The Existing Betting Customer Is Racing’s Best Hope

Fantasy Sports Versus Horse Racing

When compared to ease-of-use and churn-focused fantasy sports start-ups like Fan Duel and Draft Kings, racing is simply not built for the newbie skill game gambling market.

Fantasy sports–drafting, fielding and managing a team made up of players in all major sports–has been on a tear. Back in 1988, according to the Fantasy Sports Trade Association, approximately 500,000 people were playing games in some form. In 2003, with the help of the internet and a growing set of dedicated websites, magazines and software, that number grew to 15.2 million. In 2014, it is estimated that over 40 million people will be fielding NFL teams this Sunday as the NFL Fantasy playoffs approach. This market will spend upwards of $1.7 billion this year on the craft.

Regulatory Carve-Outs and the Rise of Cash Games

The Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) provided a carve-out for horse racing, as is well known. But there was one more carve out in the UIGEA: fantasy games. Being a game of skill, based on statistics etc, fantasy sports met the smell test for regulators (although it is probably naive to think that was the only reason; the sports leagues themselves love fantasy sports) and their grey area in terms of gambling was something that smart companies chose to exploit. Only two years ago, two new start-ups–FanDuel and Draft Kings–entered the fantasy market with weekly or daily “cash games”, where a team is chosen and fielded and money is wagered. Draft Kings sponsored a Breeders' Cup race earlier this month.

These new entrants have a business model that is almost no different than a Vegas casino offering NFL parlay cards, player prop bets or a punt on a Super Bowl coin flip. It is about enticing people to gamble on sports, and they have been getting that done. It is estimated that FanDuel will payout over $1 billion next year, with Draft Kings not too far behind. Investors in FanDuel, for example, which include Shamrock Capital Advisors, NBC Sports Ventures, KKR, Bullpen Capital, Comcast Ventures, Pentech Ventures, Piton Capital, Scottish Enterprise and Richard Koch, look to be pretty shrewd.

How FanDuel and DraftKings Convert New Players

How have these companies been growing? How have they attracted users with an average age of 34, 78% of whom have college degrees, who spend upwards of 10 hours per week just consuming fantasy sports? What is the secret, if any?

They have brought in a demographic who were playing a game with their friends, in a basement or on a computer that lasts a season long, and made it a weekly, or nightly, pastime. This shift has not occurred by accident. Both FanDuel and Draft Kings are funded and their burn rate is high, mainly with marketing spend; it is difficult to turn on a football show on NFL Network or CBS and not see an ad.

Marketing spend is a very small part of it, however. Converting marketing spend–turning a tire kicker into a car purchaser–is the key goal. They have achieved that in a number of ways.

• They created a very good user experience and user interface. The money behind the sites is formidable, users can get every stat imaginable, and the platforms are easy to use. Playing a game and watching the stats roll in real time makes it exciting. This is further enhanced by the fantasy sports ecosystem, with hundreds of sites in cyberspace with player simulators, APIs, value-based lineup generators and similar tools.
• They have not been handcuffed with too many cooks in the kitchen, or bogged down with state or country rules, or myriad other barriers to entry, and they have taken advantage of it. A 33-year-old plumber from Dawson City in the Yukon in Canada can play a 70-year-old retiree from the Villages in Florida.
• Their payouts are priced close to optimal. Twenty-eight percent of people in a most recent association survey said that pricing is the main factor in their decision to play cash games. FanDuel and Draft Kings takeout rates range from 6% to 10%. They often trumpet what is paid out as a marketing tool and a bankroll can last at these sites; even if a player is not a winner they can feel like one often enough.

FanDuel and Draft King's marketing funnel reads like a how-to guide on growing a business. They bring new players in via marketing and a newbie feels right at home. For as little as 25 cents, one can get off and running and play in an afternoon game. In “50/50” games, half the field gets paid near double what they wager, adding to the churn, and making people happy (winning cash and having an opinion verified) is the crux of all gambling. That sounds like a recipe for success.

Why Horse Racing Struggles With Newbies

Meanwhile in horse racing–which would kill for the fantasy gambling demographic–things are not as easy, or rosy. Racing has not done what fantasy has done with their UIGEA carve-out. It has not streamlined use, cannot accept people from everywhere via ADWs, does not have little infighting, does not pay prizes out at a low takeout, does not have free statistics, and does not spend marketing at burn rates to get people to gamble. There is a good chance none of that may happen anytime soon, either.

For racing, those who do get placed into the top of the sales funnel as a newbie (see racing on TV, go out with their friends to the track for the first time, see an ABR Live bus or go to the Kentucky Derby infield, etc) are then struck with having to excel in a game that is not built for them.

To land these new potential customers, racing tries to convert them via a red herring. “They need quick action” or “they need simple bets” are two famous horse racing funnel laments; like somehow if the sport runs races every five minutes and allows for an easy to understand spread bet, things will improve. Both are far too simplistic and in this view are wishful thinking.

Racing already has quick action; with 40 tracks running on a Saturday, users can bet every two or three minutes if they want to. This is not even mentioning the obvious: skill games by definition are not quick action; in fantasy, the user would not be spending 10 hours a week to play a fantasy football cash game that lasts upwards of 48 hours (Sunday and Monday games) at FanDuel if that was important.

As far as newbie bets go, it is clear simple bets work well at Draft Kings and are a huge part of converting in their funnel (the 25-cent games mentioned), but that is a whole different ball of wax. In racing, a new bet is a Grand Slam, or a once-or-twice-tried odd-even, or jockey bet. They are already there, have been tried, and few players bet them.

Exchange Wagering and Missed Opportunities

When something new does come along in horse racing that may attract this demographic, or this type of user, it then seems to spiral into the horse racing abyss where it goes to die. Exchange wagering is a good example. That medium was and is a hit with younger users because as a conduit it allows them to do what they crave (and coincidentally is also good for horse racing): it is win betting so churn is higher, the takeout is lower, it is fairly fun and exciting and an easy way to ease users into a sport.

One would think racing would want that. However, when it is broached, horsemen groups and tracks say the takeout needs to be higher so the exchange “pays their fair share”. Despite the fact that nobody knows what a fair share is, the takeout being double or triple kills the main marketing driver of the exchange. That certainly defeats the purpose, does it not?

Structural Challenges and Misplaced Marketing Spend

When looking at racing's structure, in terms of attracting newbies and converting them into long-term players, it is a formidable hill to climb. Regardless, marketing money is happily spent on billboards, or on food trucks, or getting people to watch horse racing on TV. That focus may make the industry feel good, but it does little more than that. It simply does not work; if it did, it would have worked already.

Focusing on the Existing Betting Customer

The argument is that horse racing, unlike Draft Kings or FanDuel, needs to focus on the existing fan and betting base to achieve one main goal: get the once- or twice-a-month player to become a weekend warrior, get the weekend warrior to play during the week, get the fellow or gal betting $50,000 a year to bet $500,000, get the bettor betting $500,000 per annum to bet $5 million.

To achieve that it will take a 180 to the way horse racing usually thinks. Racing must be priced better so these people can stretch bankrolls and some of them can win, or perceive they can win. The conduit needs improvement so players can sign up everywhere to online betting and all tracks need to be offered at all ADWs; competition should be fostered, not stifled.

An environment needs to be created where new mediums like a betting exchange do not end up on the cutting room floor. The culture must be changed by benchmarking, for example, a $20 billion handle at 10% of the boat is better than a $10 billion handle at 20%, because as pool size goes up, bet size goes up and with more money in the pools, and racing offering a better gamble, it can attract other gamblers.

Why Newbies Alone Will Not Save Racing

FanDuel and Draft Kings have created a system that depends on newbies. These companies need to ensure they come back; to play this new game long term. Almost everything they do is focused on that goal, and thus far it has worked.

Racing cannot beat fantasy sites at their own game, and newbies will not lead it to the promised land. Racing must leverage the existing fan base, long time bettors, those who have left racing and are willing to give it another shot to come back, and others who gamble.

To do that, it does not need to spend money on TV or billboards, food trucks or bands. Racing needs to create, foster and promote a new gambling environment that focuses on these bettors’ needs, caters to them and entices them to bet more money.

About the Author

Dean Towers is the Secretary and Board Member of the Horseplayers Association of North America (HANA). He has been a frequent speaker at industry and gambling conferences in both the US and Canada. Dean wrote his university thesis on off-track betting and has authored a white paper on exchange wagering.