With no centralized racing authority or national business model and a notable recent decline at many major racetracks, American horse racing has reached a crucial crossroads that will require industry leaders to rethink traditional business methods. In his second article on the topic, Business Lexington writer Rab Hagin discusses some of the industry's challenges and options with Joe Riddell, owner of Riddell Realty and a senior partner in the Premier Turf Club horseracing wagering Web site based in Fargo, N.D.
RH: Joe, you mentioned that the horse industry has no national business model and has no plan. What does the horse industry need to do differently?
JR: You're absolutely right, not only does it not have the right business model, it doesn't have the right management team in place. As a whole you have to understand where our customers are, where they've gone, what they're demanding and recognize that we need to bring them back into the game and certainly back into the revenue stream. ...
RH: Who are the customers?
JR: Customers are the gamblers who are demanding a certain rate, a certain convenience and customer service that the industry has failed to provide. They're usually pretty high end, very intellectual gamblers who have now had their need satisfied by their bookmakers, who don't pay anything into the pool, into our race tracks and horsemen's purses.
RH: So what does the horse industry do?
JR: Recognize why we lost them and understand how we need get them back. Ö It's as simple as understanding they are very price sensitive. We're trying to tell them that we want to charge them 20 percent for our product, and they're saying, 'Well, we'll pay you 10,' and we say, 'Okay, go away -You can go ahead and wager with someone else, but we want 20 percent,' so we get zero. Ö They also want convenience of betting through one site on all races in North America that they want to wager on. That's not possible now. The industry is so fractionalized, and there are so many fiefdoms that for you to bet all the horses in North America you'd probably have to have two or three accounts now. ...
RH: By account, you are referring to off-track betting accounts, internet wagering accounts?
JR: Yes, nowadays most of the handle is off-track. When the Interstate Horse Racing Act passed in 1978 immediately there started being OTBs open[ing] up. ... And so right now we've seen the decline in the handle. For example, at the Keeneland meet, 90 percent plus of the handle will be from people who are not at the track; less than 10 percent will be on track. ...
RH: Okay, these off-track betting sites, what are they, where are they located and how many are there?
JR: There are literally thousands. Anybody that has a license at a dog track, a harness track, a standard breed track, all have the ability to simulcast. They all can get contracts with different race tracks and take bets. Then there are many now of what we call "advanced deposit wagering sites," Internet-based or telephone-based sites were you can call in a bet or place a bet over the Internet. Most of them are licensed in Oregon, and it's a growing entity where there are only a couple of states that have the right laws, so that they don't grossly overtax it. But what you are going to see in the near future is the vast majority of the handle will be over the Internet. That's where the future is.
RH: Ö Why are the hubs from these various wagering accounts located in these (other) states and not in Kentucky?
JR: For tax reasons. Now Kentucky does have a Hub law. It needs to be tweaked a little bit; it needs to be refined a little bit, and I am hoping the Beshear administration will understand that and do what is necessary. And I'm sure they will, to be honest with you. It is a tax reason; instead of the states charging three or four percent state tax on the bet, they charge less than a half or even less than a quarter, or in the state of Kentucky it's one-eighth of one point Ö which allows you to take the bet, pass that tax savings onto the customer and therefore help to attract a customer at the rate that he is willing to pay and help them turn more, bet more.
RH: What would you suggest when you mentioned that the wagers are looking for players or looking for a uniform vehicle in which to wager, how do you think that could be brought about?
JR: Frank Stronach, who's the founder of Magna Entertainment, about five or six years ago mentioned what he called the Central Betting Exchange. Ö The Central Betting Exchange idea was to have all the signals go through one hub and then individual brokerages like my company, Premier Turf, can then get a brokerage license attached to that hub, and it would therefore be able to be a stock trade. ... So you could choose to get a volume, a company that would give you the lowest rate, or a higher rate with more customer service, more perks involved.
The Central Betting Exchange idea is one that I've spent a long time thinking about, working on and it is a truer model, where all the race tracks can agree to sell their signal ... for whatever rate they think their tracks can handle.
So Ö you've got all the signals coming to one central exchange, where different entities like Premier Turf, like Twins Spires at Churchill Downs, like Express Bet of Magna, can hook onto that central exchange and be able to handle to take bets on every horse running in North America today at a price that is appropriate, that is low enough to attract all the clientele.
RH: What would induce tracks to want to agree to such a simple exchange?
JR: Revenue, it's as simple as that. Ö The distribution channel is broken in the Thoroughbred industry. ... We only need one distribution channel so we can cut the cost of processing the bet, cut the cost of dissimilating the image literally around the world through this one channel, which could be both TV- and internet-based video streaming. It would cut out the middleman cost, it would bring that cost down significantly. Ö Then all of a sudden, we can give them a lot more to the race tracks, to the horsemen purses and still give our customers a lower fee.
RH: You mentioned that race tracks, racing associations which own the various race tracks have been very slow to react to analyze exactly what it is they need to do. Can you explain why that has occurred?
JR: It's very simple: they have the wrong managers. They've gone out of their way to hire accountants and attorneys to do it, and these accountants and attorneys, especially more attorneys than anything, are very smart people, but if they've ever gone to the races and handicapped a race and placed a bet, they are disqualified from management at these race tracks. And I'm not being facetious, I'm not exaggerating. That is exactly what they've done. They've gone out and got these very smart people who don't understand the game, who don't understand the mind of our customer. ... If Vegas had the same model, it would have been shut down a long time ago, it would be a ghost town now.
RH: Do you think there's going to be shrinkage of tracks in the near future?
JR: There has to be. Ö There certainly has to be shrinkage in the number of races. I think that maybe a lot of these tracks that are running 100-day meets for nothing, for very small purses, might end up running 15- to 20-day meets with a fair atmosphere and one big day of racing where a lot of money goes into purses and they keep their major races.
RH: You mentioned earlier that you estimated - a conservative estimate - that the racing industry was losing about $30 billion a year in simulcast revenue.
JR: Yeah. When I started working on this business model, the first time I wrote it down on paper was in April 9, 2003, and I was working as a consultant for Magna Entertainment at that time, and I didn't know how much handle was being missing from the pool. 2003 was our high-water mark, ... and we did almost $15.2 billion in handle that year. I am guessing that we are going to go down to about $14.2 or ($14.3) billion handle this year. So even when you take inflation into the picture, we've lost about 10 percent of our handle in that time frame.
RH: Were does that $30 billion go? Who gets it?
JR: Well, it's gone to our competitors. Who are our competitors? Bookmakers. Bookmakers are all over. People call them offshore; they're not offshore. They're onshore. They're your neighbors, they're high-end Internet sites Ö It's our competitors who are giving our customers the price that they want, the convenience that they want and good customer service. So the entities may be licensed in the Caribbean, they may be licensed in London, but they don't pay anything into our pools.
RH: So these offshore, as you call them, betting sites contribute nothing back to the industry in terms of purses - nothing back to the race tracks?
JR: Zero. Nothing.
RH: You see shrinkage in the number of demand for race horses in the future?
JR: Oh, yeah. We've already grossly overproduced. We have about 35,000 foals born this year, and at the most recent Keeneland September sale, the decline in revenue, was almost $60 million, and that's going to pay mortgages and is going to pay stud fees and hay bills and things like that. Yeah, I think we need about 25,000 foals right now, and probably in a couple years, need only 20,000. ...
RH: Do you see a positive turnaround through all of that?
JR: Yeah. We need to get the business model right, not only at the race tracks but on our breeding farms. We need to understand what we're breeding for, who our market is and what the costs are. ... We are an industry that responds behind the curve. The market is demanding certain things and we're not responding to it. But what I'm fearful of is if we don't as an industry get our act together right now then we could easily lose a third or more of our farms in Central Kentucky, because there just won't be any demand to raise horses here. Ö