Analyzing the Pechanga Compromises to the Horse Racing Industry

2014__07__MacarroThis past week, the California Assembly GO Committee held the third of four hearings on online poker. This hearing brought together stakeholders from both sides of the matter to discuss the bill and start hammering out some type of compromise between opposing sides.

One of the major issues, horse racetrack participation, took center stage at one point and the most unlikely source actually offered a compromise on the matter. Mark Macarro, chairman of the Pechanga tribe, proposed a pair of possible alternatives to the racing industry in lieu of providing licenses.

While race tracks have contended that they only want to participate in a level playing field, it may be wise for them to consider the compromises offered.

Revenue Sharing Compromise

The first option that was offered by Macarro was a revenue sharing deal with the horse racing industry. Macarro stated that the “Pechanga is prepared to support other opportunities for the racing industry to participate and benefit from online poker. We respect the sport of horse racing and recognize the importance of the jobs that rely on the industry. That’s why Pechanga can support legislation that specifically shares revenue derived from online poker for the benefit of the racing industry.”

Under a revenue sharing agreement, online poker providers in California would pay out a portion of their revenues directly to the horse racing industry. These would be guaranteed payments that would be a fixed percentage of total revenue. The Pechanga didn’t state what percentage they were comfortable in offering, but this is a matter that could be discussed if the horse racing industry would accept the offer.

Realistically, this is as close as anyone in California is going to get to “guaranteed income” from online poker. In this scenario, the horse racing industry wouldn’t have to do a single thing to collect the revenue. They don’t have to apply for a license, find a partner, setup a website or even do a single bit of advertising for the industry. They could sit back and collect the checks from online poker providers.

Affiliate Model

The other option offered by Macarro was to make the racing industry an affiliate to online poker sites. He said that the tracks could “enter into private partnerships with licensed operators to participate as affiliates. Racetracks can enter into arrangements whereby they refer their web visitors and players to poker websites for a fee.”

This is a common practice for many sites related to online poker. Anytime you see a site such as PokerNews, Bluff or another site offer an ad on their site, it is because they are an affiliate. They receive a fee for every player signed up through their site. In most cases, they also get a cut of the rake generate from each player.

The affiliate model could be of benefit to the racing industry as they could work closely with their online partner to make promotions that would benefit both parties. Realistically, the only real choice for the industry would be PokerStars as they will likely have the lion’s share on the industry and will likely have the best benefits to affiliates.

This model is less of a guarantee than the revenue sharing option but would give the tracks the freedom to work with any partner they choose. If sites agree to give up a portion of the rake collected from new players, this could still provide adequate revenue despite not being “guaranteed.”

Take the Money And Run

If I was making the decisions for the horse racing industry as a whole in California, the choice would seem clear. Accepting a revenue sharing deal would be the smartest move between the three options currently on the table. Despite the amount of optimism among online poker supporters in the state, analysts believe that California cannot support more than five iPoker sites. Unless the industry can put together a product that can truly compete with PokerStars and other sites with decades of gaming experience, operating a site would seem a losing proposition.

Revenue sharing would guarantee payments from the online poker operators in the state and those payments come every year like clockwork. Some might argue that they are relying on the success of others, but the reality is that the horse racing industry assumes no risk whatsoever with this option.

The next obvious step would be to look into how much the industry would gain from revenue sharing. Look at the numbers closely and see whether the industry can reproduce that same amount of profit on their own. Factor in all expenses and startup costs to see if becoming a provider makes sense. Odds are that the race tracks will find that they should take the money and run and let other companies worry with the expense and administrative headaches of operating online poker.

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