In the Massachusetts of my youth, circa the 1970s, there was really only one option for those wanting an evening of gambling fun: pari-mutuel racing. I remember my father and his friends traveling to Wonderland Greyhound Park in nearby Revere seeking an escape from the daily grind and a chance to make a few bucks through some low-stakes wagering. He wasn’t alone - at that time Wonderland attracted thousands of fans each night, a trend that continued through the 1980s, when the crowds at the track wagered enough to generate races with handles in excess of $1 million.
Massachusetts wasn’t the only state experiencing a surge in racing interest during the latter part of the 20th century. Throughout North America pari-mutuel wagering appeared strong - strong enough for established meets to regularly set audience and handle records. And with new betting formats and technologies such as simulcasting making inroads, racing’s prospects looked incandescently bright.
“Nothing succeeds quite like a monopoly,” says Alex Waldrop, CEO of the National Thoroughbred Racing Association. “In the period from 1930-1980 pari-mutuel racing and wagering was essentially the only game in town outside of Las Vegas … the future bode well for thoroughbred racing.”
Fast forward to today and instead of an easy run the industry struggles simply to survive. Evidence of the drastic change of fortune is everywhere - a six-year, 10.5 percent decline in thoroughbred handle; a similar double-digit dip in greyhound earnings, coupled with a growing animal protection movement that has led to the cessation of live racing at tracks in a number of states; a precipitous decline in live spectators and trackside wagering; contentious relations between track operators and animal owners; shortened race meets and shuttered racing facilities. It’s become so bad that some fear for the future of the entire industry.
According to Eugene Christiansen, principal of research firm Christiansen Capital Advisors, U.S. consumers lost $83 billion gambling in 2008, but only 5 percent of that amount, roughly $4 billion, went to racing; the continuation of a trend that has been taking place for years.
“Time has passed the pari-mutuel business model by,” he says.
Despite the dire numbers, few are ready to give up on the business just yet. Indeed, even in this recessionary period, the racing industry can hang its hat on certain success stories - the continued growth of popular single-day events like the Kentucky Derby and boutique meets like Saratoga in upstate New York; the growth of racinos; and the advent of Betfair and other Internet betting systems that can bring new audiences to racing. But for racing to truly recapture past economic glory, experts agree the industry’s current business model must evolve, with the goal of growing its flagging fan base.
“I think the future of the racing industry depends upon fundamentally changing its product to attract more people back to the tracks,” says Dr. Richard Thalhiemer, president of Thalhiemer Research Associated. “It will never be as it was in the early 1980s when you had 40,000-50,000 people a day at many thoroughbred race tracks. But you need a core group of patrons coming to the track to assure the long-term viability of the industry.”
A HISTORY OF DECLINEAn examination of key racing statistics for the past decade show just how far the industry has fallen. According to the Jockey Club and Equibase, a thoroughbred data collection agency, combined handle for North America’s thoroughbred racetracks in 2000 was $14.3 billion, $12.1 billion of which was generated through off-track betting systems such as simulcasting and computerized wagering. By 2003, handle grew to $15.2 billion, $13.3 billion coming from the off-track segment. Since that time, handle has trended downward. By 2008, the most current statistics available, combined handle was $13.6 billion, with off-track proceeds at $12.2 billion - down 10.5 percent and 8.3 percent, respectively, from 2003. Handle is down 5 percent from the start of the decade.
Racing and on-track numbers show an even more drastic downturn. In 2000 there were 62,887 races run at North American thoroughbred tracks, generating $2.2 billion in on-site wagering. By 2008 there were 56,974 races run, a decrease of roughly 10 percent. On-site wagering fell 36 percent to $1.4 billion.
There is no entity currently that compiles U.S. track attendance since the Jockey Club stopped doing so in 1994. Anecdotal evidence, however, seems to point toward a dramatic downtick in patronage over the past 20 years. According to a report in Business First of Louisville, a newspaper based in Kentucky’s largest city, racetracks nationwide drew a combined 45 million people in 1993, down substantially from the 57 million people who attended live racing in 1990 and well below the average of 50 million a year since 1980. Organizations that still track attendance, such as the New York Racing Authority, which operates Aqueduct, Belmont and Saratoga, also show huge attendance declines, from 3.98 million in 1990 to 1.7 million in 2008, a 56.4 percent downturn.
With off-track betting in the doldrums and live racing handle and attendance on a seeming road to oblivion, it’s little wonder that the outlook for the industry appears so dire. Yet a mere 30 years ago, racing was among the top spectator sports in North America and facing a future of seemingly unlimited potential. What happened to upend it? Actually, a number of different factors came together to stop pari-mutuel growth in its tracks. To start, pari-mutuel wagering had little competition for the betting dollar outside of Las Vegas and, later, Atlantic City. This changed with the rapid expansion of state lotteries and commercial and tribal casinos in the 1980s and 1990s.
“Today there are a great many gaming options close to home,” says Waldrop, “including casinos and lottery machines at the neighborhood convenience store. This is a challenge we face on a daily basis.”
It was quickly determined that when given a choice even the most ardent racing fan will dedicate some wagering dollars to the much easier to play and understand casino games.
“We found that when you offer casino gambling to racetrack customers the racing customers dedicate some of their money to the new casino gaming,” Thalhiemer says. “There is a one-way crossover, from the horseracing to the casino. We don’t see customers going from slots and table wagering to pari-mutuel betting. This is a pretty well-established fact.”
Meanwhile, on the entertainment front, the rise of professional sports took an increasingly larger share of the television-viewing audience.
“The rise of other forms of gaming was not something the pari-mutuel sport could do anything about. It was eventually going to happen,” Christiansen says. “But the industry made a mistake in the 1960s by declining offers from the then-growing broadcast networks to carry horseracing as a television sport. That was just a catastrophic blunder, and as a result, horseracing lost its visibility. If you’re a sport and you are not on television you are invisible.”
The industry made other strategic missteps, such as not following up on domestic simulcast success by exploring international demand for their televised signals; failing to reinvest in deteriorating facilities; and pushing more racing product out to consumers than real demand warranted.
“What we did do well was disseminate the racing product,” says Doug Reed, director of the University of Arizona Racetrack Industry Program. “What we didn’t do well is change the product to keep it fresh. Maybe a better job should have been done upgrading facilities. Also, people clearly aren’t pushing for Tuesday afternoon racing anymore; they want something different, more of an event. Yet the industry still pushes for as many racing dates as possible. At some point, you really have to start meeting the demand of the customer, not the demand of the supplier.”
Flaws also came to light in the racing product itself. High take-out rates made for a high cost of wager for the consumer, incentivizing them to turn to lottery and casino games, which are much cheaper to play and promise higher rewards. Doping, drugging and race-related injuries also turned some bettors away from the game.
“I believe that our industry has been slow to address some of the integrity and safety concerns of our customers,” Waldrop says. “Influenced in part by high-profile injuries to Barbaro in 2006 and Eight Belles in 2008 our fans are speaking in no uncertain terms to us that these issues of our game are situations that must be addressed if they are to continue supporting our industry.”
And as these problems arose, the failure to respond quickly and in a unified fashion revealed an industry that was fragmented and reactionary.
“The pari-mutuel industry is populated with many different groups - track operators, horse owners, breeders - all of whose interests don’t always coincide,” Christiansen explains. “It’s rare when all these parties are on the same page. This really paralyzes the industry and makes it very difficult to respond to changing market conditions.”
ROOM ON THE RAILDespite these shortcomings some positive trends have developed that give hope to those who believe in racing’s future. To start with, off-track betting via simulcasting and account wagering have proven to be very successful ventures, so popular among bettors that they have likely exacerbated the declines in racetrack attendance.
“On-track attendance decline is largely a result of the industry’s efforts to make wagering more convenient via the Internet, telephone, off-track facilities, etc.,” Waldrop says. “Over 90 percent of all monies wagered on a typical race are done so from a place other than where the race is taking place.”
It is important to note also that declines in attendance and handle have not hit the industry in a uniform way. Indeed, some large one-day races and niche meets continue to survive and prosper even in the current down economy. The 2009 Kentucky Derby drew 154,000 people, the ninth time in Churchill Downs history that there has been a crowd larger than 150,000 to watch a race. Another 15 million people watched the race on television. Although down from previous years, the 2009 Derby still managed to generate a healthy $156 million in handle. The Breeders’ Cup has also been a hit, the 2009 meet at Santa Anita Park in Southern California drawing 96,000 people, an 11 percent increase over 2008, and generating a two-day handle of $145 million and a TV audience estimated at more than 2 million. The six-week Saratoga meet in upstate New York is still going strong, drawing 854,000 people in 2009, an average of more than 24,000 visitors a day. Combined handle was $514 million, an average of $14 million a day. The four-week Keeneland Race Course meet in Lexington, Ky., drew 241, 000 people in 2009, the third highest total in track history. Three of the last four meets at Keeneland have generated attendance records, according to track officials.
Says Waldrop, “The continued popularity of these high points on the racing calendar is strong evidence of the enduring appeal of our game.”
The rise of “racinos” - a combination racetrack and slot parlor - is a trend whose importance cannot be overstated. A portion of the proceeds from the slot machines goes to race purses, and it is these purses that are keeping the racing industry afloat, according to experts.
“What racinos have done is to allow racetracks to become competitive with casinos that exist in close proximity,” Waldrop explains. “Racetracks don’t compete just with other racetracks, they compete with every other form of gaming and entertainment available in their general areas. The improvement to purses has been a more direct help to horsemen. Racing fans benefit less directly through higher quality, more attractive races on which to bet, which, in time, leads to more betting.”
The American Gaming Association, a trade group representing commercial casinos, counts 44 racinos in 12 states. Since the organization began tracking the sector in 2001, consumer spending at these facilities has skyrocketed from $2.1 billion to $6.19 billion in 2008. The influence this is having on the racing end of the business: Every year since 2003 the combined gross purse size at U.S. racetracks has increased, topping $1.17 billion, a remarkable feat considering the drastic declines in track attendance and handle.
“That is basically what is supporting the industry today,” says Thalhiemer. “The whole back part of the industry - owners, trainers, breeders, horse farms - are all supported by purses.”
Another positive development has been the introduction of cutting-edge computerized betting technology. Betting exchanges such as UK-based Betfair have the potential to help the industry on a number of levels.
The advent of betting exchanges, says Christiansen, “validated the pari-mutuel business model and attracted a lot of new people to pari-mutuel wagering. On a global scale, betting is more robust in some ways than casino gaming, and Betfair has tapped into that stream very effectively, creating a lot more action for horseracing, which is 70 percent of their business.”
Thalhiemer agrees. “The Internet is where people are going to bet. It has huge growth potential for horseracing, provided they get a big enough piece of the pie to compensate for simulcast and on-site wagering losses.”
INNOVATE, REINVIGORATEThe promise of computer wagering, racinos and niche events makes pari-mutuel racing worth saving, experts concur. But in order to fully exploit these trends, they would like to see the industry take the following three steps:
1) Innovate and modernize the existing business model at all levels, which has largely remained unchanged over the last 40 years.
“The track experience has not kept up with the experiences of a lot of other options that people have,” says Reed. “If anything, if you make, change or innovate the experience you develop something new and something that can be marketed, something fresh. I think the best strategy would be to innovate, but I think that is difficult in the climate, in the whole system of racing inherited over time.”
Christiansen is more blunt in his assessment. “The pari-mutuel business model, the pari-mutuel scene, the pari-mutuel laws have outlived their usefulness,” he says. This, in turn, has kept the industry from exploiting positive market trends. “The reaction of U.S. pari-mutuel businesses to Betfair was too largely circle the wagons and try to keep it out. That is indicative of the self-destructive mindset that the pari-mutuel industry has. If the industry is to have a future it is going to have to find a better or new business model.”
What that model should entail is still up in the air. Thalhiemer, for one, would like to see the industry embrace new technologies and social media. “I think the potential growth is in Internet betting. But only if the horseracing side of the equation - owners, trainers, breeders - get a share of that Internet handle. This is not the ultimate fix, it’s just one piece of the puzzle. When you look at products, there are price and quality characteristics that matter. There are delivery systems and convenience to the patron. All those things are part of the whole pie that needs to be implemented.”
Says Reed, “I wish I knew the innovation that would be the magic bullet. But it really has not been all that innovative an industry in my mind. Sure, they have used technology, but everyone has. Something is needed that would really change the experience or the game. I’m at the point where anybody willing to try new things should be applauded.”
2) Rebuild racing’s eroded fan base, and entice younger patrons to the track.
“This is something the whole industry should be looking at,” says Thalhiemer, “exploring ways in which the actual racetrack product can be improved to attract customers back.”
Reed would like to see the industry try to distill some of the excitement generated by events like the Kentucky Derby and inject it into the everyday race experience. “We need to create a product that is more like the niche meets and big events. Make it special again enough of the time that it can gain in market share. That way, when you go to a track, it’s vibrant and there are a lot of reasons to be there. I think people will return if it is something special.”
Waldrop is in agreement. “Our polling shows that racing is still very popular with sports fans. We generally rank in the top 10 of the most popular sports in America,” he says. “Our challenge is to convert that popularity into participation, either as horseplayers or owners. Live attendance is important in order to replenish the fan base, since the racetrack is where most customers gain their first wagering exposure to the sport. Our challenge is to do a better job of converting the casual players who show up at Del Mar or the Kentucky Derby to more frequent customers.”
The National Thoroughbred Racing Association is doing its part, spearheading efforts to use the Internet to engage and educate fans about the excitement of live racing. The group’s Web 2.0 strategy is designed to use the latest in social networking and mass collaboration efforts to reach a new generation of fans, blogging to alert them to the latest news concerning equine and human athletes and racing competition across the country. The association believes that as time goes on this will translate into increased fan participation on the wagering side. The organization is also pushing new product formats, such as night racing, which it believes will attract young professionals and women.
3) Evolve the racino model.
The purses generated by gaming machines at tracks may be subsidizing the industry, but this aid comes at a price.
“We found that the casino part of the racino is a huge percentage of the gaming pie - to the order, say, of 90 percent of all the revenue,” says Thalhiemer. “As a result, racino owners are less interested in investing money in the racing side. That is what we observed, and it seems to hold pretty true. When you put slots at tracks, on-track handle goes down.”
Put another way, racinos are helping businesses survive but are doing very little to grow the consumer end. Slot players are not crossing over to bet on races, for one thing.
.“The positive effects of machines on pari-mutuel business do nothing to solve the pari-mutuel industry’s fundamental problem, which is creating new fans,” Christiansen says. “Playing a slot machine and handicapping a horse race cannot possibly be two more dissimilar activities. They have nothing in common.”
This could lead to difficulties down the road if state governments start to question why they should subsidize pari-mutuel wagering when it has nothing to do with the ongoing economic success of a racino.
“People say don’t worry, racing is protected by legislation,” Reed says. “My response is, the state can give, but it can also take away as well.”
His solution: a further tweaking of slot machine proceeds to make certain everyone benefits. “We need a different racino model,” he says, “something that would try to allocate the subsidy to help the entire business. Purses are one part of the model, not the entire thing. If you get to a point where everything relies on the casino then you don’t need the racetrack and pari-mutuel wagering.”
Waldrop believes the industry is on its way to solving the problems that have plagued it the past few decades, but stresses patience.
“Interest in our sport’s big events is very strong and demonstrates the underlying strength of our appeal,” he said. “State governments certainly like the tax revenues that our industry produces on a virtually year-round basis. I think the negative trends are reversible, but there are no quick fixes to be had.”