Thursday, July 27, 2017

Partnerships at Belmont: How They Did

Being the obsessive that I am, and knowing that there are a lot of other racing partnerships out there in addition to our own Castle Village Farm, I naturally keep track of how the competition is doing. The result is a spreadsheet for every race meeting on the NYRA circuit, dating back half a dozen years and tracking every partnership that I know of that recruits publicly. I don’t count groups that are family, friends or neighbors, but I do everyone I know of whose website invites interest from new folks.

Even though Castle Village Farm basically sat out this year’s Belmont meet (our one horse stabled at Belmont had some physical issues and started just once), I kept up the scorecard anyway. (I’ll be happy to send you the spreadsheet if you email me directly at

There are, of course, methodological issues. What to do when two partnerships co-own a horse? What to do when a partnership owns a horse in a joint venture with another owner? My solution: if a partnership is listed on the program, the race is counted for that partnership. That means some races are counted twice; so be it. And the purse money for a horse with multiple ownership doesn’t all go to that partnership in a multiple-owner situation, but I count the whole purse for each partnership anyway. Not perfect, but it provides a reasonable comparison.

So here’s what I found at the Belmont meet.

Public partnerships accounted for 280 starts during the meet, winning 39 (14%), finishing in the money 44% of the time, and picking up a check (including 4th and 5th-place finishes) 70% of the time. All these percentage are just marginally above the numbers for all starters at the meet.

In the aggregate, partnerships averaged $13,755 per start, but that number is hugely skewed by Tapwrit’s win in the Belmont Stakes for Aron Wellman’s Eclipse Thoroughbred Partners and by wins in the Grade 3 Poker for Ballagh Rocks and the Grade 2 Suburban by Keen Ice, both for Jerry Crawford’s Donegal Racing. A more accurate reflection of how partnerships as a whole did is the median figure for earnings per start, at $5,000. That’s not bad; just about pays the bills for keeping a horse in training (see my most recent analysis of the cost of racing in New York, here.)

Eclipse and Donegal are high-end partnerships; a share in a horse costs $15,000 or more, and often $25,000 or more. How did the other high-end operations do? Sheila Rosenblum’s Lady Sheila group, whose horses are trained by Linda Rice, had an excellent meet, winning 6 of 16 and finishing in the money more than half the time. Team Valor ran only three horses at the meet, but all three finished second in high-level allowances. Centennial had only one win, but eight of their 10 starters finished in the money. And West Point, which ran more horses – 19, many as co-owners – than any other high-end group, had four wins and 52% of their starters in the money. I’d guess the partners in those operations felt reasonably satisfied, even though, in most cases, they’ll never get their initial “investment” back.

Two claiming partnerships dominated the entries at the lower partnership levels, both with decent results. Drawing Away Stable, which started with trainer David Jacobson but left him a couple of years ago, had 32 starters, with six winners (19%) and 14 in-the-money finishes (44%) and earnings per start of $6,888. Final Turn Racing, which took Drawing Away’s place in Jacobson’s barn, had 35 starters, winning four (11%) but finishing in the money 19 times (54%) with earnings per start of $7,033. Both those stables operate on a model where the trainer pays all the expenses and keeps most of the earnings, so partners get a lot of excitement with many entries and win pictures, but don’t really have a major financial stake beyond their initial partnership share.

Overall, 19 partnerships won at least one race. At the bottom end, 11 partnerships didn’t have a single in the money finish, though most of those started three or fewer horses.

Does all this signify anything? What it suggests to me is that racing results are fairly strongly correlated with the cost of the horse that’s doing the racing, notwithstanding the many million-dollar failures in Todd Pletcher’s and Chad Brown’s barns that never even reach the starting gate. But at all levels, what the numbers suggest is that horses have a decent chance of (mostly) paying their way on a New York race track, but that recovering those big yearling or two-year-old purchase prices is an elusive goal.

Caveat emptor.

Thursday, June 22, 2017

End of the Season -- the OBS June 2YO Sale

Ocala Breeders Sales Co. (OBS) held the last sale of the two-year-old auction season last week, concluding the juvenile auction calendar with neither a bang nor a whimper, but rather a continuation of the stabilization that has marked much of this year's sales. (See my reports on earlier two-year-old sales this year here, here, here, here and here.)

Overall, the OBS June sale continued its recent improvement in prices, albeit with a smaller catalog than in recent years. Of the 769 horses listed in the catalog, 424 (55%) sold for an average price of $36,000 and a median price of $19,000, both substantial improvements over last year, when 619 horses sold, most at lower prices. So the June sale, like most of the others on the calendar, continues to adjust to the new reality of smaller foal crops and a stagnant, if not decreasing, pool of potential buyers, especially in the "middle market," between, say, $25,000 and $100,000.

Still, there was some notable action at the high end at OBS June. For example, all five horses sired by Tapit -- North America's leading sire the past three years -- were sold, for an average price of $170,000. Without knowing what those horses' vet reports looked like or what kind of physical appearance they presented, it's hard to know whether the buyers got bargains. But, compared to Tapit's $150,000 stud fee in 2014, the year this season's sales horses were conceived (the fee is $300,000 now), it seems the buyers got a pretty good deal, if only based on their purchases' residual pedigree value.

The most active buyer at the high end of the sale was New York-based trainer Linda Rice, who bought seven horses for an average of $157,000 each. Her top purchase was a $320,000 Midnight Lute colt, who had the co-fastest one-furlong breeze of the sale, in 9 4/5 seconds. One might question the wisdom of breezing a two-year-old at the sale faster than they'll ever run again, but, in the aggregate, the horses that run faster at the sales do go on to do better on the race track than their slower colleagues, so if you're buying in bulk, time does count.

Korean buyers were, as usual, out in abundance at the June sale, buying 19 horses for a total of $864,000, an average of $45,000, including three for $100,000 or more. Not so long ago, the Koreans were looking more at the bottom of the market, with a cap of $20,000 on their bids. Now, they've become a serious middle-market player.

At the bottom of the market, condolences to the 36 horses bought for low prices by C.H.P.R., all destined to be shipped to Puerto Rico and to run for very little money and less food at El Comandante. Having rescued some horses from Puerto Rico, I know the kind of treatment they receive, and it ain't pretty. It's hard to prevent older claiming horses from ending up at Comandante, but perhaps the sales companies could take the small step of prohibiting direct export from the sales to Puerto Rico (and other countries where conditions are known to be unacceptable) before a horse has even had a chance to run on a North American track.

So that's the end of this year's two-year-old sales. All in all, it's probably a relief to breeders, pinhookers,  consignors and the auction houses that things weren't worse, and even seem to have stabilized a bit, especially at the top end of the market. Now, on to the yearling sales, starting next month, and to looking for some of those high-end two-year-olds at Saratoga.

Thursday, June 8, 2017

Why NYRA Is Subject to New York's Freedom of Information law

If you look at the financial statements posted on the New York Racing Association (NYRA) website, you'll see that there are audited financials for every year going back to 2010, as well as quarterly statements for most recent years. In addition, in the section of the website devoted to NYRA Board of Directors meetings, you'll see that the meeting books for most Board meetings over the past half-dozen years include the most recent quarterly financials. In other words, for some years now, NYRA has been operating with admirable financial transparency.

But all that seems to have stopped sometime in 2016. The last quarterly financial report posted on the NYRA website is the one for the second quarter of 2016, there's no annual report for 2016, and the meeting book for the last publicly listed Directors' meeting, held in December 2016, had a budget for 2017, but no actual financial data.

So what's happened? Why is NYRA no longer transparent? From the time "new NYRA" was established in 2011 until mid-2016, it conducted itself as if it were a governmental entity, acting in ways that were consistent with New York State's open meetings law and freedom of information law. As well it should have. "New NYRA" was a creation of legislation in 2011 that rescued old NYRA from bankruptcy, transferred the land under NYRA's race tracks to the State, and gave the state, and in particular, Governor Andrew Cuomo, effective control over appointments to the NYRA Board of Directors, and subjected NYRA to close oversight by the State Budget Department's Franchise Oversight Board.

New legislation this year (2017) changed the composition of the NYRA Board of Directors while at the same time giving the Franchise Oversight Board even greater powers. That legislation was signed by Cuomo as part of the State's 2017-18 budget, but did not go into effect until this week, when "new" Directors -- who in fact were virtually the same as the previous Directors -- were appointed. But, whether NYRA is still a state entity under the new version of the law or not, there should be no question that it was one under the law as it was through the end of 2016 and at least the first quarter of 2017, and that therefore its records for 2016 and prior years should be open to the public. After all, it was our tax money that bailed NYRA out of bankruptcy -- along with a slice of the income from the Resorts World slot machine palace at Aqueduct -- and as taxpayers we should be able to see what's happened to our money.

Several months ago, when I noticed that there were no new financials being posted on the NYRA website, I filed a Freedom of Information Law (FOIL) request for them with NYRA. So far, the only response has been two adjournments of my request, the latest to tomorrow, June 9th. Here's why I think NYRA should make its financials public on its website and therefore should also honor that request and provide its recent financial reports -- which I will be happy to share online if NYRA doesn't post them -- and, more generously, why I think its apparent retreat from transparency is wrong.

New York has two important statutes that promote public access to state agencies. The Open Meetings Law (Sections 100-111 of the Public Officers Law) requires state agencies to conduct their business in public. The Freedom of Information Law (Sections 84-90 of the Public Officers Law) allows the press and individual citizens access to government agencies' records, subject to very limited exceptions. The preamble to FOIL states that:

government is the public's business  and . . . the public, individually and collectively and represented by a free press, should have access to the records of government.

Since FOIL was first enacted in 1974, and especially after amendments in 1977 that significantly broadened its reach, the courts have uniformly said that the statute is to be read liberally, with a presumption that disclosure is valid, and that the exemptions in the law are to be read narrowly.

Under FOIL, an "agency" must disclose its records when requested, unless one of the following exemptions applies:

  • Records specifically exempted by state or federal law;
  • records that would create an unwarranted invasion of someone's personal privacy; 
  • records whose disc;closure would interfere with current or imminent contracts or collective bargaining agreements;
  • records that are trade secrets or whose disclosure would cause serious competitive disadvantage to a private entity that submitted them to the agency;
  • certain law enforcement records;
  • records that could endanger the life or safety of an individual;
  • exam questions and answers;
  • records that would compromise an agency's computer security; and
  • certain intra-agency records, but specifically not including statistical and financial tabulations and records of audits.
If NYRA is an "agency" within the meaning of FOIL, then none of these exceptions would apply to its quarterly financial reports or its annual audited financials.  So the key question is, whether "new NYRA," as created in 2011, is an "agency."

Section 86(3) of the Public Officers Law defines an agency for purposes of FOIL as:

(A)ny state or municipal department, board, bureau, division, committee, public authority, public corporation, council, office or other governmental entity performing governmental or proprietary functions for the state. . . 

Obviously, NYRA isn't a direct state agency like, say, the Governor's Office or the Department of Taxation and Finance. But that's not necessary for an entity to be subject to FOIL. Generally, even private or semi-private entities can by "agencies" for purposes of FOIL if they are so involved with the state that it makes sense to bring them within the reach of FOIL.

New York's highest court, the Court of Appeals, has not yet ruled on whether NYRA or any entity like NYRA is subject to FOIL, but in 2009, the next level court, the Appellate Division in western New York, laid out a six-factor test to be used in determining whether FOIL applies to something that's not, strictly speaking, a government department. In the absence of a state-wide rule from the Court of Appeals, and in the absence of any competing rulings from other Appellate Divisions, that ruling is precedent in all of the state. Let's look at that test and see how it might apply to NYRA.

First, is the entity required to disclose its annual budget? In NYRA's case, the answer is yes; the budget must be submitted to the State Franchise Review Board for approval.

Second, does the entity maintain offices in a public building? In 2011, when "new NYRA" was established, old NYRA ceded whatever rights it had to the land under its racetracks it the State. So, while the grandstands may belong to NYRA, the land under them belongs to the state. This factor is also on the side of NYRA's being an "agency" for purposes of FOIL.

Third, is the entity subject to a government entity's approval over hiring and firing? This factor says NYRA is not an "agency."

Fourth, does the entity have a Board comprised primarily of government officials? Only two of the 17 NYRA Board members in the 2011-June 6 2017 period were actually government officials, but of the 17, eight were nominated by the Governor and two each by the State Assembly Speaker and State Senate Majority Leader, so 12 of the 17 slots were filled by government appointees. Comes down on the side of NYRA being subject to FOIL.

Fifth: was the entity created by a government agency? "New NYRA" was created by the state legislature, through amendments to the State Racing, Pari-Mutuel Wagering and Gaming Act in 2011. Without the authorizing legislation, it wouldn't exist. Another factor for FOIL.

Finally, does the entity describe itself as an agent of a governmental agency? NYRA hasn't explicitly said so, but it has structured itself as if it believes itself to be subject to FOIL. It has appointed a records access officer and an appeals officer, as required by the FOIL statute, and, up through the end of 2016, it conducted its Board meetings in public, as required by the Open Meetings Law.

On balance, then, NYRA was right when it decided back in 2011 that it should act like a public entity. Nothing changed between then and yesterday-- although the balance of factors may be different going forward now that "new" Directors have been appointed in accordance with the 2017 budget legislation -- and NYRA should continue to make its financial records public and hold its Board meetings in the open. I'm hoping NYRA's lawyers reach the same conclusion.

Tuesday, May 30, 2017

Barr-Tonko ver. 2.0: Better, But Is It Good Enough?

Last week, Congress members Andy Barr of Kentucky and Paul Tonko of New York introduced a considerably revised version of their "Horse Racing Integrity Act." (You can read the full text of the new bill here. It has been referred to the House Energy & Commerce Committee for hearings) The first version of the bill had been introduced back in 2015, with the support of racing's aristocracy, like The Jockey Club, had aroused heated opposition from most horsemen's organizations, and had then languished in the bowels of a do-nothing Congress. I commented on some of the serious problems with that earlier bill here and here.

Since 2015, a few things have changed. First, Republicans now control both houses of Congress and the White House, and Congressman Barr is a former intern for Mitch McConnell, now the Senate majority leader. That can't help but improve the new bill's chances for passage. Second, the states are still a ways from enacting uniform rules that apply to all racing, everywhere; the supposedly ongoing movement toward uniformity was one of the strong arguments last time around for holding off on federal legislation. Third, there has been no end to publicly visible doping disasters. For example, the recent fiasco in Florida, resulting in the tossing out of more than 100 drug positives (including four for uber-trainer Todd Pletcher) suggested that at least some states can't be trusted to police doping on their own. While some of the arguments for federal regulation remain specious -- foreign buyers are still showing up in big numbers to buy US bloodstock, despite dire warnings to the contrary from US racing's grandees, for example -- there is a serious case to be made that US racing needs uniform regulation and that the states can't be trusted to get the job done.

The new version of Barr-Tonko is a considerable improvement over its predecessor. It responds to some, though not all, of the complaints addressed to the 2015 version, and it allows, although does not require, that the contentious issue of race-day Lasix be put aside, at least initially. The question for those of us in the industry is whether the changes make the bill good enough to support, or at least to live with. Industry opposition to federal legislation will just make it look like all of us want to keep on drugging our poor horses. That public perception may not be racing's most serious problem; I would argue that outrageously high takeout is much more responsible for our slow but sure decline. But it couldn't hurt if the public believed that doping was under control. So let's see if Barr-Tonko ver. 2.0 is good enough.

The new bill cures one major defect in the original by including standardbreds and quarter horses, as well as thoroughbreds. Under the old version, state racing commissions would still have been responsible for non-thoroughbred doping control, leading to different standards and duplication of effort. This is a major improvement.

Second, the new bill explicitly preserves, in its current form, the Interstate Horseracing Act of 1978, which regulates simulcasting and gives horsemen's organizations (except at NYRA tracks in New York) a veto power over signal distribution, forcing the tracks to negotiate with their horsemen. Most industry participants (except, naturally, for the corporate suits in charge of many tracks) think that the 1978 Act's system works reasonably well.

Third, the new bill adds people with actual industry experience to the Board of the new "Horseracing Anti-Doping and Medication Control Authority" that it sets up to be the federal enforcement agency. The earlier version's conflict-of-interest rules had virtually ruled out anyone who knew anything about racing. Under the new bill, the Authority would be run, and its rules approved, by a Board of 13, including the CEO of the U.S. Anti-Doping Agency (USADA), Travis Tygart, plus 6 people from the current USADA Board and six more from horse racing, including a regulator, a former racetrack executive, an owner or breeder, a trainer, a jockey and an equine vet. The Authority would still dominated by USADA folks with no particular knowledge of horses, but its management structure would be better than before.

Fourth, the new Authority would be situated within the ambit of the Federal Trade Commission, and sanctions imposed by the Authority could be appealed to an administrative law judge appointed by the FTC and ultimately to the full commission. That certainly provides a lot of due process for those accused of doping, but it might well result in a process that is no faster than the existing situation, where a trainer who lawyers up can often postpone sanctions for four years or more while appealing an already-slow racing commission determination. I would have liked to see a much quicker timetable built into the legislation.

Fifth, the new bill keeps alive the possibility of reverting to state regulation, but only if there is an interstate compact among states accounting for 90% of all starts in the US and adopting uniform rules. That's a nice feature, directly challenging the horsemen's argument that everyone should just wait while we pursue the ever-elusive uniformity. The bill also allows the Authority to delegate its enforcement functions to state regulatory agencies, if it finds them capable.

Sixth, the new bill, while still applying to all participants in the industry (except breeders and consignors -- see below), allows the proposed Authority to continue the policy of trainer responsibility for medication violations. It was unclear in the earlier version whether there would be any kind of absolute responsibility on anyone's part for a drug violation.

Finally, the new bill allows the Authority to hold off on banning race-day Lasix, at least for a while, by incorporating the existing uniform rules promulgated by the Association of Racing Commissioners (the North American regulatory group), which permits Lasix use. Still, by referring repeatedly to "international standards," the bill's bias toward outlawing race-day Lasix has not gone away. But at least that becomes a fight for another day.

So what's still wrong with the new bill? A lot less than previously.

First, the bill still does not cover breeders and sales consignors. Those of us who remember the days of the incredible shrinking two-year-old, when a horse bulked up on steroids would come home from the sale and promptly lose 100 pounds or more, might want a bit more protection against whatever it is that unsavory consignors will think of next.

Second, the bill still puts all the cost of federal regulation on horse owners, through a per-start fee. In fact, it explicitly forbids funding through a takeout increase. From the bettor's point of view, that's a good thing, but from a horse owner's, it's just one more cost in what's already a money-losing enterprise (See my analysis of the costs of thoroughbred ownership here). It's true that in many states owners already pay some or all of the cost of state regulation and drug testing, but the bill is likely to increase the total cost burden on owners nationwide.

That's it. Apart from the fear that what the legislation is really about is banning Lasix, this is a pretty good bill. For those of us in a state like New York, where corruption rules in the state capitol and getting anything done requires massive lobbying (aka contributing to politicians' campaign funds), federal regulation, even in an era of Trumpian kleptocracy, might not be any more burdensome.

Congratulations to Congressmen Barr and Tonko for listening to those of us who criticized the earlier bill and for incorporating many -- though not all -- of our suggestions. Also, they, or their drafters, have made the new version a lot clearer and easier to understand. As a former legislative drafter myself, I appreciate that effort.

Finally, some totally unsolicited and probably unwelcome advice to Eric Hamelback of the national HBPA and Rick Violette of the Thoroughbred Horsemen's Association: don't fight this one. The bill is good enough to live with, and opposing it will just reinforce the public view that we're all incorrigible drug pushers. 

Wednesday, May 24, 2017

Timonium Two-Year-Old Sale Review

Lots of news, here, here and here, celebrating the just-concluded Fasig-Tipton sale of two-year-olds in training, held at the Timonium, Maryland, fairgrounds.And by many standards it was indeed a successful sale. Of the 575 horses in the catalogue, 330 of them were sold, or 57% of the catalogue. These days, a total clearance rate of anything over 50% isn't bad. Of those not sold, the majority, 163, were scratched, and 82 went through the auction ring but failed to make their reserver price.

The average price for those sold was $76,476, compared to an average of $68,654 a year ago, an 11% increase. And the median price, perhaps a better gauge of the overall market, rose from $32,000 in 2016 to $35,000 this year. Moreover, this year's sale saw a flurry of buying at the high end, including the most expensive horse ever sold at this sale, a Curlin colt that John Oxley, the owner of 2016's juvenile champion Classic Empire, paid $1.5 million for.

A bunch of other high-priced horses also sold, helping to boost the sale average. A Distorted Humor colt went for $850,000, a Ghostzapper colt for $800,000. and an Orb colt for $710,000. The highest price filly was by Smart Strike, selling for $525,000, and two Into Mischief fillies sold for $425,000 each.

So, as in the case of last month's big Ocala Breeders Sales Co. auction, the two-year-old market, a decade past the financial crash of 2008, seems top have stabilized. Breeders have cut back sharply, reducing the foal crop by nearly half, and so the market is not quite as flooded with badly bred, cheap horses as it once was. And there are still enough rich folks willing to buy at the top of the market to make a few lucky (or smart) pinhookers very happy indeed.

But still, all is not perfect. There is still those 47% of the Timonium catalogue that didn't sell. Who is going to race those horses, and where? And when one breaks down the Timonium sale into categories, the numbers don't look quite as good.

Let's look at the New York-bred market in particular. Timonium May has long been a prime destination for New York owners and trainers, and this year, some 123 NY-breds were in the catalogue, representing over 21% of all horses listed for the sale. Of those, 71, or 58% sold, 30 were scratched and 22 were RNAs. The average price fort all NY-breds sold at Timonium was $49,626, and the median price was $25,000.Highest price was the $375,000 that agent Mike Ryan paid for an Into Mischief filly.

But those average and median figures hide a lot of complexity. I went to the sale, hoping to see some NY-breds that looked like they could win on the NYRA circuit and that might be in the $25,000 range. And there weren't many of them. The horses high on my shortlist -- even the ones without fancy pedigrees -- generally sold for $40,000 and up, in some cases way up. The ones that didn't look much like runners or that had some fairly serious vet issues were the ones that sold for under the $25,000 median.

So, to sum up, if you were looking for a horse to race, and didn't want to spend more than the horse was likely to earn in its racing career, Timonium was a tough sale. If you were a big spender, you could get a very nice horse, although most of those million-dollar and high six-figure purchases never do pay back their purchase price. And if you were a pinhooker, enough money was rolling in so you could head back to the yearling sales this summer and fall and keep the wheel turning round one more time.

Monday, May 1, 2017

OBS April Sale -- A Bit More Depth

After the high-end two-year-olds-in-training sales at Gulfstream and Ocala Breeders Sales Co., both in March, come the mass-market events. The first of thoee was held last week by OBS in Ocala, with more than 1,200 horses in the catalog for a sale stretching over four days of breeze show and another four days of horses going through the auction ring. Still to come are the Fasig-Tipton Midlantic sale at Maryland's Timonium Fairgrounds this month and then the last-chance June OBS sale.

OBS April had a few blockbusters at the top of the market, notably Coolmore's purchase of a Tiznow colt, who breezed a furlong in a ridiculous 9 and three-fifths seconds, for $2.45 million. That's the highest price in the history of the OBS April sale, topping a Tapit filly who went for $1.9 million back in 2015. Not the highest price ever for a two-year-old, though. Coolmore, you may recall, paid $16 million at the Fasig-Tipton Florida sale back in 2006 -- after a pissing, err, bidding contest between Coolmore's Demi O'Byrne and Godolphin's John Ferguson -- for the then-fastest horse in the breeze show (albeit with a rotary gallop) ultimately named The Green Monkey. The horse never finished better than third in an actual race and, when last seen, was standing for the princely stud fee of $5,000 in Florida.

So how was the sale, aside from Coolmore's once again proving that they have more than enough money to feed every hungry child in Dublin? Basically, the message was business as usual, aside from a few more high-ticket horses than we usually see. Here are the basic numbers:

Six hundred eighty-one of the 1,208 horses in the catalog were actually sold. That's about 56%, compared to 54% last year and 56% the year before. Some 388 horses were scratched before entering the auction ring, and another 139 failed to meet their reserve price. All just about in line with past years.

The average price rose from $78,923 last year to $89,913 this year, largely on the strength of Coolmore's big buy and a couple of other million-dollar babies. But the median increased only from $47,000 to $48,000; it had been $45,000 in 2014 and 2015. As any statistician knows, the median is a more meaningful number, since the average can be affected in any year by the presence or absence of just a few high-end purchases.

Korean buyers, who entered the market only a decade or so ago and who for some years set absolute limits of $20,000 and then $30,000 on what they would pay, were very active, buying 15 horses at OBS April for an average price of better than $82,000. And New York trainer Linda Rice emerged as a force in the market, buying six horses for various ownership groups for an aggregate price that was almost equal to what Coolmore paid for their one stallion prospect.

So, no collapse in the market. There was steady buying not just at the high end, as had been the case in the earlier sales this year, but also at much lower prices, where buyers actually have some slim hope of recouping their investment through racing earnings. For the time being, breeders and pinhookers -- at least those who survived the past decade and are still in the business -- can take a deep breath and continue on.

But remember, this is thoroughbred racing, and there are always storm clouds on the horizon: betting handle is flat or declining; the number of races still needs to shrink; prospects for federal drug regulation are looking stronger, and Donald Trump's laughably titled "tax plan" would apparently eliminate the income tax deduction for losing bets (up to the amount of winnings). If that last proposal ever passed, every moderate or large bettor would be out of the game in a heartbeat, and there would be no more racing.

Enjoy it while you can, folks.

Tuesday, April 11, 2017

From Horse Racing to Gummy Drop! – The Continuing Evolution of Churchill Downs Inc.

Only six years ago, Churchill Downs Inc. (CDI), then the operator of five serious race tracks, accounted for 8% of all US thoroughbred races and earned 88% of its corporate revenue from horse racing. Reading through CDI’s annual report for 2016, its apparent that things have changed in a big way in those six years.

Having shed Hollywood Park and Calder, CDI’s is left with just three tracks – Churchill Downs, Arlington and Fair Grounds – that, together, ran 222 race days in 2016, totaling 2,073 races, or merely 4.9% of the US total. That’s a bit more than the New York Racing Association (NYRA) runs in a single state, but not a whole lot more.

The shrinkage may be part of CDI’s master plan, but it is a plan propelled by market forces. We all know that horse racing isn’t exactly a growth industry. As CDI points out in its annual report, US parimutuel handle, although steady the last few years, had declined 27% from 2007 to 2011. The number of Thoroughbred foals born each year has dropped in half, and, belatedly, the number of races run each year is declining.

So racing is not likely to be a big source of growth for CDI, and, as the only player in big-league horse racing that’s a public company listed on the stock exchange, CDI is under relentless Wall Street pressure to show bigger and bigger revenue and profits. The other major players don’t face the same savage capitalist forces. NYRA is  for all practical purposes a not-for-profit corporation, as is Keeneland; the Stronach Group is privately held and insulated from short-term market pressure, and all the rest are, frankly, minor league. Thus, because it is exposed to raw market forces, CDI is perhaps an early harbinger of racing’s future. If so, that future isn’t bright.

CDI’s response has been bad for racing, but smart for CDI’s bottom line. Despite the reduction in racing, CDI’s net income as a corporation and its share price, continue to climb. Operating income in 2016 for the corporation as a whole was $194 million, more than double the 2014 total of $90 million. And the CDI share price tripled between the end of 2011 and the end of 2016, outperforming the broad stock market indexes by more than 50%.

So what’s making money for CDI? It’s not the stagnant or even declining racing segment of the company; that’s for sure. In a (few) words, its (a) casino gambling; (b) the Twin Spires ADW wagering platform; and (c) online games – a sector in which CDI is now a major player through its 2014 acquisition of something called Big Fish Games, the maker of, inter alia, Gummy Drop! and Dungeon Boss.

Here’s what each of CDI’s four principal business segments contributed in 2016:

CDI accounts for its Twin Spires online betting platform separately from its live racing business. Included in Twin Spires, at least in CDI’s accounting, is its Bloodstock Research and Information Services (BRIS), purveyor of (to my mind, overpriced) handicapping and racing data. Twin Spires is the largest ADW in the country, eclipsing Frank Stronach’s ExpressBet, Betfair’s TVG, and NYRABets, among others. Twin Spires handle for 2016 was $1.1 billion, or 10.2% of total US handle, a substantial increase in both dollars and market share from the previous year.

Because nearly 90% of the money bet on racing is bet off-track, the net takeout retained by a track that actually stages racing tends to be lower than the handle retained by the ADW bet-takers, who pay only a fraction of that takeout to the sending track. For example, CDI’s live tracks reported only a net profit margin, or takeout, of 10.1% in 2016, while Twin Spires reported a margin of 18.4% on its handle. If this is true across the industry, then either (a) there’s room for substantial takeout reductions, since ADW margins are way too high, or (b) the tracks that actually put on racing should increase their fees to the simulcast outlets. Or both.

CDI’s casino business represents a small, but growing sector of the gaming world. The company owns five casinos and two hotels with gambling attached, and has ownership stakes in the Miami Valley casino and harness track in Ohio as well as the Saratoga casino and harness track across the street from NYRA’s Saratoga Race Course. In addition, it has 25% or greater stakes in a new casino in Colorado and in the casino and harness track in Ocean City, Maryland. Altogether, CDI has 9,000 “gaming positions,” about double the size of the slot-machine palace at Aqueduct.

No single casino operation under the CDI umbrella earned as much as $100 million last year, but in the aggregate, those 9,000-plus slots and a few table games accounted for earnings of $332 million.

And then there are those video games. Big Fish Games downloaded 2.8 billion games to customers in 150 countries in 2016. It’s the seventh biggest publisher of games for the mobile iOS and Android platforms in the US. These games are typically free, but make money when gullible players fork over real money to get an edge in the game, like extra moves or extra weapons. In 2016, Big Fish pulled in $486 million in revenue, up 7.3% over the prior year.

But video gaming is a volatile business. Just ask Atari. In the long run can the clash of the CDI corporate suits in Louisville and the Big Fish millenials in Seattle, Oakland and Luxembourg produce stable or, even better, growing, profits? It’s not an odds-on sure thing.

Here’s how the four segments contribute to CDI’s revenue last year:

Twin Spires
Big Fish Games


Even combining live racing with Twin Spires, barely a third of CDI’s revenue these days comes from racing. Despite the aura of the Kentucky Derby, the company’s core business is watching wheels spin on slots and gumdrops slide down iPhone screens. What would Matt Winn, the man behind Churchill Downs and the Kentucky Derby, make of it?

Expenses for each of the four CDI segments aren’t all that different from one another, as a percentage of revenue. Those expenses eat up 75% of racing revenue, 73% of casino revenue, only 67% of what Twin Spires brings in, and a surprisingly high 82% of Big Fish Games’ revenue (must be all those perks for the game developers). And the suits (i.e., corporate, general, marketing, administrative expenses, etc., plus whatever CDI tucks away under the heading of research and development) gobble down another 10% of total revenue. But still, CDI is comfortably profitable, with net income of $108.1 million last year, a gain of better than 50% over the previous year.

From the point of view of the stock market and CDI executive bonuses, the message is clear: continue to minimize racing and focus on way easier kinds of betting, like slot-machines and video games. From the point of view of racing, the message is equally clear: a publicly traded company, beholden to the demands of the market, will never save horse racing. If CDI is the industry leader, us troops better turn around before we’re neck deep in the Big Muddy.