Friday, July 4, 2008

Ellis Park Closes -- And Reopens --Now We're Playing for Keeps

On July 2nd, just two days before this year's Ellis Park (KY) meet was due to begin, track owner Ron Geary announced that he was calling off the meet, because, he said, the horsemen's association had refused permission to send Ellis's simulcast signal to out-of-state internet betting sites. By this weekend, it was reported that Ellis horsemen and Geary had reached a deal to reopen the track as of July 11th. Early press reports say that Ellis horsemen achieved their goal og getting one-third of the takeout from ADW (advance deposit wagering) sites for purses.

The simulcast issue is almost certainly not the real reason that Geary closed the track, treatening to deprive Kentuckians of a summer racing venue that had been around for over 80 years. Maybe he couldn't take the competition from Indiana casinos, maybe he just planned to sell the plant for its real estate value, but the horsemen's stance on simulcasts certainly made for a useful whipping boy. And Geary, who bought Ellis from Churchill Downs Inc. just two years ago, was, wittingly or not, acting as an ally of the Churchill conglomerate when he blamed the horsemen for closing down the place.

Now, horsemen -- that's us owners and trainers -- need one thing to make a living, and that one thing is racing. If we can't run our horses, all we're doing is operating a very expensive boarding house for equines and biding our time until we can sell them into the completely insane breeding market. But, seriously, we're in the game to race, and we wouldn't do anything that eliminates racing if we can help it.

But when we do race, we want a fair share of the money that our horses generate, and that fight for a fair share has, just in the past few months, heated up as horsemen around the country have, at long last, begun negotiating for a reasonable split of simulcast revenue.

And now, a short detour into history, in order to explain how horsemen have the power to do this. Under the federal Interstate Horse Racing Act of 1978, all horsemen's associations (except the one at the NYRA tracks in New York) have the right to refuse permission for the export of a simulcast signal, whether to all or only to specified outlets. When Congress passed that act, it's major purpose was to ensure that the then newly emerging simulcast business would not run afoul of the federal Wire Act, an Al Capone-era statute designed to prohibit illegal gambling. But as the act emerged from Congress, it also included a provision giving most horsemen's groups the right to negotiate about where the simulcast signal could go.

Over the past three decades, horsemen's groups have come to realize that they can use this power to negotiate contracts with the race tracks.
In other words, where horsemen have the power under the 1978 Act to block simulcasts, they can use that power the same way a labor union uses the threat of a strike as leverage to secure a decent contract. Blocking a simulcast signal doesn't necessarily shut down racing entirely, but it certainly focuses the attention of race track management. As the importance of simulcasting has grown, the horsemen's power under the federal law has also grown, particularly for those tracks that have an attractive racing product.

(he horsemen's association at the NYRA tracks was cut out of the 1978 Act on the patently absurd grounds that NYRA was a not-for-profit institution and therefore (?) shouldn't have to get its hands dirty negotiating a contract. Funny, NYRA seems to do just fine negotiating contracts with its mutuel clerks and maintenance workers, so why not the horsemen?)

In the old, B.S. era (Before Simulcasting) the issues that mattered to horsemen were pretty simple: how many races would be run, what kind of races would they be, what was the track condition going to be like, and, most important, how much money would be going into purses. Traditionally, purses were a set or negotiated fraction of the track's betting handle. If average takeout was, say, 15%, then a typical deal might give half that amount to the race track for its operations and dedicate the other half, say 7.5%, to the purse account. Race track management would have to estimate the amount going to purses when the racing secretary wrote the condition book, but there was usually a mechanism in place either to give the horsemen a meet-end bonus if betting was better than expected, or to cut purses at the start of the next meet to reflect a shortfall.

But as simulcasting, first to other race tracks and OTBs and, recently, to the so-called ADWs (advance deposit wagering sites, typically online) has increased, the calculation, and negotiation, of how much of what's bet on the races ends up in the purse account has become far more complicated.

Last year, roughly $15.4 billion was bet on horse racing in the US. Of that, almost 90% was bet off-track, at other racetracks that receive a simulcast signal, at OTBs, at casinos, dog tracks and jai alai frontons, and, increasingly, at online wagering sites, or ADWs.

The growth of these off-track avenues for betting has substantially increased total handle, which should be a good thing for racing, as a portion of every dollar bet ends up in the purse account, where it pays owners some fraction of what they spend on buying and caring for their horses. The bigger the purses, the more likely it is that owners will come into and stay in the game.
But, because simulcasting introduces additional entities into the wagering stream, the same amount of takeout now has to be carved up into more than two pieces, complicating the determination of how much of the betting dollar the horsemen can claim.

Typically, horsemen's contracts with race tracks provide that half of all the money that the track receives from the simulcast wagers -- sometimes after an allowance for race track expenses -- will go into the purse account. (Click here to see a typical contract.) Sounds good, but it all depends on how much the track itself receives for the simulcast.

Usually, it's been left to the race tracks to negotiate with the entities that receive their simulcast signals. Sometimes, as in the case of New York's regional OTB corporations, that percentage is set by legislation. More often, it's just a contract negotiation between the track and the simulcast outlet. And the tracks haven't been asking for much.

In the early days of simulcasting, the tracks were happy just to get their signal out there, so they made sweetheart deals with other race tracks under which the sending track would get back only 3% or so of the amount bet, leaving the receiving entity with the bulk of the takeout (in my example of a 15% takeout, the simulcast wagering outlet would keep 12% of every dollar bet, leaving the sending track and the horsemen with only 1.5% each). Of course, since tracks were mostly making deals with each other, there may have been a sense of professional courtesy involved, even though the amount of wagering was far from even. Bettors at Rillito Downs in New Mexico would wager a lot more on Saratoga than Saratoga bettors would wager on Rillito, even if they could get the latter's signal.

Then, when casino race books and online wagering sites came on board, those new wagering sites used the early race track contracts as precedent to argue that they shouldn't pay much more than 3% for the major-league tracks' signals, either. That allowed them to offer sizable rebates to their best customers, drawing big-time gamblers away from the tracks to set up shop in Las Vegas, or even in a couple of cases, to set up their own OTBs in such traditional racing jurisdictions as North Dakota or the Cayman Islands. As any handicapper knows, it's a lot easier to beat the races when your effective takeout is 3% than when it is the 15% they charge at the race track. Just ask super-handicapper Ernie Dahlmann, who left New York for a suite, and large rebates, in Las Vegas.

Gradually, and often at the urging of their horsemen, tracks have been pushing for a fairer share of the revenue from simulcast and off-track wagering on their races. Most simulcast contracts with outlets other than thoroughbred tracks (i.e., casinos, ADWs, harness tracks, etc.) now return more than 3% to the track where the races are actually run, but the percentages are still less than the takeout; in fact, they're generally far less than half the takeout. And, since the purse account generally gets only half of what the sending track receives, that means only 2-3%, at best, of the amount bet at simulcast sites finds its way to the purses of the sending track.

The Thoroughbred Horsemen's Group was formed last year by seven different horsemen's associations to address the simulcast revenue problem, a problem frequently described as "handle up, purses down." The THG has since grown to include at least 18 horsemens groups in 16 states covering 52 race tracks. (Disclosure: I'm a member of the Board of the New York Thoroughbred Horsemen's Association, which is not -- yet -- affiliated with the THG. Partly because, as noted above, NYTHA, unlike every other horsemen's group in the country, doesn't have a legal right to negotiate contracts with its race track management.)

The THG has been designated by a number of horsemen's groups to handle negotiations with tracks, especially on the issue of the division of simulcast revenues from ADWs. Despite the race tracks' claims that using the same negotiator is a violation of antitrust laws, this is just doing what employers do all the time. There are law firms that specialize in union-busting campaigns and hard-nosed negotiating, and they work for lots of employers in the same industry. So why shouldn't different horsemen's groups have the right to hire experienced, competent negotiators? Or is it that the track-media-ADW conglomerates like Churchill and Magna just can't take the heat? If that's the case, we can point them toward the kitchen door.

Although each negotiation is somewhat different, reflecting the specific situation of each race track, the basic position that the THG has been advancing is that 7% of what's bet on any thoroughbred race should end up in the purse account, wherever that wager comes from. That's roughly comparable to what happens when the money is bet on-track. Since most tracks have a blended takeout rate of 20-21%, that 7% is royghly one-third of the takeout, just what the Ellis horsemen got in their negotiations.

As the negotiations have heated up, it's become clear that the horsemen's principal antagonist is not a casino, or an OTB, or an independent ADW, but rather Churchill Downs, Inc. (CDI). Now, most of us might think that Churchill is a race track company -- after all, we knew it when all it owned was Churchill Downs, and it still owns a bunch of race courses, including Arlington, Calder and Fair Grounds, though it's sold off Ellis Park and Hoosier Downs just in the past two years. And, thinking of it as a race track company, we would be sympathetic to the idea of increasing its revenue from the export of its very popular signal. But Churchill's management doesn't share that delusion. They know that they're really an online wagering company that happens to own a few race tracks. Churchill has formed a joint venture, TrackNet Media, with Frank Stronach's Magna Entertainment (which is the owner of Santa Anita, Gulfstream, Pimlico and Laurel, among others), to exploit the online wagering market . Churchill also owns the slot-machine operation at the Fair Grounds, as well as some 20 OTB locations around the country. And the two big corporate players are evidently looking to a future in which just about every horse racing bet is placed online and they control the lion's share of that market.

Churchill's recent filings with the Securities and Exchange Commission show why it wants to shift wagering from the tracks, even its own tracks, to its OTBs and ADWs. According to its own figures, Churchill nets 19.9% of the handle from "Other Investments" (i.e., OTBs and ADWs), compared to a range of 6.7%-12.3% from its various race tracks. No wonder Churchill sees its future online.

From Churchill's point of view, the economics are simple. If a bet is made at the race track, purses get 7%, the track keeps 7% or so, and a little goes to the state. If a bet is made at Churchill's online site, twinspires.com, then Churchill gets to keep all of the takeout except the 1.5-2% that they remit to the purse account. No wonder they don't want to promise the horsemen a 7% share.

The principal battlefields in this war have been Churchill Downs itself and Calder in South Florida, which is also owned by CDI. At each track, the local horsemen's group has used its power to block export of the simulcast signal to ADWs, including the ones owned by CDI. And at each track, CDI management has cut purses by 20% -- considerably more, the horsemen say, than is warranted by the revenue loss attributable to the simulcast ban. Because of the purse cuts, some owners have picked up stakes, field sizes are down, and handle, of course, is greatly diminished. At Calder, for example, total handle through June 30th for the meet that opened April 26th was down 72% compared to last year, to an average of $762,000 a day. At that rate, and until there's a substantial contribution to purses from the slot machines authorized by last year's Miami-Dade County referendum, it's hard to see how year-round Florida racing can continue. My own trainer in Florida, Kathleen O'Connell, reported that she had only one owner send her to the Ocala two-year-old sales this year to look for horses, compared to four or five in prior years.

Although final figures are not yet available for the Churchill Downs meet that ends on July 6th, early figures showed that total handle was down only 2.7% as a result of the ADW-simulcasting ban. Nonetheless, Churchill Downs also cut its purses by 20% on May 10th. Churchill then followed that retaliatory cut with a lawsuit aimed at the THG and at its horsemen, even naming individual directors of the Florida HBPA as defendants. War has been declared.

Horsemen don't have a lot of options. We could simply refuse to enter our horses at tracks that don't provide a fair share of simulcast revenue. But too many of us operate to close to the financial edge to be able to withstand an "entry strike;" we don't have the kind of strike fund that successful labor unions maintain, and we have huge costs every day just to care for our horses. Besides, if such an entry strike were to occur, you can be sure that the race tracks would be at the courthouse with antitrust claims within hours.

Alternatively, we could go to our various state legislatures and regulatory bodies, and lobby them to mandate that a fair share of the various streams of wagering revenue go to purses. That's the route we've had to follow, with some success, in New York, where we don't have right to block the simulcast signal. But that kind of lobbying takes time and money and is subject to the vagaries of politics, where, as in Kentucky just this week, a new Governor can throw out his predecessor's racing regulators and replace them with his own gang.

(Shameless pitch: the New York Thoroughbred Horsemen's Association is running a golfing outing on Monday, July 7th, to support our political action committee's work in Albany. It's a good cause that has won major benefits for owners and trainers in the past few years, so we'd like to keep it well funded.)

Finally, outside New York, we horsemen can use the weapon that Congress gave us in 1978, the right to block a track's simulcast signal. That's what's happening in Kentucky and Florida, and CDI's huge over-reaction shows that it's a weapon that works. And the horsemen's victory at Ellis might just be the opening salvo in what will become an ever more bitter war.


The confrontation between horsemen's groups and the Churchill-Magna behemoth may not have quite the epic stature of historic labor battles such as the United Auto Workers' sit-ins at Ford in the 1930s or the coal miners' strikes led by Mother Jones in Appalachia, but it might be one of those events, like those labor actions, that marks a real turning point in an industry, providing a decent livelihood and a bit of dignity for those who dare to oppose corporate power.

5 comments:

Winston said...

Thank you, sir, for making this issue clear.

K_Huff said...

I'm a trainer in Ky, and I was starting to look for OTHER options for racing my one gelding. I bred his mother, foaled him, raised him, and now he's racing. I heard this evening that Ellis is re-openning. Although I'm not fond of Ellis Park's timing, I'm greatful we Kentuckians have a track to go to! I'd rather stay instate if I have a choice! Kudos to the people that made it possible!

K_Huff said...

I'm a Trainer/Breeder/Owner in Lexington, Ky and I've just heard that Ellis Park is re-openning this Friday. I was going through other condition books looking for races for my gelding, and am very happy that I now get to choose to stay "instate". Kudos to All those who made it possible! And Kudos to the owner of Ellis for not being a hard nose! We, the small time Ky Trainers, salute you!

thoroughbredbrief said...

Thanks for posting this - it's an issue I have trouble wrapping my brain around. I'm familiar with the older anti-trust cases, but this made the present situation much clearer.

I think CDI's legal representation has been a major factor in the move toward expanding gaming, etc. Not too long ago they headhunted one of the best equine attorneys in the business, who used to work for Magna (I clerked for the firm last summer). But maybe it was the firm responding to what CDI wanted, rather than vice versa - I probably shouldn't speculate! Anyway, thanks again, and I hope you don't mind my adding a link on my blog, because I really want to follow your postings.

Steve Zorn said...

Please do link the blog! I love to have lawyers reading this. I usually introduce myself as a recovering lawyer -- practiced tax law in New York for a while, then taught in law school before the horses took over.