The Business Of Racing: What Sports Betting Means for New York Racing

January 20, 2021

By Steve Zorn

Sports betting, once limited to casinos in Nevada and Atlantic City, is expanding throughout the US. Eighteen states plus the District of Columbia currently permit betting on sports events other than horse races; four more have passed legislation allowing sports bets but haven’t yet implemented it; and bills are pending in seven additional state legislatures. By the end of this year, it’s likely that sports wagering will be legal in more than half of US states.

In some states, including New York, bets can be placed only at casino sports books. In others, like New Jersey, betting is available online as well. And that’s where the money is. In New Jersey, over 80% of sports bets are made online, which helps explain why the state, with less than half the population of New York, generates well over half of the handle that is recorded at the brick-and-mortar sports books located at casinos in New York.

As a new legislative session begins in Albany, there are already two proposed bills, with two very different visions of what online sports betting in the state should look like. Assemblyman Gary Pretlow and State Senator Joseph Addabbo, the chairs of the committees overseeing racing and other gambling, have proposed a bill that would authorize all the existing betting outlets in the state, including race tracks, OTBs, etc., to host online sports betting apps. Addabbo’s bill has just been reported out of committee, moving it along in the legislative process. In contrast, Governor Andrew Cuomo has proposed a single-source model for online betting, in which only one vendor would be licensed by the state. It’s far too early in the legislative session to know which model will prevail, or even if any legislation at all will emerge from the black box that is the New York Legislature, but the Governor’s concept would certainly not help the state’s tracks and horse owners.

Over the past half-century, the state’s breeding and racing industry in general, and the New York Racing Association (NYRA) in particular, have had four opportunities to benefit from new legal and technological developments. Two of these were basically failures from racing’s point of view, one was a solid success, and the fourth, sports betting, remains in the balance.

The first opportunity was the advent of off-track betting in the early 1970s. The horse racing aristocrats who were then at the helm of NYRA turned down an opportunity to operate, or even to be involved in, off-track betting in the New York City area, believing, apparently, that gentlemen weren’t bookies. Instead, the state created the patronage-laden NYC OTB operation, conceding to NYRA only in requiring that the original OTB parlors be as unwelcoming as possible, with no chairs, no bathrooms and no live feed from the tracks – plus a ridiculous 5% surcharge, in addition to the regular track takeout, on winning bets. Eventually, many NYC OTB venues came to resemble a decent bookmakers’ establishment – a couple even offered bars and restaurants). In 2001, learning from past mistakes, NYRA formed a partnership with Churchill Downs Inc., to bid for the franchise, which was supposed to be spun off from NYC control under then-Mayor Rudy Giuliani’s privatization plan. But the plan – and NYRA’s opportunity to operate OTB, was abandoned when Giuliani left office. NYC OTB eventually went bankrupt in 2009 and closed up, a victim of political patronage and bad management.

While it was alive, NYC OTB never paid NYRA and the horsemen’s purse account more than a tiny fraction of the takeout, even as on-track attendance dropped from the weekend crowds of 30,000 or more typical of the 1950s and 1960s to the low four-digit “crowds” of today (or rather of pre-pandemic times). And one can only speculate what it might have paid if NYRA had owned or operated it from the start. Presuming that NYRA ownership would have done away with the heavy costs that layers of political appointees laid on the operation.

Racing’s next opportunity came with the advent of simulcasting, first allowing bettors at one track to watch and wager on contests at other tracks, and then, later, expanding to include off-track advance deposit wagering (ADW) outlets like Twin Spires, TVG and Xpressbet. Although simulcasting was legalized as early as 1978, with passage of the federal Interstate Horse Racing Act of 1978, growth was slow; it wasn’t until 1984 that the Kentucky Derby was first simulcast, and then only to 24 other race tracks. And at first, tracks viewed simulcast revenue as new, found money, nothing but a splash of icing on the cake of their real revenue, which came, and which the tracks probably believed, would always come, primarily from on track handle. In that spirit, they practically gave away their signals, asking for as little as 3% of handle from simulcasters, leaving the rest of a 15-20% takeout on the table for the receiving tracks or ADW operators. Today, of course, more than 90% of total US racing handle is bet off-track, and the race tracks, having seen the error of their earlier ways, are belatedly trying to recoup some of the money, raising fees for the better tracks to 6-8%. NYRA has also, finally, become a bookie, through its captive ADW, NYRABets, which earns all the takeout from bets in New York and most of it from bets elsewhere. So far, though, NYRABets is at a disadvantage; having come so much later to the ADW game than Twin Spires and Xpressbets, NYRA still has to watch those behemoths rake in most of the handle even from NYRA’s own tracks.

As casinos expanded across the country in the 1990s, racetracks in many states successfully lobbied for a piece of the action, in compensation for the gambling business that they might lose to slot machines and table games. The result was often that either (1) the track was permitted to set up slot machines on its premises, or (2) casinos were required to divert a slice of their revenue stream toward the race tracks. In New York, the New York Thoroughbred Horsemen’s Association (NYTHA), led by the late Rick Violette, lobbied for and eventually succeeded in having more than 7% of the net win from the machines at the mammoth Resorts World casino at Aqueduct earmarked for the purse account, along with a similar sum for NYRA operations and a lesser amount for the New York State breeding industry. (Disclosure: I was on the Board of Directors of NYTHA throughout this effort.) The contract between NYRA and Resorts World runs through 2036, and the money from the slot machines has recently accounted for about 40% of NYRA purses. In other states, like Pennsylvania and West Virginia, purses are even more dependent on casino subsidies. While the money is nice while it lasts, pressures on state government budgets, intensified by the COVID-19 pandemic, will, sooner or later, reduce or eliminate this off-track revenue stream. In New York, that means big-league racing at NYRA has a time horizon of just 15 years, until the end of the Resorts World contract, unless handle grows dramatically or unless some substitute source of funds is found.

So, sports betting is the next, and perhaps last, hope for an outside boost for racing, a revenue source not based on betting handle from the track. Like slot-machine income, sports betting could supplement handle in either of two ways: (1) the tracks could offer their own sports books, perhaps by making deals with FanDuel, DraftKings or some other competent bet taker to run the show as their agents, or (2) a stream of income from non-racetrack sports books could be diverted toward the tracks. The Pretlow-Addabbo bills in the New York Legislature would follow the first model, while Governor Cuomo’s approach might allow for the second. There’s no legislative text yet so no way to be sure, though I am pessimistic, and only in part because Governor Cuomo is famously anti-racing. More importantly, the second approach requires that the State give up a slice of revenue that would otherwise flow directly into its own budget – not an easy sell in these difficult times for state governments.

Nor is there any certainty that the amount of revenue to be raised from sports betting will be enough to make a meaningful difference in race track and horse owner finances. In New Jersey, for example, nearly $1 billion in sports wagering handle last November produced barely $50 million in net revenue, after returning almost 90% of the money to bettors and taking out expenses. Sports betting operates on a significantly lower takeout than horse racing – generally in the neighborhood of 5-10%, compared to 20% or higher at the track, so there just isn’t as much to go around. And with the government so needy, there’s likely to be even less.

Back in the 1940s, race track takeout in New York was 10% – half for the track and purses and the other half for the government. Then in 1946 New York City Mayor Bill O’Dwyer tacked on another 5%, pushing takeout to 15% – still 5% for the track and the remaining 10% for state and city governments – and setting us on the road to today’s environment of high takeouts and consequently stagnant handles. So, even if racing succeeds in getting a piece of the sports book action in New York, it probably won’t be the magic bullet that saves racing, just as off-track betting, simulcasting and slot machines haven’t been either. This year’s battle in Albany may not be rearranging the deck chairs on the Titanic, but neither is it the final showdown that will make or break New York racing.

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