Expert: Breakage belongs in horse racing’s takeout debate

August 21, 2018 12:01pm

Ask what could improve horse racing, and players are likely to mention lower takeout rates, so it came as no surprise to see the topic highlighted at the recent 2018 Jockey Club Round Table Conference.

The Thoroughbred Idea Foundation, a relatively new non-profit organization, is also curating suggestions to better the industry. Advocating for lower takeout is a major item on its agenda, too.

Pat Cummings, the executive director of the Thoroughbred Idea Foundation, said he was happy to see these conversations taking place, but added that his organization would like to add breakage to the ongoing discussion.

“The actual effective takeout rate is far higher than what’s even being reported,” Cummings said. "That 17.3 percent – that’s the average published takeout rate – doesn’t really factor in elements like breakage, which is something that we’re really quite keen on and talking about and really educating the public.”

While takeout is the percent of money a racetrack retains from pari-mutuel pools for race purses, taxes or operating expenses, breakage is the pennies retained by a racetrack or state after a pari-mutuel payoff is rounded down to nickels or dimes.

As part of the Round Table Conference, The Jockey Club commissioned McKinsey & Company to analyze the Thoroughbred industry, with Dan Singer, leader of the Global Sports and Gaming practice, and senior external advisor Mike Salvaris presenting the findings.

Concerning takeout, McKinsey & Company found that 89 percent of racetracks had a win/place/show rate higher than the optimal one. Using a regression model, the optimal rate McKinsey & Company presented was 15.8 percent.

“We think our initial analysis makes a case for tracks to experiment with lower takeout rates for win/place/show pools, recognizing that it could take six to 12 months for bettors to adjust to new takeout rates,” Salvaris said in the presentation. “In the short term, lowering takeout rate may simply lower revenue for the track and purse, with the ultimate gain in handle coming a year or more later.”

With takeout retaining money from the pari-mutuel pools and breakage taking change off a winning bet, there is less money being returned to bettors’ hands for a subsequent bet.

Cummings used 
Justify’s odds in the 2018 Preakness Stakes at Pimlico Race Course as an example of what breakage takes away from winning bettors:

“Justify paid $2.80 to win. He was 2-5,” Cummings said. "But if you took the actual amount that was in the win pool after takeout was taken away, divide it by the amount of money that was bet on him to win, the number comes out to be 1.44. So for every dollar you bet on this horse, the return is $1.44. Multiply it by two, you get $2.88, that’s your return. But people who bet $2 to win on Justify didn’t get $2.88, they got $2.80.

“If you bet $20, you didn’t get $28.80, you got $28. If you bet $200, you didn’t get $288, you got $280. So it’s that leftover amount, it’s that decimal, it’s rounded down.”

With breakage added on to takeout, Cummings said there is less money being returned to bettors, which in turn leaves them with less money for a subsequent bet.

“In the case of the Preakness, Pimlico has an 18 percent win takeout. But when you factor in the amount of money that’s withheld for breakage, add that into the existing takeout that’s already been taken, and the effective takeout becomes about 20.69 percent for that particular race,” he said.

If more money was returned to the bettors’ hands, Cummings said the trickle-down effect of increased handle, or the amount of money wagered in a pari-mutuel pool, would result in increased purses, which would also mean more money back to the owners, trainers and jockeys.

And, as Salvaris pointed out, lowering takeout could mean less money for the racetracks short term, but the positive outcomes – such as higher purses from more subsequent bets creating a higher handle – would be long-term effects.

From McKinsey & Company’s main focus areas of fan engagement, sports wagering, advanced analytics and ensuring major racetracks are in major cities, The Jockey Club also listed potential projects it would investigate. Among them is advocating for racetracks to experiment with decreased win, place and show takeout rates.

 

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