Secondary Pari Mutuel Oganizations

It's not whether you win or lose, but how you play the game. In the age of horse racing, that statement takes on new meanings: Only a few people in the world can beat the game of horse racing. And the challenge of the game cannot ever really be defeated because; the circumstances are always changing and thus, creating a never ending challenge. This is much like the climate of the pari-mutuel racing industry today. The days of monopolies are gone and the challenges of the competitive market are here. The market is filled with mega companies vying for the entertainment dollars available. This shrinks the piece of the pie available to the racing industry. In the present day, finding vehicles to the future in this competitive market are essential. The Secondary Pari-Mutuel Organizations (SPMO's) are valuable to assisting with the industries path to the future. CDI's position is that a good business model is one in which every participant benefits. With this in mind, it is critical that the model for dealing with the SPMO's changes. The umbrella of integrity must protect our decisions for a better racing tomorrow. Therefore, it is necessary to monitor, and regulate the track and SPMO relationships. In addition, the economic paradigm for the racing industry needs to shift towards higher retention of revenue within the agreements with these organizations. At present, the model is set up with the SPMO's having the crÐ"Ёme de la crÐ"Ёme of deals.

The NTRA Wagering Systems Task Force defines "Secondary Pari-Mutuel Organizations" as pari-mutuel operations in which no live racing is conducted, but its main source of revenue is derived from wagering on simulcast races. It provides rebates ranging from 5 to 10% to its customers. The patrons utilize the internet, computers, telephones, and other specialized ways to place the wagers. The owners of these organizations are often not clearly identified and often have very little U.S. regulatory oversight. Other noticeable characteristics are significant levels of business that produce substantial money settlements from the host tracks, and no verifiable tax withholding practices (7-8). The organizations do not need to fulfill every characteristic to be considered a SPMO.

The racetrack is the foundation to the whole industry. In recent times, the need for increased revenue streams has created many different sources. It started with Off-track wagering and simulcasting, and then went to racinos, and then to advance deposit wagering. Now, in the 21rst century as part of this process there is a need to deal with

issues pertaining to SPMO's. In dealing effectively with these issues a valuable revenue source could be secured. Some of the issues to be addressed are rebates, churn effects, computerized robotic wagering, transparency issues, and negative settlements.

Before tackling the issues lets examine the motivations of the players in this game. First, there is the foundation layer which is the racetrack. They are entrepreneurial businesses which want to maximize profit over the duration. The larger the volume and the lower the costs produce the largest profits. Then, you have the horsemen. They are looking for more purse money and opportunities to get that purse money. They too are entrepreneurial businesses as well. The regulators are the ones to direct, or control in accordance with the rules, laws, or principles. Next is the patrons, they are seeking entertainment and monetary opportunities. Under the standards of operating in today's market SPMO's are able to do business with only self interest in mind. They can operate with the benefits of buying a product for a little and providing more to the customer than those who create, provide and sell their signal.

This where the model must be changed. Rebates reflect this problem verbatim. Racetracks have agreed to sell their signal for 3-3.5% to entities that have next to no overhead. This leaves them in a position to offer large rebates and lure bettors away from the racetracks. Many supporters of SPMO's believe that the wagering they generate is incremental, many others doubt this as true. The industry needs to put a barrier around the pools. This simply means patrolling the pools from free entry without regulated approval. The racetrack to racetrack business would still use the 3 to 3.5% simulcasting rate model, out of respect for the other track and its expenses. But when selling their signal to SPMO's and other non race track entities the fees should be increased or a profit sharing arrangement should be worked out. Whereby, the track has a prearranged agreement to share in the profits of the rebator. Of course, the patrons will meet these changes with much distain, but being they are intellectually based individuals they should realize that businesses have to change their model to keep up with the times to stay in business. The changes would need to be implemented slowly for the benefit of perception. Because, the implementation would be slow the possible handle regression from lower rebates could be minimized. The horsemen like the track would benefit from any gain in simulcast fees. The bottom line is that the racetracks have the power to control entry into their pools and who receives their signals. The additional funds collected would serve in attaining higher retention of revenue and start to change the paradigm.

Another issue under dire need to be addressed is the computerized robotic wagering (CRW). This is important to the SPMO discussion because much of the handle generated by the SPMO's are via the CRW.The NTRA task report describes the CRW process as a complete robotic package. It begins with a computer and a proprietary handicapping program that is based on mathematics. It then statistically analyses each horse entered. It may even to take into account past wagering activities. Then when betting pools are opened it begins to look for wagering imbalances (statistical overlays) between the programs values and those established by the bettors. The program calculates on a weighted basis to capture the perceived value

and the inefficiency in the pool. The person then selects the best filtered value with one to two minutes till post time. The wagers are then placed directly into the tote system (9). The process is not illegal and is available to anyone that comprehend, facilitate, and afford the

system.

This brings up both an ethical issue, and regulatory issue. The question of fairness comes into play. It provides a clear advantage to those people who can participate in this process. The average player

would not see the effects of these wagers on the final odds until after the race is in progress. This creates a playing field which is not level for everyone. This practice