Sunday, July 26, 2009

Racing's Pricing Problems

Merely shrinking thoroughbred racing, as I proposed in my last post, would not, in itself, be enough to sustain the health of the industry, especially when racing is faced with a malevolent mix of (1) tough competition from casinos for the gambling dollar, (2) shorter attention spans in Generations X, Y, Z and whatever else followed us baby boomers, (3) decreasing discretionary income for most Americans, and (4) the continuing blots on our image from drugs, breakdowns and the neglect of horses (a special thanks to Ernie Paragallo for keeping that one in the news).

But there are some things we could fix, especially in the area of pricing. A more coordinated industry, and one that has racing as its primary focus (as contrasted, say, to Churchill Downs Inc.'s apparent focus on online bet-taking) could take some important steps that would attract more fans to live racing, increase handle, both on-track and off, and provide a fair division of revenue as between the track owners and the content providers, i.e., owners, trainers and jockeys.

1. Why Aren't Race Tracks More Like Casinos?

One of racing fans' persistent complaints is the nickel-and-diming by track management for admission, reserved seats and parking, combined with the outrageous prices for very ordinary food. Most casinos, in contrast, offer free admission, often with a refund of some part of public transportation costs for those arriving other than by car. I can take a bus from NYC to Atlantic City for $35 round trip, then have the casino hand me $25 in cash when I arrive. Try that at your local race track; actually, I have; the Long island Railroad charges me $12 for a round trip from Penn Station to Belmont, and I've never seen a NYRA staffer waiting at the station to hand me $5 or $10 back, even in the form of a betting voucher. Parking at most casinos is free, though a few might charge $5, often refunded if you're a regular. And if you're playing at a casino, the drinks are free -- well, a $1 tip is expected, but that's a lot cheaper than the $6-plus beers at most race tracks. True, the restaurants in most casinos are no bargain if you're paying in cash, but again, if you're a regular, you'll be accumulating "comp" points that you can use to lessen the damage by paying all or part of your restaurant bill.

I find it hard to believe that race tracks actually make money by charging for parking, once the cost of paying the parking lot attendants is figured in. And whatever pittance the tracks do make would be far offset by increased handle from those fans who resent the charge and don't bother to go. Similarly, free admission seems an obvious winner; every additional fan attracted by the freebie will certainly contribute more in betting handle than whatever he/she would have paid at the gate. Even if general admission is only a couple of bucks, that's enough of a deterrent to keep a lot of people away. And if you want to have a clubhouse that exudes higher class, why not do that by having a dress code (in Kentucky, anyway, that could be "church or business attire," a phrase one doesn't often encounter on the coasts), rather than a fancy admission price. Rich -- and not-so-rich -- horse owners get into the track for free, but guys on Social Security who want to hang out with friends and make the occasional $2 bet have to pay -- what's wrong with that picture?

A good example of the power of low-cost options is Churchill Downs' recent experience with Friday-night racing. Offering discounted admission for seniors and Twin Spires card holders, Churchill drew crowds that are huge by today's standards, on the order of 30,000. After a first-time disaster, when there weren't enough concession stands to handle the crowd, Churchill apologized, drafting everyone up to CEO Bob Evans to pour $1 beers, and apparently gained back lots of good will. True, Louisville is a particularly horse-centered town, but even so, good promotion and cheap prices showed what can be done.

As a trendy new book points out, "free" is a powerful price. Google has grown to be one of the largest companies in the world by offering its principal products for free, then cashing in on advertising. Other businesses give some things away cheaply or for free and make money by selling other things (razors and razor blades, printers and toner). That's what racing should be doing. Free admission and free parking are no-brainers. Cheap soft drinks, water and beer are equally obvious. Want people to bet? Give them a usable program for $1. If they want more, they can move to the Daily Racing Form, BRISnet or the Sheets. Make the track experience cheap and easy. How hard can that be?

And, while you're at it, why not a customer rewards program as robust as that of the casinos? Offer everyone who walks in the door a "player's card," then use it to track their bets, with proportionate rewards, not just the minor rebates on betting that some tracks now offer, but also discounts on food and drink, preference for seats for the big days, etc. And use the information from the players' cards to direct targeted advertising, just as the casinos do. That builds brand loyalty at hardly any additional expense.

2. Takeout - The Big Bad Price

Everyone who's taken Economics 101 knows that, in theory, a lower price leads to higher volume. So, in theory, lowering takeout should mean that handle will increase. But, again applying those not-so-useful rules from Econ. 101, any business needs to determine where in that supply-demand equation it can make the most profit. If a track with a average 20% takout does $100,000 in handle (let's leave out simulcast handle for now -- that's a whole different problem, discussed below), it makes $20,000. To make the same $20,000 at 10% takeout, it needs to double the handle to $200,000. Will that happen, or will the growth in handle lag behind the decline in takeout? Despite the earnest claims of the Horseplayers Association of North America, there's just not enough evidence to know for sure where the ideal price point is. HANA's rankings give their highest grades (B+ -- evidently no track meets their demanding standards for an A) to Keeneland and Churchill, which charge 16% on win-place-show bets and 19% on all multiple and exotic wagers. At the other end of the scale, with F grades, are Assinoibia and Suffolk, with takeout rates of 26-29%; Frank Brunetti's Hialeah, in its dying days, went even higher. Every casino game has lower takeout than that, ranging from about 10% on penny slot machines down to 1-2% on blackjack and some other table games. In poker, the casino game that most closely resembles parimutuel betting, because one is playing against other bettors, rather than against the house, the takeout, whether in the form of a "rake" from each hand or a seat-rental charge, ranges from perhaps 10% in low-stakes games down to as little as 0.5% in the high-stakes games in Las Vegas. When the "comps" earned by players are added back in, it's possible to play certain games at certain casinos for what amounts to a microscopic take.

Racing couldn't survive with a takeout that low, but I'd love to see some serious experiments at major tracks with real takeout reductions. Laurel tried a 14% takeout on its Pick 4 for a while, and NYRA reduces the Pick 6 takeout to 16% on days when there's no carryover, but there's no good scientific evidence that I'm aware of as to what really works. I recall that when Steve Crist was working for NYRA, he managed to get some trakeout reductiuons through, and they did not in fact result in proportionately greater on-track handle, but the NYRA of that day, run by Kenny Noe with little regard for the fans, did little to promote its pricing structure. It remains to be seen whether a major reduction, say to 10%, as HANA suggests, would work. Let's give it a try.

3. The Simulcast Pricing Problem

Tracks sell their simulcast signals to other tracks, OTBs, casinos, and, most importantly, internet-based wagering sites. The tracks don't get the full takeout on bets placed through these other outlets; they get anywhere from 3-8% of the bet, the remainder of the takeout remains with the off-track operator. In some cases, that operator may share it with big bettors, granting substantial rebates.

Overall, some 90% of US handle is now wagered off-track, so the vast majority of the takeout on bets goes not to the host track and its thoroughbred owners, but to the parasites, oops, to the folks who operate the off-track systems. Last year, the Thoroughbred Horsemen's Group (THG), an alliance of numerous state horsemen's associations, advocated sharing the takeout evenly, one-third to the host track, one-third to purses for the horse owners, and one-third to the off-track bet taker. The entrenched interests, notably including Churchill Downs Inc., which sees its future in online betting and slot machines, put up a huge fight, seriously damaging the livelihood of many horsemen at Calder and Churchill. Those disputes were ultimately settled, but we're nowhere near the one-third sharing level yet.

From a horseman's point of view, one-third of everything for purses would be a LOT better than the current regime of, say, 7% of on-track betting and perhaps 2.5% of off-track betting. Even if takeout was cut from the current average of about 20% to 10%, we could live with it, and pay our training bills at least as well as we can now, if we could get one-third of the total. And I think the tracks could live with it as well; they'd get more money for operations than they do now.

The losers would, of course, be the off-track bet-takers, and to some degree the "whales," or large bettors who feed off them, insisting on immense rebates. Internal studies that I've seen (but, alas, am not allowed to quote) suggest that the "whales" may account for about 15% of total US racing handle. Instead of basing our whole simulcast pricing model on being able to accommodate the top 15%, why not introduce across-the-board rebate systems that reward all players, in proportion to the volume of their play. The current system, like Republican tax cuts, over-rewards the tiny sliver of those at the top of the (betting) heap, while hurting all those lower down.

4. Owners, Trainers and Jockeys

No business that fails to pay its talent a living wage deserves to be a success, and talent that organizes, whether it's through Actors Equity or the Major League Baseball Players Association, does better than talent that doesn't. The starting minimum salary in major league baseball this year is $400,000 (thank you, Marvin Miller, who should have been inducted into the Hall of Fame years ago). That covers nearly 1,000 players. Even in ballet, a field that no one would think of as a way to get rich, principal dancers for the NYC Ballet earn in the mid-$200,000s. If the top 1,000 jockeys, trainers and horse owners made a few hundred thousand each, I think we'd all be deliriously happy. But the reality in racing is far different. Even at the major tracks -- New York, Kentucky and Southern California -- most trainers and jockeys make only a modest income. Perhaps 50 jockeys nationwide make a mid-six-figure income, and perhaps 100 trainers. And thoroughbred owners, as a group, make in purses less than half of what it costs us to care for our horses. Sure, there are a few outstandingly successful trainers and jockeys who make seven-figure incomes, but very few. There are lots more who, but for their love of horses, would be making far more off the track. Some of them could even pay their mortgages.

Some small steps have been taken to compensate jockeys a little better. With New York owners and trainers taking the lead, the base rate for riding at NYRA tracks was incrteased to $100 last year, a long-overdue step for men and women who risk their lives on the track. Many other tracks have followed suit.With better purses, more could be done.

Trainers have been able to increase their day rates a little (the going rate in New York is now $85-90 a day), but the current economy is leading a lot of small-scale owners, the guys who run trucking companies or are contractors, say, and who get together with their friends to buy a few horses, to drop out or cut back. That may not hurt Todd Pletcher or Steve Asmussen, but it sure hurts Leah Gyarmati, Mike Miceli and Mitch Friedman, just to name some of the people I see in the mornings at Belmont. Those small-scale trainers, and hundreds more like them, are in an impossibly precarious position at the moment. Some relief could come through cost-cutting measures, especially by finding a better way to deal with workers compensation, but the ultimate solution is to return more money to the talent, by way of bigger purses.

Finally, the horse owners need to see at least the hope of meeting our costs. And the only way to do that, as well, is with bigger purses. NYRA, to its credit, has made some innovative changes for the Saratoga meet, increasing purses based on field size, especially in longer races, and rewarding those who keep their horses in a race that's rained off the turf. That's a start, but we still need more.

Together with the ideas that I floated in my previous post, these pricing suggestions could help restore racing to something approaching fiscal stability. The only issue now is, how do we get there?

Anyone want the job of racing czar?

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.