TIF Reports: Penny Breakage Returning Rightful Winnings to Bettors and Stimulating North American Tote Pools

TIF Reports: Penny Breakage Returning rightful winnings to bettors and stimulating North American tote pools September 7, 2018 TIF Reports: Penny Breakage September 7, 2018 Preface The recommendations offered in this and The Thoroughbred Idea Foundation (TIF) was subsequent papers aim to serve as a starting recently launched to provide an active forum point for industry change. TIF welcomes your for the exchange, curation and advocacy of feedback via our website – ideas which will improve thoroughbred RacingThinkTank.com. racing for all stakeholders, and specifically its primary financial participants – horseplayers Introduction and owners. The Jockey Club’s Round Table Conference Implicit in this process will be the discussion on Matters Pertaining to Racing in August of various industry policies and positions 2018 featured a presentation from McKinsey which may have existed, unchanged, for consultants in which they identified 15.8% as decades. The topic discussed in this paper is the “racetrack revenue-maximizing” takeout one of those. TIF believes the industry must rate for win, place and show pools (WPS). thoughtfully address matters which can help Unfortunately, for both horseplayers and stem the downward trends experienced the racetracks, the average takeout in WPS within the last decade. Foal crops are at all- pools across more than 60 tracks studied is time lows, handle dropped precipitously and 17.3%. has since flat-lined, while industry consolidation is an unavoidable result. But the reality is far worse for bettors in those pools when factoring in breakage. Racing, as a whole, is incredibly reliant on past performance. For the sake of the Serving as an additional rake on winning industry’s future, we suggest that such bets, breakage increases the effective reliance be limited to the analysis of horses. takeout to near 20% or higher in some The sport’s existing model was developed jurisdictions, reducing the return to bettors decades ago, where elements of pricing, and thus reducing the amount of money that transparency and innovation were far less could be churned back into the pools, important to the sustainability of the increasing handle. business, especially while racing enjoyed a near-monopoly in the legal sports betting As handle on North American racing has environment. Our intent is not to shift pieces essentially stagnated over the last five years, of the proverbial pie from one group to and is down more than 20% for the last another, but rather to grow the pie for all. decade, racing operators and regulators need to find ways to stimulate wagering. Given improvements in technology, changes One way to help the entire system would be in the way horseplayers bet on races and to return the rightly earned winnings to increased competition from other forms of bettors, without the burden of breakage. wagering, it is imperative the industry updates its model to keep pace with the current environment and then focus on getting ahead of the curve. 1 TIF Reports: Penny Breakage September 7, 2018 What is breakage? That means that the total amount to be returned to winning bettors is $82,700 Breakage is the difference between what ($100,000 minus the $17,300 takeout). horseplayers should receive on a winning bet and what they actually receive. The favorite in this hypothetical race has $39,530 bet to win, which converts to an Essentially, breakage is a rounding down of a even money chance (1-1). Take the winning dividend in order to present a tidy returnable winning pool of $82,700 divided payout, eliminating the need for tellers to by $39,530 and the raw return for every $1 count and return pennies to winning on- wager would be $2.0921. Since it is track bettors. The concept has been ever- impossible to pay $0.0021, the rounded present in racing since the pari-mutuel tote amount bettors would be entitled to would system was implemented. Breakage impacts be $2.09 for every $1 wagered. With a $2 every pool in pari-mutuel wagering and can minimum bet, this horse should return never be fully eliminated as there will always $4.18, but yet nearly all jurisdictions in be some rounding required to the nearest racing return just $4.00 to the winning penny. bettor. Penny breakage exists in various aspects of In this example, $3,640 is retained in daily life. The total you owe once filling your breakage from the race. When added to the gas tank is broken to the penny based on a $17,300 already withheld as takeout, the cost per gallon and the exact filled amount, total amount which did not get back into the using decimals beyond two points. The price hands of the winning bettors totaled of produce, meat or fish might be based on $20,940 – creating an effective win pool a pound, but the scale used to measure how takeout rate of 20.94% from the original much you are actually buying is often $100,000 wagered. (See Exhibit A in the calibrated to two or three decimals. The Appendix for more details) break on your payment goes to the penny. This effective rate is also 32% higher than the Unlike fuel or produce, North American 15.8% rate suggested to racetracks by horse racing does not break to the penny, McKinsey in their recent report to The but in most cases, the nearest dime on every Jockey Club. dollar. For horseplayers, breakage is most notable in pools where winnings are smaller Now consider that breakage happens in – such as WPS – as opposed to exotic pools every race across North America. The effect with higher payoffs. of breakage varies depending upon the particular rounding characteristics of a Here is a basic example of the impact of race’s pools, but the impact is the same – breakage in pari-mutuel tote pools. horseplayers do not receive their fair share of winning dividends. Take a race with $100,000 bet in the win pool where the takeout rate is the Based on a review of various racing aforementioned industry average of 17.3%. commission reports delineating breakage, the Thoroughbred Idea Foundation 2 TIF Reports: Penny Breakage September 7, 2018 estimates breakage at roughly 0.45% of total Should you have wagered $20 to win on handle. That suggests breakage totals at Justify in the Preakness, the return was least $50 million per year. With this money $28.00, not $28.80. A $200 wager would returned to horseplayers, we estimate the have yielded $280, not $288. The difference betting churn from breakage to total at is breakage. See Exhibit C in the appendix for least an additional $200 million in annual additional details on the calculation of win- handle. pool breakage from the Preakness. Breakage in the 2018 Triple Crown The impact stretches to the place and show pools as well. Below, find the place and show The 2018 Triple Crown serves as a useful payouts from the Preakness, along with example of the impact of breakage. what the payouts would have been with breaks to the penny. Notably, Justify Justify returned victorious in all three legs as returned $2.80 to win and place in the the favorite. Each of the win payouts on Preakness, but if penny breakage was Justify were impacted by breakage, with just implemented, he rightfully would have over $1 million retained in total breakage rewarded place backers more than those in for the three wins. the win pool. Effective takeout was highest at Pimlico, not Preakness Win Pool Breakage $ 355,755 Pay merely because the Maryland track has the Place Total Horse Without highest win-pool takeout of the three Triple Payout Breakage Breakage Crown venues, but also because Justify’s Justify $ 2.80 $ 2.94 $ 86,860 actual payout was lowest. The lower the Bravazo $ 7.60 $ 7.72 $ 15,815 payout, the greater the impact of breakage Tenfold because the more money bet on a winning Preakness Place Pool Breakage $ 102,675 return will increase the number of occasions Pay Show Total on which breakage is retained. Horse Without Payout Breakage Breakage Pay Justify $ 2.60 $ 2.64 $ 19,556 Win Total Race Without Bravazo $ 4.80 $ 4.88 $ 11,475 Payout Breakage Breakage Tenfold $ 6.80 $ 6.98 $ 15,704 Derby $ 7.80 $ 7.86 $ 264,413 Preakness Show Pool Breakage $ 46,735 Preakness $ 2.80 $ 2.88 $ 355,755 TOTAL PREAKNESS WPS BREAKAGE $ 505,165 Belmont $ 3.60 $ 3.68 $ 384,863 Breakage in the WPS pools for the Preakness Triple Crown Win Pool Breakage $ 1,005,031 totaled more than $500,000 – the equivalent Win Effective of 2.45% of the $20.59 million bet in those Race Takeout Takeout pools. While the advertised takeout for WPS bets at Pimlico is 18%, the total amount Derby 17.5% 18.17% withheld from horseplayers in those Preakness 18% 20.69% combined pools was nearly 14% higher - a Belmont 16% 18.12% blended WPS takeout of 20.45%. 3 TIF Reports: Penny Breakage September 7, 2018 Where does breakage go? breakage is retained by the bet-taker. Place that bet via an ADW and the ADW retains the As with many issues related to North breakage. Place that bet at Keeneland and American thoroughbred racing, individual Kentucky’s breakage rules apply. state or provincial regulations dictate the recipients of breakage. Some are fairly Actions taken to return breakage to its straightforward, others are more complex. rightful owner, the horseplayers, could (See Exhibit B in the Appendix for a selection generate some negative sentiment from its of breakage policies) current recipients. However, the total breakage for a particular track’s races are As betting on horse races in North America now divided across a far larger set of bet- has changed, so too have the recipients of takers, suggesting that the significant breakage.

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