Saturday, October 25, 2008

So Long Breeders Cup, Hello Aqueduct

The Breeders Cup is over. So let’s get on to the important stuff.  Which is that racing returns to Aqueduct on Wednesday.

Well, OK, perhaps Aqueduct isn’t the center of the racing world any more – though it did host the Breeders Cup in 1985 – but for some of us in the game, it can be the center of our economic, if not aesthetic, lives.

And for the New York Racing Association (NYRA), which operates the rusting old track on the fringes of JFK Airport, Aqueduct is, bizarrely, its most reliable profit center.  Sure, Belmont and Saratoga have the famous races and, occasionally, draw the big crowds, but it’s Aqueduct that actually generates the cash.

For those who haven’t had the pleasure of spending quality time at the Big A, here’s a video clip that can give you a bit of a feel for the ambience. True, the clip is 40 years old, and the crowds are a lot smaller these days, but some things never change.

The original Aqueduct track opened in September 1894. At the time, long before there was an airport there, the area was farmland, and still independent of New York City.  In 1941, a new clubhouse and track offices were built. The whole plant was razed in 1956, just after the New York Racing Association was formed, consolidating the then-four major New Yorktracks into a single entity, and a new "Big A" opened in 1959.

That new Big A is now approaching 50, and its age is showing.  The plant that held over 40,000 for the Breeders Cup back in 1985 now draws an average weekday “crowd” of perhaps 1500.  The cavernous grandstand has been closed off for years, awaiting the installation of slot machines that were approved by the New York State Legislature in 2001 and are, at latest report, going to be ready – perhaps – by 2010. Unlike most tracks that operate in the winter, Aqueduct has no indoor seating from which to watch the races.  If you want to see them live, rather than on a TV screen, you have to venture out into the often-frigid box seat area, where the paint peels from the iron rails, and feeble electric heating elements shine a dim yellow light that one can pretend has some warmth in it.

But, to look on the bright side, Aqueduct is the only track in America that has its own subway stop. In fact, you can stand on the subway side of the clubhouse and see the skyscrapers of Wall Street in the distance. The folks betting the daily double are probably doing better these days than those guys in the skyscrapers

And don’t forget the racing itself. In 1975, an inner track, which miraculously resists freezing, was built to accommodate winter racing. Once the horses move to the inner track – usually from December through March – there’s no turf racing, and the distances are a relentless parade of 6-furlong, 1 mile 70 yards and 1 1/16th miles, with a few longer routes thrown in very occasionally for variety.  The intrepid handicapper gets very accustomed to seeing the same horses, in pretty much the same conditions, running against each other every other week. From a handicapper’s point of view it’s pretty ugly; the inner track is relentlessly speed-favoring, especially when it’s wet (which is often).

On the bright side (at least it’s bright if you’re a very young rider), most of the top jockeys head south for the winter, so there’s almost always room for an unknown apprentice or two to break through into the standings, a pattern that’s helped along by the speed bias.  Trainers put a 105-pound bug boy (or girl) on their horse and tell them to just pop out of the gate and hold on.  If the horse is fast enough to clear the field, and the jock doesn’t fall off, they’re on their way to the winner’ circle.

In an ideal world, you might think, Aqueduct would just go away, we’d race at Belmont from, say, March through July, go the summer camp for racetrackers, i.e., Saratoga, for August, then back to Belmont through maybe Thanksgiving.  And, in the winter, horses could go to beautiful oldHialeah or Gulfstream, or just take a few months off and frolic in the pastures of South Carolina.  Oops, John Brunetti’s intransigence and the demographics of South Florida seem to have doomed Hialeah, and Gulfstream is no longer either old or beautiful.  And most of us who own horses can’t afford the luxury of a winter vacation.

Certainly there have been attempts from time to time to close the place.  To understand why it endures, and why some even love it – well, perhaps love is too strong a word; how about have a secret, well-guarded fondness for it – one needs to understand the crucial role that Aqueduct plays in the economics of New York racing.

There are four different interests whose need Aqueduct serves very well: (1) New York State and its politicians; (2) NYRA itself; (3) owners and trainers who race in New York; and (4) New York thoroughbred breeders.

First, the state.  Since Albany takes a very big cut from the betting dollar,Albany has mandated that NYRA run many, many racing days each year. These days, the Aqueduct “season” runs from late October through the end of April, with only an 11-day break at Christmas.  The rest of the time, the live racing show must go on.

Second, there’s NYRA.  Strange as it may seem, NYRA makes a profit at Aqueduct.  Sure, on-track attendance is low, and so is on-track handle. But the Aqueduct simulcast signal, sent through the statewide network of OTBs and to virtually every pari-mutuel betting outlet in North America, brings in much appreciated dollars. At the same time, purses are much lower than atBelmont and Saratoga.  Hardly any of those pesky Grade I stakes that cost the track money, but there are lots of NY-bred maidens and allowances, and lots of low-level claiming races, with appropriately low purses. Generally, NYRA breaks even, more or less, at Saratoga – huge handle, but correspondingly huge purse distribution – and loses money at the Belmontmeets, which don’t have the huge attendance, but do have lots of rich stakes races.  This year, NYRA has cut back Aqueduct purse levels by 10%, so even with an expected decline in handle, there should still be a profit.

Third, Aqueduct is the savior of the average working horseman.  When the big outfits, with their million-dollar yearlings, roll into town for the summer, it’s pretty hard for a small stable, with modestly priced horses, to compete. But when we move to Aqueduct, all of a sudden there’s room in the winners’ circle. As Pletcher, Zito, McLaughlin et al. head south, the rest of us begin to see spots in the condition book where we can compete.  (My own modest stable, Castle Village Farm, was leading owner at the Aqueduct spring meet in 2006, something we’d have no hope of accomplishing at, say, Saratoga.) Stables that have lots of New York-breds tend to do particularly well at Aqueduct, because the racing secretary needs to fill races, and there are lots of NY-breds at the track, so there are often four or five NY-bred races on a nine-race card. And those races draw full fields, which makes NYRA and the state happy as well, since betting handle is pretty much proportionate to field size.

Finally, because of its reliance on NY-breds, Aqueduct is a major force propping up the New York breeding industry.  Thanks to the efforts of horse owner and retired State Senate majority leader Joe Bruno, New York has one of the richest state-bred programs in the country, with substantial bonus payments to the owners, breeders and stallion owners of NY-bred winners. For a good-sized breeding farm, those bonus payments are like annuity checks, rolling in every two months.  Without the heavy diet of NY-breds running at Aqueduct, a lot of those farms wouldn’t survive.

So I don’t see Aqueduct fading away any time soon, no matter how much the NY Port Authority would like to grab the land for airport parking.  Neither the state, nor NYRA, nor a good portion of the horsemen could survive a long winter break.  And Belmont, where the grandstand faces into the north wind, and there’s virtually no heating, would require a billion-dollar makeover to handle winter racing.  So that leaves Aqueduct as the only feasible winter track.

But the old decrepit Aqueduct that we have such an intense love-hate relationship with may, finally, be in for a change.  After years of delay, theAlbany politicians have at last agreed on an operator for the (as yet totally imaginary) 4,500 slot machine palace at Aqueduct.  The lucky company is Delaware North, which also runs the slots at the Saratoga Harness track and at Finger Lakes, the only New York thoroughbred track that’s not part of NYRA.  Construction may finally get under way any day now – well, more likely sometime next spring.  And after that, it’s mere months, well perhaps 15 of them, until the slots are in action and the profits are flowing, in distinctly unequal shares, to the state, Delaware North, NYRA and, finally, purses for the horsemen. (Oh, and the breeders, connected as they are in Albany, get a share too.)

Delaware North has, in fact, put forth a vision of the new and improved Aqueduct, complete with a convention center, hotel, shops and restaurants (gee, sounds almost like Frank Stronach’s fiasco at Gulfstream; let’s hope not):

Any resemblance between that drawing and Aqueduct past, present or future is, I’m sure, purely coincidental.  But it’s nice to dream.

Meanwhile,  my NY-bred filly Just Zip It is entered in the feature race on Thursday. I can hardly wait.

Monday, October 20, 2008

New York Moves Toward Uncoupled Entries

The New York State Racing and Wagering Board – the state agency responsible for regulating thoroughbred racing – has proposed a rule that would allow trainers to enter a maximum of two horses per race as uncoupled entries, i.e., separate betting interests.  The rule, which was announced by the Board on October 10th, could be adopted any time after the public comment period ends on October 29th.

Coupling of entries has always been a hot-button issue for bettors.  When a trainer’s horses run uncoupled, and the 20-1 longshot wins, while the 8-5 favorite runs up the track, many handicappers are quick to suspect chicanery. And who knows, in some cases they may be right.  So the pressure for requiring a trainer to couple entries has always come from bettors and those in the press who say they’re representing the bettors.

Uncoupled entries are already permitted in New York in stakes races. The proposed rule would allow them in all races.  Coupling of entries as a single betting interest would still be required, as it is now, when two or more horses in a race have the same ownership (in New York, that means a 25% overlap in ownership among the horses), whether or not the horses have the same trainer.  Obviously, the potential for game-playing is greater where there’s common ownership, as the same entity ends up with the purse, no matter which horse wins.

New York trainers have been seeking the rule change for years.  They say, with a good deal of truth, that the rule limits their options for entering horses, and makes it difficult to explain to their owners why some horses get in and others don’t. A particular issue has been the rule that, if a trainer enters two horses in a race that will have superfecta betting, then only one can race, with priority established according to which one has the better date (don’t ask – the date-preference system deserves a column all its own), and not by which one the trainer really prefers.  Uncoupling the entries would eliminate the superfecta-race problem, while at the same time making it easier for the racing office to attract enough entries so that the race could be used for superfectas.

That’s the real reason for the change – since it isn’t always possible to get bigger fields, this is a way to get more betting interests and a bigger handle without having to beg more trainers to enter their horses.  In the face of double-digit declines in handle around the country, the Racing and Wagering Board has dusted off the long-pending rule on uncoupled entries to try to provide some short-term relief.

Along with permitting uncoupled entries, the proposed rules would also reduce the field size required for various types of bets.  Exactas could be used with as few as three betting interests in a race, compared to four under current rules. The minimum for trifectas would drop from six to five for all races; now it’s five for stakes and some allowances and six for all others. And the minimum for superfecta races would drop from eight betting interests to seven, with a further proviso that a late scratch – after the horses have left the paddock –down to six betting interests would not cause the entire superfecta pool to be refunded.

If you put together the decrease in required field sizes for the exotic bets and the new rule on uncoupled entries, it’s pretty clear that the state is doing what it can to keep handle – and the portion of handle that goes to the state –as high as it can in difficult economic times.  I don’t expect many handicappers to find real overlay bargains in five-horse trifecta fields or seven-horse superfectas, especially given New York’s high takeout on multi-horse exotics, but perhaps that’s not the point.

For those who are so inclined, you can send comments to John Googas at the Racing and Wagering Board.  His email is Comments are due no later than October 29th.


Equine Hedge Funds

Even as the world financial system came crashing down over the last few weeks, it appears that promises of returns that are too good to be true aren’t limited to Wall Street.

For those who, luckily, aren’t in the stock market, here’s a quick definition.  A hedge is an unregulated, rich guys’ version of a mutual fund.  It collects money only from “qualified investors” (i.e., rich people) and invests in, well, anything, from credit default swaps with Lehman Brothers to thoroughbreds with blazing speed and bad feet.

For the promoters of hedge funds, the big lure is the compensation.  The industry standard – don’t ask me how it got to be the standard, because it represents an unbelievable level of greed – is that the fund manager’s annual compensation is 2% of the value of the assets, plus 20% of the profits.  So, if you can attract enough money into the fund, you’re guaranteed to do well even if your returns are no better than what one would get putting the money into the S&P 500. Or a mattress.  It appears that hedge funds as a whole are losing something like 25% this year. But the managers will still get that 2%. So if you have a $100 million hedge fund, there’s $2 million in compensation just for turning on the lights.

It was only a matter of time until this get-rich-quick model made it into horse racing. Michael Iavarone of IEAH, whose name in most newspapers is preceded by the label “Wall Street investment banker”  (and who, actually, should be labeled “former Long Island penny-stock broker,” but, hey, a little puffery never hurts, right?) is setting up a $100 million fund, with a minimum investment of $500,000. Reportedly, the IEAH fund does NOT include an interest in Big Brown.

Not to be outdone by those sharp New Yorkers, the Kentucky establishment has countered with the Thoroughbred Legends Racing Fund, the brainchild of Kentuckians Olin Gentry and Thomas Gaines, along with New York investment banker Tripp Hardy of Gallatin Capital.   The model is similar – a goal of around $100 million, with a minimum investor commitment of $1 million a year for three years.  The major come-on is that the horses will be divided evenly among the “legendary” trainers D. Wayne Lukas, Bob Baffert and Nick Zito.  Like IEAH, the Legends Fund will operate on Wall Street’s “2 and 20” model. Thoroughbred Legends was among the leading buyers at the Keeneland September sale, spending $12 million for 29 yearlings, an average of just over $400,000.

Now, if you spend enough money at the sales, you’re going to get some good horses, so I’m sure the investors in IEAH and Thoroughbred Legends will get to be in the winners circle for some big races.  If that’s all they’re looking for, then maybe they’ll be happy. But if they’re looking to make money – which is usually why people invest in hedge funds -- the odds are surely against them

Here’s why. Purses are going down, while the costs of maintaining horses are going up.  The current nationwide purse level of some $1.2 billion doesn’t even cover the current costs of keeping horses in training, and that’s not counting  the original capital costs of buying or breeding those horses, and maintaining them until they are old enough to race.  And, once they are at the races, perhaps one of every ten horses is modestly profitable in a given year, and perhaps one in 100 is a serious money-maker.  But everyone (except, I’m sure, the marks who are going to be attracted to these hedge funds) knows that you don’t go into racing to make money

In the past few decades, the real money has been in stallion stud fees. And the only wildly successful business model has been Coolmore’s. The Irish powerhouse spends perhaps $40 million a year, mostly on well-bred yearling colts.  It probably buys 50 or more yearlings every year, but if even one or two of those colts turn into multiple Grade I winners or champions, then Coolmore is in a position to recoup the whole $40 million through stud fees, breeding their stars 200-300 times a year, in both Northern and Southern hemispheres. One wonders if an equine Viagra is part of their vet bills.  If Either IEAH or Thoroughbred Legends can convert some of their pricey colts into high-priced stallions, then maybe the investors can make some money.  But the timing is against them, as all the presure right now is for stud fees to go down, and for fewer mares to be bred.

For most stables, if they can’t afford the top-of-the-market prices for yearlings with blue-blood pedigrees that have the potential to be important commercial stallions, the economics are strongly against serious profitability. And the hedge fund model of putting all the assets in a single fund makes it even more likely that the fund as a whole won’t break even.  There’s a strong tendency in these aggregations for results to return to the mean – and the mean, or average, result in racing is that an owner loses money.  That’s why most partnership operations, including my own, have moved toward single-horse partnerships.  That way, if you happen to get a really special horse, its earnings aren’t eaten up by the losses on the others. Still no guarantee for making money in the long run, but, I think, more psychologically satisfying.

So, if anyone out there has a spare $3 million, or even a spare $500,000, have fun with these equine hedge funds.  But remember, the people making the money will be the managers, not you.

Saturday, October 18, 2008

Stronach - Waist Deep in the Big Muddy

Back in 1967, folk singer Pete Seeger wrote “Waist Deep in the Big Muddy,” a trenchant commentary on the stupidity of pressing ahead – in that case, with the Vietnam War – when everyone knew the cause was hopeless. (Here’s a link to the song’s debut on national television in 1968, after CBS relented in its efforts to keep it off the air.)

It seems to me that the song is once again appropriate, and not only to the current occupant of the White House.  Frank Stronach seems intent on leading Magna Entertainment, and with it the shareholders in other Magna companies, deeper and deeper into the swamp that he has created.  Only now people are beginning to speak out and call his bluff.  As Lyndon Johnson discovered in 1968, once that happens, the question is not if the end is coming, but when.

As I noted some time ago, Magna Entertainment, which owns Gulfstream, Santa Anita, Laurel and Pimlico, Lone Star, Golden Gate Fields, Remington Park and other racing properties, is insolvent, unable to meet its liabilities as they come due.  Its stock has lost 95% of its value over the past two years, and it has been repeatedly forced to negotiate month-by-month extensions of its working-capital loans with the Bank of Montreal and, more importantly, MI Developments Inc., a Stronach-controlled company that has been keeping Magna Entertainment on life support with hundreds of millions in intra-company loans. MI Developments owns a majority stake in Magna Entertainment, and, even though Stronach himself owns only 2% of MI Developments, he has thus far been able to exercise effective control. That situation is about to change, though.

Stronach, of course, has been doing everything he can to keep it from changing. For example, Magna Entertainment reported to the US Securities and Exchange Commission this past Wednesday that it had once more renegotiated the loans.  This time, the Bank of Montreal gave Frank until November 17th to repay its $40 million. Magna Entertainment had to pony up an extra $400,000 to secure this extension, in addition to the junk-bond interest rate that it’s paying on the loan. In addition, MI Developments not only extended the due date on its $110 million loan to Magna Entertainment, to December 1st, but also increased the credit line from $10 million to $125 million. And MI Developments also extended the repayment date on a separate $100 million loan for the Gulfstream Park redevelopment, also to December 1st.  Magna Entertainment was charged $2.25 million as a fee for those extensions.  Only God, and Frank, know where that money came from.

Trouble is, as Ray Paulick has prominently pointed out there are now others involved – the wealthy outsider Halsey Minor, who has offered to buy the MI Developments debt, and MI minority shareholder Richard Fried, who has gone public with his disgust at Stronach’s use of MI Developments to prop up Magna Entertainment. Fried’s firm has an 8.5% stake in MI Developments and, not surprisingly, doesn’t want to see its investment sink into Frank’s swamp. In a letter to the Board of MI Developments Board Fried says that Magna Entertainment “has been, is and will remain a financial sinkhole.” The letter threatens legal action if the MI Developments Board of Directors – which, like the boards of all Magna companies, consists primarily of Frank’s friends and flunkies – doesn’t stop paying for Magna Entertainment’s ongoing losses.

Halsey Minor, the CNet founder who has also been negotiating with John Brunetti to buy Hialeah, has apparently attempted to buy some of the Magna race tracks as well, notably Pimlico and Laurel.  When he got no response to those offers, he went public with a bid to buy up the various debts that Magna Entertainment owes to MI Developments. Minor has offered to buy those loans at par, thus getting the outside shareholders in MI Developments off the hook and at the same time putting himself in a position to foreclose on some of the race tracks.  Shrewd move, and Minor has some heavy hitters lined up to do the hard work on his bid – the Australian-based Macquarie Capital to handle the finances, and the large US law firm Latham & Watkins to do the legal work. Using advisors of that caliber means he’s serious.

Stronach is trying to hang on.  He’s countered the outside pressure from Minor, as well as the hedge funds and venture-capital firms that own a stake in MI Developments, with a plan to have that company turn Magna Entertainment into a wholly-owned subsidiary (right now, MI Developments owns 54% of the stock in Magna Entertainment, but has 96% of the voting power, because different classes of stock carry different votes). But now that the MI Developments shareholders have begun to threaten legal action, that sleight of hand is probably doomed. Frank may be waist deep in the big muddy, but it looks like the rest of the platoon is heading back to shore.  Between the well-financed bid by Halsey Minor and the increasingly short temper of the minority shareholders, it looks like the end of Frank’s dream could be only weeks or months away.

NYRA Cuts Purses, Axes Employees

As a TBA colleague  has already already pointed out, NYRA has announced major purse cuts for the upcoming Aqueduct winter meet, which opens October 29th.

Apparently in response to the sharp drop-off in handle in recent months – Saratoga was down 10.6% from 2007, and the Belmont fall meet is down 10% so far – NYRA is cutting purses back to their January 2007 levels.  That means open-company maidens will drop from $48,000 to $43,000, and N1X allowances from $50,000 to $45,000.  New York-bred races in the same categories will pay $2,000 less than the open-company events.

In addition, NYRA has announced that it will lay off 42 low-level employees when the Belmont meet ends.  The folks who will lose their jobs – none of whom is named Charlie Hayward – include 19 seating attendants (“whitecaps” in NYRA parlance), 16 parking attendants, five admission clerks and two program sellers. 

OK, I understand that business is down, and I’m willing, as a horse owner, to take my share of the hit through lower purses, even though the cost of keep a horse in New York keeps going up.  And I understand that, with free admission and free parking at Aqueduct, not to mention the anticipated lower attendance, some jobs may become redundant.

But did anyone in NYRA think that maybe some management staff should be let go as well? Or how about a 10% across-the-board cut in top-level management salaries?  Or even, if NYRA insists that some of the costs be borne by those workers least able to afford them, how about talking with NYRA’s various unions about a temporary wage rollback that would allow everyone at least to keep their jobs? That’s a tactic that’s been used with some success in the auto and airline industries when they fell on hard times.

Sure, some of the parking attendants, whitecaps and program sellers also have jobs on the backstretch in the morning – probably paying all of $350-$400 a week. They need those afternoon jobs with NYRA just to get by. These hard-working people, many of whom I’ve known for years, deserve better than this.

Saturday, October 11, 2008

The Economy Catches Up With Racing

Well, it took a while, but there are more and more signs that horse racing won’t be spared the ills that are affecting the rest of the economy.

There are three ways of measuring how well racing is doing, depending on what your economic interest is.  If you’re a commercial breeder, what you care most about is the average, the median, and the buy-back rate at the sales.  If you own a racing stable, you care about purses, which are funded by handle and by slot machines. And if you’re a race track operator or the owner of an ADW or OTB operation, you care about handle, because that’s where your revenue comes from.

Now, for the first time that I can remember, all those indicators are heading down at the same time. Sales prices are down, and buybacks are up.  According to a just-released NTRA/Equibase report, nationwide all-sources handle was down almost 10% in the just-completed third quarter, compared to the same period last year, and down 5.75% for the first nine months of the year. And purses, which had until now resisted the downward trend, were down 1.29% in the third quarter, compared to 2007, and 0.04% for the year as a whole.  Admittedly, that’s not much, but the decline is accelerating, at the same time that costs for horse owners keep rising; the median day rate for a horse in training in New York is creeping up toward $100 a day, and more and more trainers are being forced to charge separately for tack and supplies, for their workers comp. coverage, for paying the extra groom on race day, and so on.  The picture I gave just a few months ago of what it costs to keep a horse in New York – admittedly a high-rent district – is already starting to be out of date.

 Let’s look at these trends in a little more detail.

 Auction Sales 

 At the Keeneland September sale, which offers more yearlings than all other US sales put together, only 3605 (65%) of the 5555 horses catalogued actually sold, even though the catalogue was bigger this year than last, when 3799 sold. The rest either failed to meet their reserve or were withdrawn by the consignors  -- some for injury, but many because the market was weak.  Gross revenue declined by 15%, from $385 million to $328 million, average price declined from $101,000 to $91,000, and the median price (half the prices were higher, half lower) dropped from $43,000 to $37,000.

 Results at the Ocala Breeders Sales Co.’s August yearling sale, and at Fasig-Tipton’s Midlantic sale in Timonium at the end of September were similar. At Ocala, only 56% of the yearlings in the catalogue were sold, compared to 62% a year ago, and average price dropped by about 15% at both the select and open sessions.  At Timonium, the number of horses sold dropped by 16% compared to 2007, to 483, just barely over 50% of the number catalogued; median price dropped from $10,000 to a paltry $9,000, and average price dropped by a huge 27%, to $17,000.  And the weak market shows signs of continuing into the fall bloodstock sales, starting with the just-completed OBS mixed sale, which was a disaster for sellers.

 Even scarier, for breeders, is the way they’re being squeezed between ever-higher stud fees and costs, on the one hand, and diminishing auction returns on the other.  In a fascinating analysis, first published in the Thoroughbred Daily News on October 3rd, Rob Whiteley, the owner of Liberation Farm and one of Kentucky’s smartest breeders, concludes that only 18% of the yearlings offered at this year’s Keeneland sale returned even a nominal profit to their breeders, after taking into account stud fees, costs of keeping the mare and raising the yearling, and costs associated with selling the yearling at Keeneland. On the final day of the sale, September 23rd, not a single sale was profitable, according to Whiteley’s analysis.

 So, between the decreasing profitability of sales yearlings, increasing costs, especially for hay, alfalfa, feed, fuel and fencing, and the credit squeeze arising from the banking system’s meltdown, many small breeders will undoubtedly face some tough times this winter, and many will probably decide that they just can’t afford to stay in business any longer, waiting for that one great horse that all of us in the business hope for.  Whiteley proposes a one-year interim relief plan that would have the auction companies, stallion owners and sales-oriented vets all cut their fees by 50%  Don’t hold your breath waiting for that to happen.  The reality is that some breeders will be forced out of the game.  In the long run, that may help reduce the excess thoroughbred population, which wouldn’t be a bad thing.   But in the short run it means that a lot of people who’ve put their whole lives into caring for race horses will be facing a dismal future.


 There are two things that matter about handle: how much it is, and where it comes from.  In the good old days – before OTBs, casino race books and internet wagering – handle was what was bet at the track where they ran the races, and the whole of the takeout went to the race track operator and to purses for the horsemen.  Now, barely 10% of total handle nationwide is bet at the track. The rest comes from other pari-mutuel sites – thoroughbred and harness tracks, dog tracks, jai alai frontons – from OTB operations, from casino race book betting and, increasingly, from internet-based advance deposit wagering sites (ADWs). And when money is bet at those off-track locations, only a small fraction of the takeout finds its way back to the track whose races are being bet on.  When simulcasting was first introduced, most track operators treated it as “found money,” and were happy to sell their signals for 3% or less of the handle, even if their own takeout rates were 15-20%.  That left a lot of money on the table for the off-track operators, and for rebates to the high-rolling “whales” who placed their bets through those sites.

 So, with the mix of where bets come from shifting more and more away from the track, increases in handle no longer translate into more money for purses,. And when handle declines, as it’s doing this year, but bets continue to shift off-track, as is also happening, there will inevitably be a real squeeze on the purse account.

 In many jurisdictions, that squeeze has been temporarily averted by filling the gap with slot machine revenue, or “in lieu” payments from casinos anxious to avoid competition for the slots dollar.  But that’s pretty much like putting fingers in the dike while the ocean surges over the top of the levee; it won’t hold off the inevitable forever. 

There are only two ways to fix the situation: increase handle overall or take a bigger, fairer percentage of the handle on off-track bets and return it to the track where the races are being run.  Probably we need to do both if we’re going to keep the game alive.  Certainly, we need to do the obvious things to make racing, and betting, more accessible and more fan-friendly: allow anyone to bet on races anywhere through a single account; get the good races on television channels that are accessible to everyone; get rid of admission and parking fees at the track; lower takeout to some optimal level that maximizes the ability of players to keep playing; coordinate the major stakes races and figure out a way to make the whole season, or at least April-October, something that fans can appreciate and where they can follow their favorites.

 But we also need to get a fairer division of the dollars between the places where the races are run and where the bets are made.  That’s what the Thoroughbred Horsemen’s Group, which has been advising horsemen around the country in the latter’s negotiations with race tracks, has been doing.  Their basic model is splitting the takout three ways – the betting outlet, the sending track, and purses at the sending track.  THG, though, is willing to make exceptions that will keep the whales in the game, adjusting for rebates where that’s what’s needed to get the big bettors to play.  And, even though the THG formula would benefit the tracks themselves, Churchill Downs, Inc. stubbornly opposes it, and is locked in ongoing feuds with horsemen at its tracks, especially Calder and Churchill itself.  Now why should that be? Oh, right, Churchill owns its own ADW, Twin Spires, so the more betting it can direct there, as opposed to having the bets made at the track, the less it has to pay over to purses.  Churchill sees its future as being an internet wagering platform, which just happens to own a few race tracks as a way of guaranteeing that it will have a product to bet on. And these guys hold themselves out as some sort of keeper of racing’s heritage. Shame on them.


 Despite increasing costs, overall US purse levels have been pretty stagnant for years, at about $1.2 billion, or roughly 7-8% of the total handle.  This year, though, looks like being the first with a measurable decline in purses, if current trends continue. Horsemen at the Churchill Downs Inc. tracks have been particularly hard-hit, but, aside from the boutique meets at Keeneland and Saratoga, it’s hard to find anywhere where track operators can actually have a reasonable hope of making more than it costs to open the gates.  Nationally, something like nine out of 10 horses lose money for their owners, taking into account what they cost to breed or purchase and what it costs to keep them in training. So, it would seem that rational economics would say that purses need to be higher, or else owners wouldn’t supply their horses.  But little about the racing business is rational (but, oh yes, that seems to go for banking and Wall Street, too, these days).

 So, how do you make a small fortune in racing? By starting off with a big fortune.  There are only a couple of viable business models.  At the high end, Coolmore can spend $40 million a year for well-pedigreed yearlings, and if one or two turn into Grade I winners, they’ll make all that back by breeding the horse 250 times a year at an inflated stud fee.  And at the low end, maybe you can scratch out a living at Mountaineer or Charles Town if you keep your horse in the back yard and it stays sound enough to run every two weeks.  But in between, most of us can expect to lose money.  For the rich, that probably doesn’t matter; they’re in it for the glory, not the money.  But for most of us, it would just be nice to have a decent chance of breaking even.

 So, how do we increase purses?  Essentially, the same way we increase handle,.  Everyone basically knows what should be done; more fan-friendly tracks, better coordination among tracks, better TV programming, easier access to betting platforms, keeping the stars of the game racing at ages 4 and 5, getting a bigger share of the takeout on simulcasts, OTB and ADW betting for the purse account. But it’s a question of either getting the people who control racing’s various fiefdoms to work together or getting them out of the way.  Perhaps, now that the idea of federal regulation is resurgent in some other areas of the economy, we might think about it again for racing, too. Or then again, we might just set up a real commissioner's office, which I guess was what the NTRA was intended to be, before it ran afoul of people protecting their turf.  

 No, racing isn't immune from the effects of what's laughingly called the real economy.  And we're starting to see the signs of that economy's impact on our little corner of the world.  Let's hope most of us weather the storm and always have a two-year-old in the barn to dream about.