The story of pari-mutuel betting in the US: Saving horse racing By Artur Loss February 24, 2014 at 8:03 pm The run-up to the Kentucky Derby 2014, which is on the 4th of May this year, began on Saturday the 2nd of February with the Risen Star Stakes at Fair Grounds in New Orleans and the Fountain of Youth Stakes at Gulfstream Park in Florida. Kentucky Derby is still a big event attracting large crowds every year, which has no problems selling out tickets for the big day. However, in recent years horse racing has lost a lot of its fan base. People are choosing other means of entertainment, leaving racing behind. Experts say that this is due to increased competition from other types of gambling, and there is little hope for horse racing to get back to its former glory. How has it come to this and what lies ahead for horse racing? This story will attempt to answer this question. Horse racing was brought to US by British settlers in 1665, and the first track was laid out in Long Island (Kouperstein). The wagering method used for betting on horses is pari-mutuel betting. Pari-mutuel betting is a system of placing bets where winning players divide the total amount of bet in proportion to their individual wagers less management expenses. It was invented by a Frenchman Pierre Oller in 1865 and first used for horse racing in the US in 1871 in New York (Rudd et al., 2009). The introduction of this betting method became a turning point in the history of horse racing, which has shaped it in a way it is known today. It is also used for making bets on greyhound racing and jai alai. In 1908 pari-mutuel betting became the standard for horse race wagering when used at Kentucky Derby that year (Rudd et al., 2009). Back then horse racing was very popular. Races were held several times a week, and attracted enormously large crowds of up to 80,000 people. This was the golden age of horse racing. The sport prospered until 1950s and 1960s, when it declined in popularity. However, it recovered in the 1970s (Kouperstein). In the 1989 horse racing was the second most popular sport in US after baseball. „56,194,565 people wagering $9.14 billion attended 8,004 days of racing“ that year (Kouperstein). Unfortunately, just after that horse racing started to lose its popularity. The number of races has decreased from 74,071 in 1989 to 54,304 in 2002 (Scott, 2003). Once a beloved entertainment, it was replaced by baseball, lotteries, and casino-style gaming. The newly introduced land-based, riverboat, and tribal casinos were too hard to compete with. The availability of additional gambling options was „crowding out“ pari-mutuel betting. There has been a steady decline both in the number of races and live racing handle each year. The proposed solution to this problem was expansion of betting opportunities outside of the racetrack. Off-track betting (OTB), a possibility to make a bet on a horse without attending the race track, became legal in New York in 1970 (Rudd et al., 2009). Another betting option originated then was inter-track wagering (ITW), allowing spectators to bet on a different race than they were attending (Rudd et al., 2009). Although introduced in the 1970s, these betting options became widespread much later. In 1986, the percentage of bets made off-track was still only around 20%, which increased to 87% by 2003 (Rudd et al., 2009). The introduction of these betting methods has had two major effects on horse racing. The first one was the decline in track attendance, and consecutive reduction in the number of races. It has decreased by 27.8% between 1989 and 2003 (Rudd et al., 2009). However, the second effect has offset the first, and the level of thoroughbred handle, which is the amount bet, has seen a steady growth, most of it coming from off-track betting. It accounted for 86.52% of handles in 2002 (Scott, 2003). In spite of the perceived negative impact on track attendance, off-track and inter-track wagering is what saved pari-mutuel betting and horse racing. It kept people interested in the sport, which also made them more likely to attend the track. Racetracks also get a share of the handle generated through OTB and ITW (Rudd et al., 2009). Despite the support new betting options have provided for horse racing, it was not enough to bring it to its former glory. OTB and ITW have certainly changed horse race wagering, as most of it today occurs outside of the racetrack through off-track betting or online. However, this innovation alone was not enough, as the gross annual pari-mutuel wager in the consecutive decade has seen only a slight increase from $17 billion it was in 1987 (Claussen & Miller, 2001). The suggested fix for this problem was the introduction of slot machines to the race track. This move was supposed to bring people back to live racing events. Racetracks with slot machines on the premises were called “racinos“. By August 1999, there were 21 “racinos“ in the US, which resulted in a two fold increase in revenue since 1996 (Claussen& Miller, 2001). Some tracks have performed even better. For example, Dover Downs race track at Delaware increased its revenue from 39 million dollars in 1997 to 140 million dollars in 1998 after the introduction of 2,000 slot machines on its premises (Rudd et al., 2009). This trend has also continued through the next decade. Between 2006 and 2007, gross purses of 17 North American “racinos“ increased from $135.3 million to $295.2 million after the introduction of slot machines to respective tracks. This was a staggering 118% increase (Malinowski & Avenatti, 2009). Additionally, in 2008, 44 racetrack casinos had generated $6.19 billion in gross gaming revenues, a 17.2% increase over 2007, due to the said change (Malinowski & Avenatti, 2009). This substantial revenue growth was achieved by both improving track attendance and receiving additional revenues from slot machines. Some percentage of winnings from slot machines at the track was also probably bet on horses. The introduction of slot machines at racetracks has been another crucial moment in horse racing, which helped it to prosper. However, the current expansion of US gambling market poses new challenges. Research has found that the success of racino model is not universal across US. For example, in Louisiana the introduction of slot machines at a racetrack did not have a significant effect on racing handle (Scott, 2003). What really matters there is the new competition. Additional casinos and racetracks inevitably divert customers away from existing ones. Research has shown that within a 200 mile radius of a racetrack, a dollar of new casino revenue reduces live racing handle by 3.1 cents, while a dollar increase of live racing at the competing track reduces live handle by 9.6 cents (Scott, 2003). Today, horse racing is still having a hard time. Despite all the measures described above, there is not enough revenue from pari-mutuel handle to support the industry. There are several possible solutions to this problem. These are developing the “racino“ model further by expanding gaming floors or introducing slot machines to new tracks, receiving subsidies from the rest of the gaming industry or the government, or reviewing the horse racing legislation to ensure it takes into account all the realities of horse racing industry of the 21st century. The first approach, among many others, was taken by Finger Lakes Racetrack management. The facility had a grand reopening on the first of November 2013, presenting to the public a $12 million expansion, with 350 additional slot machines, 102-seat restaurant, and a 140-seat bar opening on the premises (Kingston, 2013). Another route to be taken is for the industry to get subsidized by other gaming industry players or the government. Pennsylvania is an example of this approach. It has used the state subsidies to support its horse racing industry. This state subsidy directs 12% of casino slot revenues to the Race Horse Development Fund (RHDF). The fund has received $225 million in the 2012-2013 fiscal year, which helped increase prize money and support horse racing in general (Wood & McCrone, 2014). Finally, the real solution is to resolve long standing problems with the legislation around horse racing. Important issues include the inadequate share of revenue tracks and other industry stakeholders receive from off-track wagering, the legal status of online pari-mutuel betting, and other industry problems regarding humane treatment of horses and use of certain drugs during races. Other ways to revive horse racing include sponsorships from major corporations and employing racing promoters. The horse racing industry is using an outdated business model, which worked in the last century, but is not viable any more. The customer is spoiled with choice of gaming entertainment today. There is simply not enough interest in horse racing these days in order to fill up the track every single time. The small percentage the track has from each bet is simply not enough to support such a demanding industry. There is a great need in the legal restructuring in this area if horse racing is to prosper. The problem is nobody would agree to subsidize the industry, which does not bring any explicit value to society. However, the nearest future of horse racing is not necessarily bleak. Tracks will further develop the “racino“ business model, while getting additional help from the state out of the pool of money it receives from other gaming industry players. Betting online is likely to become more accessible, and horses will hopefully be treated better. In the long term, however, horse racing is likely to become a much smaller part of the “racino“ model than it is today. References Claussen, C., Miller, L. (2001). The Gambling Industry and Sports Gambling: A Stake in the Game? Last accessed 25th Feb 2014. Kouperstein, T. History of Horse racing. Last accessed 25th Feb 2014. Malinowski, K. & Avenatti, R . (2009). Impact of Slot Machines/Video Lottery Terminals (VLTs) on the Economy, Horse Racing and Breeding Industry, Agriculture and Open Space in States/Provinces where they Exist: Why is this Important for New Jersey? Last accessed 25th Feb 2014. Rudd, D., Mills, R., Flanegin, F., & Litzinger, P. (2009). Racinos – The Marriage of Horse Racetracks and Casino/Slots-Style Gambling – Friends or Foes? Last accessed 25th Feb 2014. Scott, L. (2003). The Economic Impact of a New Racetrack on Horse Racing in Louisiana. Last accessed 25th Feb 2014. Wood, S. & McCrone, B. (2014). Pa. lawmaker proposes using horse racing funds for schools. Last accessed 25th Feb 2014. Artur Loss has a degree in Economics and Management from Aberdeen University. The gambling industry fascinates him, especially its latest developments in US. Artur enjoys swimming in his free time.