Wednesday, July 15, 2009

Time for Some Serious Downsizing?

It's almost time for the Saratoga meet, the highlight of everyone's racing year on the East Coast. The last two races for our (Castle Village Farm) horses were a third in a stakes race and a win in an allowance. And we're in the process of buying the best horse we've ever had (a two-year-old by Smoke Glacken, in case you were wondering). So what could be the matter?

Well, for a start, the state of the racing industry. The latest figures from Equibase show a disturbing acceleration in the decline of the industry. For the first half of 2009, total US handle was down 10.5% (to $6.5 billion) as compared to 2008, and purses were down 6.0% (to $507 million), even though the total number of racing days declined by only 2%. And the rate of decline was much worse for the month of June, with handle dropping 16.9% from the same month in 2008 and purses declining by 10.3%, to $101 million. Both these decreases were far larger, in percentage terms, than the drop in the number of racing days for the month (5.6%, to 620 days). So, even as other parts of the US economy are stabilizing, if not recovering, the decline in racing is accelerating.

This is as close to free-fall as it gets. At previous purse and handle levels, horsemen put about twice as much money into training and caring for their thoroughbreds as they took out of the game in purses, without even counting in what they paid to buy or breed the horses. We all know that owning a race horse is generally a money-losing proposition, but at least we could harbor the hope that someday we'd get a big horse and make a big score.

As purse levels decline precipitously, though, even this hope becomes more remote. True, the prices at the auctions may be experiencing double-digit declines, but the cost of training and vet services shows no such easing. It doesn't matter if you can now buy a good horse more cheaply than a couple of years ago if you can't afford to keep it at the race track. My back-of-the-envelope calculation suggests that, if you buy a horse for $40,000-$50,000 and race it in a high-cost state like New York, it will have to earn $200,000 on the track for you to break even. Not many horses do that well. And if you pay more than that, you'd better win some graded stakes and resell the horse as a stallion or broodmare prospect if you want to come out ahead.

While the folks nominally in charge of the game continue to rearrange the deck chairs (see Ray Paulick's account of the Breeders Cup "strategic planning" conference; Ray is more optimistic than I am that something will actually come from this endeavor), racing has, more and more, the look of a dying industry. Yes, changes in the Breeders Cup system, making the end-of-season "championship" look more like playoffs in other professional sports, would help. (Patrick Patten has some sensible ideas on how to do this here.) And serious enforcement of drug rules is an absolute necessity if there is to be any hope of gaining public confidence in the honesty of the game. Kentucky and Indiana's rules that suspended trainers can have no financial interest in the performance of their horses while the trainers are suspended is an excellent start in this regard. (Let's see what actually happens with Rick Dutrow's 30-day suspension in Kentucky.) And the near-universal ban on steroids in racing seems to have gone into effect without any serious impact on the number of starters available for racing

Actions like these are necessary, but by no means sufficient, to create a healthy industry. As long as handle continues to decline, and purses inevitably follow, it quite frankly makes no sense to own race horses. Thoroughbred racing started in England as the hobby of a few rich aristocrats. If current trends continue, racing may become something similar, a hobby for the rich who care more for glory than for financial reward. That would mean fewer -- many fewer -- race meetings, and no place in the game for the thousands of breeders, trainers, grooms, hotwalkers and farm employees who now draw their livelihood from the racing business.

There are, however, two areas in which substantial changes could be made that might provide a foundation for a healthier long-term outlook for racing: an orderly, well managed downsizing and lower prices. This post looks at the downzing possibilities. I'll follow it up in the next post with some thoughts and information on ways in which racing's price structure could be changed to make the industry more viable for the long term.

Racing is already in the midst of a significant downsizing, albeit one that is unplanned and chaotic. Some important tracks, like Hollywood Park, Bay Meadows and Ellis Park, have either closed or are on the way to doing so. Suggestions are being made with increasing frequency that, at a minimum, government funds shouldn't be used to prop up tracks that are losing money. (See the recent editorial in the Newark Star-Ledger advocating letting New Jersey racing die a natural death.) The Magna Entertainment bankruptcy may end up putting some of its tracks (Santa Anita, Pimlico?) in the hands of those willing to pay the highest price, and such potential bidders are far more likely to be property developers than they are to be race track operators. What's lacking in all this, though, is a plan. When General Motors went through bankruptcy, at least someone thought about what the company should look like when it emerged from court supervision and faced the future. Because of racing's fragmented state -- too many entities offering the product, too many different state regulators each defending its turf (or synthetic, as the case may be), there seems to be no way for the racing industry as a whole to agree on a restructuring plan.

As anyone knows who's been to the track recently, not a whole lot of people come out to see the live product, except for a few special days (the Triple Crown, the Breeders Cup) and a few boutique meets (Keeneland, Saratoga). Some 90% of betting these days is done through OTBs, telephone accounts, casino race books and the internet, and most of that is bet on the major-league tracks, however that's defined. Do we really need to be racing at all 74 of the tracks that are listed on the Daily Racing Form's site (and that's not including six California fair tracks)? Do we really need racing year-round in New York, Pennsylvania, West Virginia and Maryland? Do we really need all those $2,500 and $4,000 claimers running at Finger Lakes, Charles Town, Penn National or Beulah Park? Is there a way that a benevolent racing czar, if such could be conjured up, could design a model racing system?

An interesting parallel can be found in the history of baseball. While the major leagues expanded from 16 to 30 teams in the post-World war II period, minor league baseball contracted sharply, and both major and minor leagues prospered. In 1948, there were some 448 minor legue teams, in 59 different leagues, attracting some 39 million fans. In 2007, there were only 160 minor league teams, in 16 leagues, but they drew 42 million fans; the teams that remained were healthier, and both the majors and the minors were generally profitable, despite an astronomical increase in major league salaries. Television, an increasingly urban economy, and a more mobile population forced minor league teams to close up shop, but the survivors are doing very well. And young men still work hard at becoming big-league ballplayers, although nowadays they may more often be found playing on a sandlot in San Pedro de Macoris than on a field in the middle of a farm in Van Meter, Iowa.

So what would a downsized and sustainable racing industry look like? Fewer tracks, racing fewer days, organized in circuits, or "leagues," with coordinated schedules, so they didn't cannibalize each other's signature races, and with standardized conditions that eliminated trainers' forum-shopping for the best (read "least") weight to carry.

The major league tracks would form a pretty select group. They'd have most of the graded-stakes races, most of the purse money, coordinated television coverage ("races of the week" every Saturday, always on the same TV channel at the same time?), and, most importantly, most of the off-site betting handle (does anyone not a part of the owners' and trainers' families actually bet on the 5th at Prairie Meadows?)

Who'd be in this league?. For a start: the NYRA tracks, Churchill, Arlington, Del Mar, Keeneland, and the winter tracks, because of their importance to the Kentucky Derby: Fair Grounds, Oaklawn, and Gulfstream and Santa Anita (if the latter two survive). They'd have first call on scheduling the major stakes races, access to the television feed, and a high minimum overnight purse level.

At the equivalent of AAA baseball would be the major regional tracks: northern California, Texas, Calder, Colonial Downs, Philadelphia, Laurel and Pimlico, Delaware Park, New Jersey, Louisiana Downs, Hoosier Park, Presque Isle, Prairie Meadows(?), Remington Park(?), .

And then there'd be the equivalent of Class A in baseball -- shorter seasons, lower purses; tracks that functioned mainly to support the horses, and their connections, that couldn't make it at the big-league level. Suffolk, Penn National, Finger Lakes, Delta Downs and Evangeline, Emerald Downs, Pinnacle, Canterbury, Tampa, and the like.

Lots of the 76 existing tracks should probably, like most of those 448 minor leagues teams, just be shut down. Do we really need racing at, say, Arapahoe, Blue Ribbon Downs, Fonner Park, Les Bois, and the like? And i know we don't need it at Mountaineer and Charles Town, since I've seen the condition of horses that end up having to race there.

It wouldn't be exactly like minor-league baseball; AAA tracks could still put on some high-level events, like the Virginia Derby, Calder's Summit of Speed, The Haskell, The Lone Star Derby, etc. And the Class A tracks that remained could put on regional or state-bred events. But the scheduling of these would be subservient to the scheduling needs of the major tracks.

Shrinking the industry would mean shrinking the thoroughbred population, as well as closing a bunch of tracks. And that would put a lot of people out of business. So there would need to be an adjustment program for those caught in the middle: compensation for land that was no longer needed for horse farms, job retraining and relief payments for those put out of work. But such upheaval is part of capitalism. Where did all those buggy-whip makers go? Probably into the auto industry (which now has its own problems). Sure, it would be a wrenching change for a lot of people who love horses, but if we don't do something drastic, the industry will just wither away, and we'll all be out of work anyway. Its always better, in bankruptcy, to try a Chapter 11 reorganization, which leaves something still functioning, than a Chapter 7 liquidation. Racing as a whole is bankrupt, and if it doesn't get the kind of major overhaul that General Motors got in bankruptcy court, it has little hope of long-term survival.

How to effect a change this big? Baseball was forced into it after the Black Sox scandal of 1919 forced the warring team owners and leagues to agree to give a commissioner real authority; they were helped along by an antitrust exemption for baseball that the Supreme Court affirmed in 1922. (Interesting aside that has nothing to do with racing: the trial judge who heard the first baseball antitrust case in 1915 was none other than Kenesaw Mountain Landis, who obliged the major leagues by taking the case under advisement -- i.e., not deciding it -- until it was moot, and was subsequently tapped by the baseball owners to run the game.)

I know Congress has a lot to do, what with health care, wars in Iraq and Afghanistan, a collapsing economy, global warming and the like, but maybe they could spare a few moments for thoroughbred racing and give us an antitrust exemption too. Kentucky's delegation might take the lead here. After all, Senate minority leader Mitch McConnell has been helpful to racing before, and the state's junior Senator, Jim Bunning, used to pitch in the major leagues. Armed with an antitrust exemption, racing's dysfunctional family of tracks, breeders, owners, trainers and workers might even be able to agree on a few things.

But don't hold your breath waiting. I'm just hoping that racing has enough years left for our new two-year-old to win a few big races.





18 comments:

Elliott Masie said...

Steve... Great post. It would be great to have this conversation with a group of folks in racing this summer in Saratoga. Glad to help organize. Elliott Masie (MASIE Stable)

Steve Zorn said...
This comment has been removed by the author.
Raleigh said...

thanks Steve, a very well put together piece.

Glenn Craven said...

I was going to comment here, Steve, but your post prompted such length that I decided to blog it myself.

I certainly respect your opinion as closer to the game than I. But I have some differing viewpoints, as well.

pnb63 said...

Based on average daily handle... Tampa's 3.9 million per day was greater then the Fair Grounds and Oaklawn and therefore they should be include in the same league.

Rob Whiteley said...

Another thoughtful post, Steve. Because of its prior use in other sports, the concept of "Major League," as in Major League Racing, possesses an already established familiarity for attracting fans while conveying a sense of excitement and quality. I like it. Unfortunately, the establishment of such a league requires the cooperation of heretofore competitive entities who fail to grasp the importance of making a collective effort. Would love to chat further at the Saratoga sale. Thanks for speaking out. - Rob Whiteley

Pete Denk said...

The slots Bandaid has delayed the contraction you are calling for.

G. Rarick said...

All of this makes so much sense I can't believe people aren't listening. I'm sorry you're not on the Jockey Club Round Table's list...as Racing Czar! It's painful to sit over here (in France) and watch the sport in America flail to its death when the solution - nationwide cooperation - is so obvious. In any case, you can always run your two-year-old over here.

rather rapid said...

i'd respectfully differ. the post shows an extreme lack of awareness, and turns simple highly questionable propositions into facts. I'd suggest Mr. Zorn talk to folks racing at Blue Ribbon and Fonner Park before blithely dismissing those operations as "do we really need". When you based the future of racing upon prejudices that gain strength by continually repeating them, what you end up with is something like this post. Cot Campbell, Ivarone Jess Jackson et. al. will be applauding. Let's get rid of "most of racing". Make the rest of it a better product. Not.

Steve Zorn said...

Thanks, Rob. I appreciate the comments from someone whose views on the industry are always sensible.

And, Gina, mirabile dictu, the folks at the Jockey Club read the piece and did invite me to this year's Round Table. Should be fun.

imtmac said...

Good Post, I do applaude the time and effort put into your thoughts. It is a sad time for our sport. I do have to disagree on one thing. Smaller tracks are the mainstay and backbone of our sport. Without them many folks would have a void in their lives. For example Charles Town is thriving. They should be rewarded for the great job they have done to improve their product. Its a shame it all depends what state you are in and the rules they have.

Handride said...

Steve thanks for the link, we'll see if anyone is listening. The worse the economy gets the more likely a huge change could come about (though I'm always doubtful, and starting to believe it's all just lip service).

If you went before Congress and asked for an exception you'd need a highly detailed plan. I think that's what racing needs. All those old contracts based on the industry of 1970's they all help the state carve out its pound of flesh.

Steve Munday said...

Steve, these are good thoughts and the argument is well reasoned but the sport also needs "major league" caliber race horses to have longer careers to generate sustained interest among casual fans. Usually you will not see Triple Crown contenders race at all after the Belmont Stakes, or the Breeder's Cup Classic at best. While Curlin racing at age four was a great gesture by Jess Jackson, it would have been even better if he had horses of a similar caliber to give him a run for the money, at least on the dirt.

Handride said...

@SteveMunday the only stars racing generates is from the 3yo division. That's a MUCH larger problem. Horses like Zenyatta, Einstein, Gio Ponti would have a following if there was a mechanism for getting them in the general publics eye (why this sport needs standings)

Handride said...

Steve Z, how illegal would this be for those anti-trust folks, but how great would it be for business.

Many tracks form an LLC to purchase exclusive rights to their signals (television & wagering). The LLC purchases and sells signals (television & wagering seperate) based on qualities they want to see in racing (Give some bite to the NTRA's/BC's/TOBA's initiatives), levying rebates and taxes on the price that is either paid for or accepted for a signal. The LLC also comes together to produce a calendar of racing that makes sense: Gr III's lead to Gr II's lead to Gr I's, where tracks cooperate to get their best races on between 4:30-5:30 every Saturday so that they can receive more money from the LLC... because they set up an advertising arm that helps match up owners w/ national advertisers. Ads would appear on the saddle cloths and NO where else. The LLC takes the money from advertisers and splits it between host track, jockey, and owner and a % is saved to go to year end rewards based on standings. This creates a central regulating body in racing, increases cooperation, revenue, and profile.

Pacingguy said...

In theory I agree 100%. Harness racing has similar issues.

Two problems with your ideas. First of all the states are the ones that decide schedules and they want as much racing possible for purposes of tax revenue. Secondly, you have anti-trust issues. You can't force tracks to agree to this and if you form a league and try to force them out you are going to find a track operator charging other tracks with collusion.

The only way this will work is after more naturual consolidation and when you have the survival of the fittest, they may agree.

Steve Zorn said...

PacingGuy: I recognize the antitrust issues; that's why I think we really would need Congress to act.

Gio Ponti is an absolute star (saw him in the Man O'War at Belmont last week) that no one knows about. He's racing at 4 and, unless he wins everything in sight this year, might well go on at 5. How to publicize him?

Totally agree on the need for sounder, longer-racing horses. A huge shrinkage in the foal crop, which would accompany downsizing, could do that.

Steve Munday said...

As I see it: Issue #1 - the Faustian bargain racing made with slot machines. Slots $ saved minor league racing circuits from dying but now they're taking market share from once stable circuits. If there weren't racinos in Pennsylvania, Delaware, West ByGod, Indiana, etc., would they really be needed in traditional racing states like KY, NY and MD? Issue #2 - the money from breeding graded stakes winners makes them too valuable to race. The most famous horses are in the breeding shed at age 4 when they should be racing. Issue #3 - how do you market great older horses like Zenyatta, Gio Ponti, Einstein, etc. who are likely better than any horse coming out of the Triple Crown? How about the fact that the Manhattan wasn't even televised by ABC prior to the Belmont?!? Most non-racing fans don't know there are under-card races for the Derby, Preakness, and Belmont - I'm not kidding! The Manhattan was arguably a better race than the Belmont but got absolutely no coverage. Instead we got 2 hours of useless fluff pieces and 2.5 minutes of actual racing on network tv.