ALTERNATIVE GAMING AT RACETRACKS: GOLD OR FOOL’S GOLD?

At the close of 2008, in the United States there were 44 racetrack casinos operating in 12 states.   According to the American Gaming Association, these racinos were a bright spot in an otherwise dismal year for gaming.   While casino revenues in 2008 decreased for the first time in this decade, racino revenues bucked the downturn.   In 2008, racino revenues tripled 2002 revenues, to $6.19 billion, and soared by 17.2% over 2007 revenues. 

Racino gaming has fueled racing purses.   As a result, horse owners and trainers are increasingly leaving racetracks without gaming in search of a better payout at racinos.   In Kentucky, the center of Thoroughbred breeding in the United States, the lack of slot machines (video lottery terminals) at the racetracks has had a deleterious effect on purses, so much so that Churchill Downs has found it difficult to fill some of its races.   Many owners and trainers have taken their horses to the greener pastures, pun intended, in nearby states with racinos.

The long-term issue, or the overriding question, is how long lawmakers in racino states will continue, or should continue, to subsidize racing purses.   Imagine addressing an audience of taxpayers or legislators, who want to hear your reasoning as to why horse racing should be subsidized by gaming.   What is the rationale, or the justification?  What would you say?

Suppose, for example, you had to craft a rebuttal to a questioning editorial about slots revenues subsidizing racing that appeared on the Philadelphia Inquirer’s Philly.com on June 19, 2009.   In part it read:  “If you’re one of the 3,000 owners/operators of a race horse in the state, or holder of one of 10,000 related jobs, saving the state’s horse-racing industry is important.   If you’re someone who likes to bet on horse races in your home state, growing the industry is convenient.  But if you’re a child whose Head Start funding is about to be cut . . . or a parent who has kids in public schools . . . or a senior citizen facing cuts in health-care coverage, all of which the Senate-proposed budget would affect, maybe it’s time to be a little less generous to the horse-racing industry.”  [click here to read the full editorial]

Arguments for Subsidizing Racing with Gaming Profits

The reasoning for subsidizing racing purses with gaming revenues is “tip of the iceberg” logic.   The economic impact observed at a state’s racetracks–the jobs and tax revenues– is what is readily visible.   Because of the multiplier effect, racetracks create demand for secondary and tertiary suppliers.

Note that this logic is identical to the justification that the federal government used to bail out Chrysler and General Motors.   Not only would an untold number of auto workers lose their jobs in a severe downsizing or liquidation of these companies but so would hundreds of thousands more people who were employed by their vendors. 

Similarly, cities often help to build stadiums and arenas to entice or keep professional sports franchises largely because of the money the community receives from fans attending games and patronizing area businesses such as restaurants and parking lots.   The subsidies are justified accordingly.

Ohio has seven racetracks that are struggling mightily to remain in business  because the Buckeye state is surrounded by states with casinos and/or racinos, except for Kentucky.   According to a study by Deloitte that was done for the American Horse Council Foundation, the total estimated annual economic impact of horse racing in Ohio is $731 million and $81 million in state and local taxes.  Thoroughbred and Standardbred racing account for 8,200 direct jobs and 16,000 total jobs.   If the racetracks disappear, so do the bulk of these benefits.   In spite of this impact, the only reason that Ohio’s governor, a longtime adamant foe of slots in the Buckeye state,  is now a reluctant convert to racinos is that he is facing a $3.2 billion budget deficit and slots at racetracks can offer some relief.    The alternative–raising taxes and drastically cutting services–is not the ideal way for the governor to prepare for a 2010 re-election campaign.

Proponents of gaming at Kentucky racetracks, like the Kentucky Equine Education Project, accurately use the same genre of evidence, citing, for example, “2.3 million estimated attendance at Kentucky Thoroughbred and Standardbred tracks, $217 million economic impact of the Kentucky Derby, and $8.8 billion economic impact of the state’s tourism industry, which features the horse industry as its signature promotional attraction.”    Notwithstanding the indisputable importance of the bloodstock industry to the Bluegrass state, 45 representatives in the Kentucky House recently voted in a special session of the legislature against allowing the state’s racetracks to install slots (52 voted yes) and the Senate Budget Committee apparently killed the initiative altogether–by a 2-to-1 margin.

Another justification for gaming subsidies to racing is that they provide the wherewithal to fix up the dilapidated structures at many racetracks, or to build new facilities, improve food offerings, and cater to customers.   With the legalization of slot machines in Pennsylvania, The Meadows Racetrack & Casino south of Pittsburgh was transformed from a deteriorating Standardbred track into a modern complex encompassing a casino, entertainment, a bowling alley, and improved harness racing.   This new and inviting ambience might encourage more racing fans to attend in person.

Arguments Against Subsidizing Racing with Gaming Profits

The standard operating procedure in corporate strategy is for top management to redirect cash flow from product lines that are either mature or declining to product lines with the growth potential to become the cash cows of tomorrow.   A cash cow is a mature business that earns more than it needs to maintain its market share position.  For instance, at General Electric, some of the profits from slow-growing mature product lines like major appliances are put to work in GE’s most promising nascent businesses.  

The main argument against using gaming cash flow to enhance racing purses is that pari-mutuel wagering is a mature product and should be able to stand on its own.   Taking cash flows from a growing product line like gaming and diverting it to a mature product line like pari-mutuel wagering is normally contrary to conventional corporate strategy.

Consider MTR Gaming Group.   For the year ended December 31, 2008, the Company increased revenues over 2007 by 13.2%–from $415.8 million to $470.8 million.   Gaming comprised 88.8% of revenues and pari-mutuel commissions accounted for 3%, with the remainder coming from food, beverage, lodging, and other.   Pari-mutuel wagering is such a mature product and such a small part of the corporate portfolio that the rationale for subsidizing purses is difficult to fathom…unless one can convincingly make the “tip of the iceberg” argument.   A West Virginia legislator has suggested that MTR Gaming Group’s Mountaineer Casino Racetrack & Resort abandon live racing and become a simulcast facility only.

The situation is much different at Canterbury Park Holding Corporation in Minnesota.   In 2008, revenues from racing constituted 29% of total revenues.   Card club revenues were 52% and most of the remainder of total revenues came from concessions, admissions, and parking.   In this instance, advocates of horse racing would have a much sounder argument than they would at MTR Gaming Group.

Analysis

The strength of racing’s position, in a given state, for receiving purse subsidies from gaming will depend on its ability to show factually that it is responsible for many jobs, significant tax revenues, and the well-being of a large number of ancillary businesses.   Horse racing interests in Kentucky, Maryland, and New York, for instance, would have a strong argument in this regard, whereas the case would be harder to defend in states where horse racing is not a consequential agribusiness.   However, as the situtation in Kentucky demonstrates, irrefutable hard facts about horse-racing’s importance as an economic contributor do not always persuade government officials.

If management of a racetrack can get alternative gaming, by all means it should do so.   In the near term, enhanced purses, larger breeder funds, and other benefits will be forthcoming.  But racehorse owners and breeders are chasing fool’s gold if they expect alternative-gaming subsidies to last forever.   History is clear as can be that governors and legislators covet additional revenues, especially when times are difficult, and gaming revenues are an easy target.  With the explosion in Medicaid and other social services, the future looks to be one in which a budget crunch is a perpetual problem, as in California, New York, and most other states.

The pari-mutuel industry needs to use whatever monetary largess it receives to modernize its facilities, improve customer amenities, figure out how to attract more fans, and come up with innovative bets that do not take an expert handicapper to understand.   Otherwise, subsidies will further weaken a patient already reeling by rendering them even more dependent.   At some point, the patient will have to stand on its own.   

In addition, there is the very real risk that slots and table games will decline in popularity, as they proceed through  their  product life cycles.   In particular, slots may not be of much interest to today’s Internet-oriented younger generations as they age. 

Also look for some of the states to rathchet up the competition by expanding gaming even more.  States with slots will seek table games (e.g., Pennsylvania) and states with casinos will try to install sports betting (e.g., Delaware).  Then there is always the possibility that Internet gaming will be legalized.  The end result is that, in this competitive milieu, slots will be pretty tame fare and certainly not a long-term solution to racing’s problems.  

However, as renowned economist John Maynard Keynes famously observed, the “long term is a misleading guide to current affairs.  In the long run we are all dead.”   Racing’s dire straits in many venues indicates that the only realistic course of action is for racing interests to seek slots revenues to survive in the here and now and live on to fight for customers in the unknowable future.

The July 11, 2009 edition of Horse Racing Business examines the subject “Can Slots Players Be Attracted to Pari-Mutuel Wagering?”

Copyright © 2009 Horse Racing Business

Comments

  1. I am a 23 year old horse racing employee. Horse racing is my way of life and my livlihood depends on it. However, froma business standpoint it irks me how many track managers and track personnel are so quick to become complacent with the MTR Gaming model (as you used as your example). I think your comment regarding largess monies from gaming is 100% spot on. No racetrack should turn down alternative gaming, as the infrastructure costs are far less than horse racing, with profit margins much higher. However, racetracks must analyze what went wrong in the way they did business BEFORE alternative gaming and develop a plan to reverse the distribution of revenue to a more balenced model. In other words, tracks should not throw money at mature, lost cause (for lack of a better term) horse racing and develop this mature product into something that can be re-vamped to join its gaming counterpart. Kudos to you sir for putting this in solid business terms and hopefully your cries and mine do not fall on deaf ears and racing can return to profitability, as it was for so many years!

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