Late last month, the Pennsylvania Spectrum Gaming Group issued a comprehensive report for the New York Gaming Commission entitled ‘Gaming Market Study: New York’. It brought into focus many serious questions.
While the main focus of the report appears to be directed to the possible expansion of sports betting in New York and the issues associated with expansion of casinos to other markets, including New York City, there is a substantial amount of excellent research and industry statistics in both the body of the main report and in the appendices.
Tom Precious, who is an astute reporter covering politics and racing in Albany, New York, called my attention to the study in a January 28 Blood-Horse article. Below is the first paragraph of his article.
“A state government-commissioned study of the gambling industry in New York calls for major changes to antiquated racing regulations and laws. The proposed changes aim to end decades of unproductive in-fighting by stakeholders in the racing industry and smarter ways to devise how everything from pari-mutuel revenues are distributed to how many days a year a track offers live racing.’
Click here to read the main report (the relevant pages are 258-345) and here for the various appendices (relevant pages 84-122).
The issues I will focus on include the relationship between NYRA and the NY OTBs (Off-Track Betting Shops), the structure of the OTBs and its failings, the importance of Advanced Deposit Wagering (ADW) and its history in NYC, the importance for the State of New York to support all the racing participants, including trainers, jockeys, owners, breeders, backstretch and track employees, and especially the wagering public for the benefit of the state.
It is also important to realize and appreciate that a strong, live racing program is the lifeblood of a successful Thoroughbred industry.
In 1971, the New York OTB network was started with the opening of NYCOTB (New York City Off-Track Betting Corporation) and the five other OTBS. Nassau, Suffolk, Capital, Catskill and Western were all incorporated and operating by 1973.
New York State was the first state to open an OTB system. The first flaw was that, instead of setting up one statewide OTB operation, the six OTBs were set up as distinct, regional operations. This meant six executive teams, presidents, finance directors, HR directors etc. Every OTB made individual Tote arrangements with the three national tote companies, which was expensive and wasteful. New York was the first state with an OTB network, but no other state subsequently set up such a decentralized, expensive labor-intensive operation.
Most OTB networks were run by the tracks in a state or a statewide operation. The independent structure that was established initially was further exacerbated because the OTBs were frequently run by politicians, and not by racing executives, creating serious business limitations.
Failures sadly being repeated
I would like to move ahead to the events leading up to NYCOTB declaring bankruptcy in December 2009 and then completely closing down in 2010.
In the 1980s and early 1990s, the individual New York OTBs collectively were virtually the largest customer for every U.S. racetrack. The racetracks and the off-track betting parlors fueled the growth of the industry at that time. ADW was not made legal until Illinois passed a law allowing wagering over the internet in 1999. As an example, New York State did not pass a law legalizing internet wagering until June 2006. More on that later.
In an effort to address NYCOTB problems, Meyer ‘Sandy’ Frucher was hired as president in June 2009. Frucher was a well respected financial executive who had run the Philadelphia Stock Exchange for over a decade. The only real problem was that he was hired ten years too late.
The failures of NYCOTB are well known and sadly are being repeated in the New York OTBs today.
I believe in the final year of operation (2010) NYCOTB still handled around $800 million in wagers, which explains how poorly it was managed. The problem that NYRA and I had with Frucher was that, not long after he was hired, I discovered he had stopped paying NYRA for our racing signal (I was NYRA president and CEO at the time).
When I was able to reach Frucher, I told him he was required to pay NYRA his statutory obligations and the NYRA purse account. His explanation was that he was familiar with the statute and NYCOTB’s obligation but that there was no stipulation as to when he had to pay NYRA.
Short-lived enthusiasm for our strategic plan
We appealed to the New York State NYRA Franchise Oversight Board, the Governor’s office, the State legislature to no avail. The result was that when NYCOTB declared bankruptcy in early December, 2009, they owed NYRA and NYRA purses a total of $25 million. When NYCOTB closed the operation and liquidated, NYRA had to write off the $25 million. So much for cooperating with the NY OTBs.
In the third quarter of 2009, anticipating the inevitable NYCOTB bankruptcy, I interviewed and hired Stephen Travers, who at that time was the administrative manager for all aspects of the NYCOTB restaurants and tele-theaters, including wagering activities. I hired Travers as the director of hospitality for all NYRA operations.
While NYRA could not contact/visit NYCOTB’s properties during the bankruptcy, Travers was able to contact other restaurants throughout the five boroughs to assist in developing a comprehensive plan that included a specific strategy for signing up new NYRA Rewards (now NYRA Bets) customers.
On February 14, 2012, our management team presented a strategic plan to immediately open ten restaurants/tele-theaters in the first year and 40 total by the end of the third year. Our presentation was made to the Franchise Oversight Board, which was chaired by Robert Megna, who served also as the NY State budget director. The meeting is described in this Blood-Horse article by Tom Precious on February 14, 2012.
There was real enthusiasm at the meeting for our proposal, and we were initially optimistic about our prospects. Unfortunately, NYCOTB was too toxic and no politician wanted to touch the subject. Shortly thereafter, I left NYRA in late April 2012 and Travers subsequently left NYRA. In their current report, the Spectrum Group does recommend one possibility of NYRA taking over operations in New York City. If presented with the opportunity, I am certain that NYRA president David O’Rourke and Tony Allevato, NYRA Bets president, would maximize this business opportunity for all NYRA industry participants.
The impact of Advance Deposit Wagering
Turning to the ADW issue, we need to take a step back in time again.
As noted above, the New York legislature did not legalize internet wagering until June 26, 2006. In meetings with all the New York OTBs (including NYCOTB, which was still operating at the time) we proposed to the OTBs that we do not make the same mistakes that were made when OTBs were incorporated in 1971-1973. NYRA was already moving forward in building its own proprietary transactional website, which would save all the OTBs either the capital cost to build a site or to eliminate/reduce costs if they were contemplating a third-party deal.
Clearly, the big issue was who would own the customer, which we proposed could be solved by sign-ups or some geographic rules. Unfortunately, each regional OTB decided that it was not interested in partnering with NYRA on an internet account wagering business.
NYRA moved forward in April 2007 and made a presentation to the New York State Racing and Wagering Board, which was quickly approved. Here is the Blood-Horse article by Tom Precious that stated that NYRA was the first and only racing entity to date that had applied for an internet license.
Thanks to the current management team, NYRA now has an ADW internet site with the most advanced technology, a state-of-the-art wagering interface, first-class, high-definition television, implemented funding and withdrawals similar to online banking practices, and you can bet on any NYRA track with a NYRA Bets card at any betting machine.
In the early days of NYRA Rewards, for contractual reasons NYRA could only take New York and Connecticut accounts. NYRA Bets now is an international ADW and the customer can watch and wager on tracks around the world.
NYRA Bets handle for 2020 was a robust $652 million, which was a strong 43.9 percent increase over the NYRA Bets 2019 handle of $453 million.The most recent handle number for all-source handle for all five OTBs that I have is 2018, which was $506 million, and all NYOTBs show an annual decline of five percent, except Capital, which has declined at an annual rate of one percent.
If the five OTBs did ten percent of the $506 million in 2020, their combined internet handle would be $50 million, which would result in a loss for their collective internet sales. Hindsight is 20/20, but I strongly believe that, if the NY OTBs had combined their internet operations with NYRA, today their handle would be significantly higher and their costs lower.
However, that ship has sailed.
Slots: Clarity required
One last OTB issue needs to be studied and articulated to the larger Thoroughbred racing community: NYRA, after years of delay by the State, signed a contract with the Genting Group and NY State for the Genting Group to be the operator for 5,500 slot machines at Resorts World Casino at Aqueduct racetrack.
NYRA was to receive the following percentages of the net win from the slot machines at Aqueduct:
- Purses 7.5%
- Breeders 1.5%
- NYRA operating expenditure 3.0%
- NYRA capital expenditure 4.0%
- Total 16.0%
The casino opened in late October 2011. Genting payments to NYRA accounts started on October 29, 2011, with 2,486 machines, which increased on December 24, 2011, to 5,000 and on April 2, 2016, to 5,500.
During this entire period, the average win per machine was approximately $450. If you multiply the number of machines times the net win, times the relevant percentage fee, that was the amount of money Genting owed to purses, breeders and the two NYRA Accounts.
Genting made those payments starting October 29, 2011. That practice continued until April 2, 2016, when Genting stopped recording the numbers on its website. I am not aware of any public source for Genting payments.
According to newspaper accounts, Genting agreed to designate 1,000 slot machines to operate on behalf of Nassau OTB, which had been authorized by the state to operate them. In addition, for the payment to Nassau, Genting agreed to designate the top 1,000 net win machines, which would result in a net win average of $754. Yet the payment per machine to NYRA would drop from an average near $450 per machine to $304 per machine, according to Spectrum Gaming.
Further, the published payment terms to Nassau OTB from Genting called for a $9 million payment for the first two years and then the payment would jump to $25 million annually. Further, on page 296 of the Spectrum Report noted above, it was stated that the racing support payments would be reduced to:
- Purses 2.3%
- Breeders 0.5%
- NYRA operating expenses 0.9%
- NYRA capital expenditure 1.3%
- Total 5.0%
This results in a support payment reduction to NYRA, purses and breeders of 11 percent.
After reading this Spectrum report carefully, it is still not clear to me what the financial impact was on Genting, Nassau OTB and NYRA. Nassau OTB clearly is not out of the woods due to payment agreements to Nassau County. NYRA, purses and breeders could be losing a minimum of $10-$20 million a year. Genting would appear to be the clear winner due to increased margin on a majority of the machines. I would welcome any further information and clarity on this situation.
Market Origin fee: Some puzzling facts
The Market Origin fee was instituted in 2014. Somehow. I missed this when it was implemented and I did not read any negative response from the racing press at that time.
The Market Origin was developed to tax the out-of-state ADW operators who were taking bets from New York residents. In reading the Spectrum Report, I could not believe that Spectrum did not advocate changing the report to reward the entities performing in the best interest of NY racing.
Here is a copy of the distribution of funds under the rules of the current Market Origin distributions for the month of August 2020, which is obviously during the 2020 Saratoga meeting. You can refer to the Market report and follow the following categories that I am referring to.
The Saratoga meet consistently generates over 20 percent of the national handle during its run. First, it is very surprising to me that the NY harness tracks should receive 40 percent or $1,412,769 of the Market Origin and NYRA receives only $353,192.
The total handle for all five harness tracks for the full year of 2019 was less than $500 million, and Saratoga generated over $700 million during the 40-day meet in 2020 for the second year in a row. Due to the ludicrous allocation methodology, Capital OTB received $452,522, Nassau OTB $399,059 and NYRA and NYRA purses each received $353,192 - less than both Capital and Nassau OTB.
I am certain that this August payment was greater than the profit of both of these OTBs for their entire year. The harness tracks payment seems to be equally out of proportion. The harness tracks’ total handle for August 2019 was $18,706,279, resulting in a payment of $706,385, which seems excessively high.
Meanwhile, the NY Thoroughbred Breeders Fund received only $127,145 from the August Market Origin report. Two harness tracks alone were both paid almost four times what these breeders collected. The New York Racing Association is highly dependent on the New York State breeders to fill fields in NY-bred races, open company and Graded stakes races.
Here are some other metrics that demonstrate the serious discrepancies with the current Market Origin fee:
- For an on-track $20 Belmont wager, the NY Thoroughbred industry receives $14.50 approx.
- On a $20 NY OTB wager, the NY Thoroughbred industry receives $6.50 approx
- On an out-of-state ADW, the NY Thoroughbred industry receives $1.50 approx
Looked at another way, the same wager placed at a NY Thoroughbred track results in 12 times more purse money for Thoroughbreds than if it was with an out-of-state ADW operator.
Source market fees were initiated to protect in-state racing interests. Comparing the total source market fee in New York to other states, it is tied for tenth. When comparing how much of the fee is returned to the Thoroughbred industry, it ranks last.
Sports betting: Time for urgent action
Sports Betting in NY is a key component to the development of the ADW wagering business.
It is essential to the future of Thoroughbred racing that NYRA Bets has access to the young, affluent and enthusiastic sports betting customer. NYRA Bets had a very strong year in 2020 thanks to the pandemic, which kept customers away from the track and the OTBs, and to NYRA’s aggressive and effective television strategy.
NYRA Bets grew its business by 76 percent in 2020, which is very impressive. However, I believe that the two largest ADWs in the U.S. market, Betfair and Twin Spires, doubled their handle in 2020. Betfair is the largest ADW in the U.S. and is a formidable exchange wagerer around the world.
It is affiliated with Paddy Power, a powerful bookmaker across Ireland and the UK. It is a subsidiary of Flutter Entertainment, an international wagering powerhouse that also owns Fox Bets and FanDuel.
Twin Spires is owned by Churchill Downs and is the second largest ADW in the U.S. Churchill has sold off most of its racing assets and has made aggressive acquisitions in account wagering companies and land-based casinos.
Both these companies are aggressively growing their businesses and acquiring customers that they can promote through their various gaming companies. However, to remain competitive with the two market-leading ADWs, it is imperative that NYRA Bets participates in sports betting.
NYRA has built a state-of-the-art ADW platform and is using television to grow its customer base and the business. It has a talented management team in place and strong partnerships in the racing industry. However, to grow the business and attract new customers to the racing industry, sports betting is a key critical component.
Finally, it is essential that NYRA retain its focus on the racing industry and the importance of its owners, trainers, breeders and wagering customers.
This pandemic has been a huge challenge and NYRA appears to have successfully met that. However, during this last year, out of necessity, we have lost contact with our industry participants and our customers. It is essential that all participants in the NY Thoroughbred racing and breeding industries re-engage with the racing community.
Whatever segment of the business one is in, most people in racing are in it because they enjoy their horses, participate in many aspects of the industry and want to contribute and feel part of the industry experience. People engaged in the industry have enthusiasm, opinions and want to be heard. Let’s make certain that our racetracks are listening to them.