning only a small amount of the handle wagered on its race.  Its horsemen are only getting pennies on the dollar for their purse account.  With on-track attendance falling each year, this makes for a serious problem because tracks are not generating the revenue necessary on-track to stay in business.  Instead of 8 cents, they are getting less than 2.  Host tracks, of course, also act as guest sites for other tracks, but they still only make around 6%.  The “best” bet is the one made at the track on a live race.

Now that I understand this, I have become a regular horseplayer.  Every time I am at the track, I place bets.  I’m no whale or high roller, but I do bring enough to make some good exactas.  I feel that to go to the track and not place a bet is akin to stealing cable.  It may not be illegal, but you are still getting a valuable piece of entertainment for free.  And you are also not contributing to the care of the horses – training, vet and feed bills are paid by the horse owners who win the purses that are funded by the takeout from the handle wagered on the race.

I hope that readers now understand how important it is to wager on the races.  Wagering is the lifeblood of the sport.  It is fantastic to go to Oaklawn and cheer for Zenyatta, to enjoy her magnificent presence and outstanding performance.  But it helps her more to bet on her.

*The morning line that the track publishes with the entries is not what the track wants the odds to be.  It is an estimate of what they believe the odds will be at post time, as determined by a formula.  The morning line can does often does change, how dramatically depends on how well the track’s handicapper has “read” the habits of the bettors.  It is done to help novices decide how to wager.

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