Archives for January 2009

WHEN KENTUCKY AWOKE

January 31, 2009 by

Continued from While Kentucky Slept (January 17, 2009)

“The history of the failure of war can almost be summed up in two words:  ‘too late.'”                              

                    General Douglas A. MacArthur


Lexington (Ky.) Herald-Leader writer Tom Eblen posed profound questions in his column of January 25, 2009:   Kentucky remains “near the bottom of many national rankings of social and economic progress, despite…decades of good work of many public-interest groups.   At the moment, we seem to have our hands full trying to survive the current economic slump.   But once this crisis has passed, what’s the next step, and the next?   What will it take to create the…climate in Kentucky to really invest for success in the 21st century and beyond?”

While no single  method is a cure-all, Mr. Eblen, one immensely helpful solution is there for the taking, if Kentuckians and their elected officials can get the ball rolling now.

Circa 2059: 

The Commonwealth of Kentucky is doing the best it has ever done.  It is still the epicenter of Thoroughbred horse breeding and sales in the United States, but has diversified its economy.   Lexington has lost numerous horse farms to development, but many remain and the State’s racetracks are viable entities as racetrack casinos.  Fifty years ago the governor, legislature, and business community put their personal disagreements aside and unified behind the concept of using tax revenues from full-scale racetrack casinos to fund long-range economic development initiatives that would enable the State to compete in the 21st century global high-tech economy.  Elected officials recognized that the money to educate, provide infrastructure, and supply incentives for companies to start-up and grow in Kentucky had to come from somewhere…and the State’s dominant industry, horse racing and breeding/sales, was the one best source of capital. 

The sagacious powers that were in 2009 also knew that simply allowing slot machines or video lottery terminals at racetracks would be a half measure, since the racetracks would still be disadvantaged in competing with Indiana and West Virginia casinos that offered a full-line, including video lottery terminals and table games.  In addition, how long slot machines would remain popular was questioned.

Consequently, voters were asked to pass (which they did) a constitutional amendment permitting full-scale casinos. The economic rationale for the amendment was carefully explained to the voters and the tax revenues were constitutionally dedicated to specific uses so that the funds could not be diverted to other programs. 

The casino legislation took into account that in order to be competitive in a knowledge-based world economy, a state needs at least four resources: prolific, big-thinking entrepreneurs, a skilled and well-educated workforce, capital to fund ventures, and commercially-feasible ideas and technologies for creating and growing businesses. As a result, racetrack casino tax revenues were dedicated for funding: 

1.  Promising research and development projects at the State’s colleges and universities.   The main criterion applied in allocating funds was whether the research output had the potential to be a significant commercial success, either as a product or a business.   The governing body for screening projects and granting funds was an independent private-sector board comprised of venture/angel capitalists, scientists, engineers, and business executives–with State oversight. 

2.  Start-up businesses and later-stage growth companies headquartered within Kentucky.   The Commonwealth took equity positions in all of these investments and cashed out whenever a company went public or sold out.   The governing board consisted of proven entrepreneurs, business executives, venture/angel capitalists and others with expertise in starting and growing for-profit enterprises with great potential. 

3.  Scholarships at the State’s colleges and universities for outstanding Kentucky students in math, science, engineering, and computers/software. 

4.  Employee training/retraining programs at the State’s community colleges in skills necessary for a technology-oriented society. 

5.  Programs for treating problem gamblers. 

Originally, it was suggested that the money derived by the State from taxing casinos go to reducing citizens’ taxes and other short-term uses.  Upon further thought, however, the money was channeled to Kentucky’s long-term competitiveness via economic development…and, in reprospect, this decision was prescient. 

In 1996, a colleague and I were working on a project commissioned by the Ewing Marion Kauffman Foundation (the largest philanthropic organization concentrating on the study and promotion of entrepreneurship).   The end product–a monograph titled “Stoking the Small Business Engine”–reported our research into why some communities do so well in economic development pertaining to start-up and growth enterprises and why others do not.   As part of the research process, we interviewed knowledgeable people in cities across the United States.  One was Greensboro, North Carolina. 

North Carolina was historically dependent on three industries–tobacco, textiles, and furniture manufacturing–all of which have declined dramatically.  The Piedmont Triad–around Greensboro, High Point, and Winston-Salem–was battered mightily by the fate of these industries.  Not only was Greensboro suffering from hard times, it also had to cope with perceptions lingering from the famous “sit in” in 1960 by four African-American college students, from North Carolina A&T, at a Woolworth’s lunch counter that sparked similar protests across the United States and helped to launch a Civil Rights movement.  Greensboro today is a progressive city that has diversified its economy and radiates a “can do” attitude about stimulating business and improving its quality of life. 

Greensboro welcomed me with open arms and assembled some of the city’s movers and shakers to meet with me and answer my questions about the city’s revival.  But it took more than a positive community attitude to counter the economic decline.  The city leaders early on decided where they wanted to go, how to get there, and how to fund the efforts.  And they were not provincial in their thinking.  For example, the Piedmont Triad Partnership is a joint economic development marketing venture among the 12 counties close to Greensboro, High Point, and Winston-Salem.  North Carolina’s Research Triangle (Raleigh, Durham, and Chapel Hill) is another well-known success story that combines private enterprise and university research.  Again, these do not happen by accident, but rather, result from a synergistic planting of ideas, research, and capital.

In 2003, I spent some time visiting Purdue University in West Lafayette, Indiana, and saw the same kinds of processes at work.  An impressive and well-thought-out public-sector/private-sector modus operandi for bringing research to market is creating a better future for Indiana.

All of the economic development successes across the United States are different but have the common ingredients of optimistic attitudes, entrepreneurs, ideas, teamwork, planning, and capital. 

Kentucky, by strengthening its horse racing and breeding enterprise instead of inhibiting its ability to compete on even terms, should be able to supply a plethora of capital to cultivate the industries and companies of tomorrow.  In addition, it will ensure that its number one (and most aesthetically-pleasing) tourist attraction is later rather than sooner replaced by shopping centers and housing developments. 

Dan Liebman, Editor-in-Chief of The Blood-Horse magazine, recently wrote:  “Unfortunately, many elected to represent the citizens of the state [Kentucky] continue to see the [horse racing and breeding] industry only as wealthy breeders, wealthy owners, and wealthy racetracks, despite study after study showing that not to be the case.”

Liebman is correct…but maybe, just maybe,  rational thinking about wealth creation and elevating everyone’s standard of living will prevail in the Kentucky legislature.

Adam Smith, the father of economics, explained in his 1776 opus The Wealth of Nations how people, by pursuing business opportunities in their own self interest–such as wealthy breeders, rich owners, and prosperous racetracks–raise the standard of living of society:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

The determinative question for Kentucky is whether the Colonels in the legislature will be “too late” in acting in the immediate self  interest of the horse racing and breeding industry.   The long-term vitality of the entire Commonwealth could be riding on the answer, provided that the tax revenues from racetrack casinos are properly channeled to investments in science/engineering education, technical job training, funding promising nascent products/businesses, and infrastructure needed in a high-technology economy.

Copyright © 2009, Horse Racing Business.

 Coming Attractions…

February 7:   Angels of Mercy.

February 14:  Racing’s Misguided Muhammad Ali Philosophy of Publicity.

February 28:  Churchill — Down or Up?

Filed Under: Horse Racing Business Tagged With: ,

RACING’S RESPONSE TO BETTING EXCHANGES

January 28, 2009 by

by Eugene Martin Christiansen

Editor’s Note:  This article was published in November 2004 in Insight — The Journal of the North American Gambling Industry. It is reprinted (with permission) in light of its relevance after the acquisition of TV Games Network by Betfair Group Ltd. from Macrovision for $50 million–which was announced on January 27, 2009.  The data are from 2004 and earlier, but the discussion of racetracks versus betting exchanges is more applicable than ever, now that Betfair has purchased a U. S.-based horse-racing television company with a advance deposit wagering platform.

How should U.S. racing respond to betting exchanges like Betfair? Everyone agrees that something needs to be done but there is no agreement on what course to adopt. Here are five possible responses.

1.  Racing might do nothing. Sometimes when industries are impacted by technological change this is the only option. It’s difficult to see, for example, what transatlantic passenger lines could have done to adapt to the technological change of air travel, other than to redeploy capital in the airline industry and/or repurposes liners as cruise ships.

2.  Racing could form a committee.

3.  Racing could take refuge in the “competition is illegal” response, which comes to it naturally. Other industries have adopted this course: the recorded music industry responded to Napster in this fashion, invoking intellectual property law in U. S. courts to shut Shawn Fanning’s technological innovation down.

4.  Racing could change its business model: add new lines of business that are unrelated to horseracing- -VLTs (video lottery terminals), for example.

5.  Or racing could enter the market with a competing betting exchange service.

Let’s look at what is really going on.

Internet-related technological change isn’t some isolated one-off phenomenon that affects just the racing industry. The Internet is realizing its promise: it is wringing inefficiencies out of industries across the economy, lowering consumer prices for goods and services through more perfect information. As (MIT computer scientist) Nick Negroponte has pointed out, being digital changes the way consumers relate to the world. Consumers can access goods and services (or each other) directly–bypassing pre-Internet industry gates like CDs or racetrack turnstiles. The impact of betting exchanges on racetracks is merely an incident in a much larger transformation in the global economy.

Let’s look at some examples.

Here are five industries that are feeling the same Internet impacts racing is experiencing: airlines, movies, music, travel and lodging, and bookmaking. The driver of change is lower consumer price: record labels price CDs at $10 to $18, shared files are free, business travelers who used to pay high airfares and book through travel agents now have direct access to near-perfect fare information and the ability to book cheap seats online and so on. It isn’t rocket science to connect the dots.

If you think horse race handle and attendance trends are discouraging take a look at the music industry. Following a decade that saw recorded music sales rise from $9 billion (in 1992) to $14.6 billion (in 1999) music went into a tailspin. Not coincidentally, the post-1999 years saw the birth and explosive growth of a new form of music consumption: file sharing. CD sales appeared to rebound, slightly, in the first three quarters of 2004, but have been wobbling around zero for the past nine weeks–a possibly ominous sign for a jittery industry heading into the holiday shopping season. Has recorded music stabilized at some lower level of CD sales–or is the bottom about to fall out?

Here’s the underlying reality. Almost 25 million Americans download music from free file-sharing services. About 9 million pay to download files, at least occasionally. Less than half a million Americans subscribe to Internet music services. None of this existed, of course, before Shawn Fanning came along.

The music industry’s almost instinctive response to file sharing was that it was illegal under intellectual property law. The industry was right about that. The labels invoked that law in the courts and shut Napster down. New file-sharing services located outside the United States–does this sound familiar?–sprouted to fill the vacuum created by Napster’s demise–for Napster had proved the file sharing business model. Grokster, Kazaa and a raft of competitors set up shop online. File sharing continued to grow and CD sales continued to plummet. So the labels decided on a second response: sue the consumer. In September 2003, the Recording Industry Association of America (RIAA) instituted lawsuits against “illegal” file sharers. Through October 2004 about 6,191 such suits had been filed, according to the RIAA; there have been few convictions, but about 900 defendants have settled for amounts reportedly averaging $3,000, payable to record labels.

The music industry is divided on the strategy of suing consumers: marketing people, as you would expect, have reservations about it. It’s worth pointing out, though, that intellectual property law is fundamental in ways that the Wire Act is not. The unenforceability of 18 U.S.C. 1084 says something about Federal attitudes towards gambling–namely that they are at variance with the attitudes of ordinary Americans–but at the end of the day most ordinary people couldn’t care less whether betting on sports is legal or not. What matters is that it’s easy to do. Intellectual property law, on the other hand, matters to everyone. Artists’ rights in their intellectual property are the legal protection for all forms of creativity; these rights are the legal foundation for publishing, movies, television programming, music, the theater and a long list of “creative” industries.

As things stand today, the effect of targeting consumers with lawsuits on CD sales is unclear, but the lawsuits did remove the quotation marks around “illegal” file sharing and established a distinction between free file sharing services like Kaaza and RIAA licensees like Apple’s iPod/iTunes.

At this juncture an outsider jolted the music industry onto a new track. Steven Jobs, Apple Computer’s founder, launched a new licensed music download service, iTunes, and used it to drive a new Apple box, iPod, into consumer pockets and purses. It worked like a house afire. Apple is currently selling songs at the rate of 150 million a year worldwide, for 99 cents apiece. Somewhat belatedly the labels woke up to a fact that Jobs, being an outsider, had been able to recognize before they did: legal or not, downloading music had been validated by the consumer. And if downloading was a new way to get music there must be a way to get consumers to pay for it. Apple iTunes/iPod was that way. The labels took notice and set up online music stores of their own. So did Microsoft and music dot-coms like RealNetworks and Roxio, which purchased Napster from its disenchanted German owner (Bertelsmann) and re-launched it as a licensed service.

Devising a new business model for recorded music is very much a work in progress. Online music stores seem to be part of the answer but probably aren’t all of it. Universal Music Group, the biggest label, recently announced the start of Universal Music Enterprises Digital, a digital “label” that will publish music directly on the Web, dispensing with CDs altogether. The CD album, UMG thinks, has become at least partly obsolete–it’s too expensive as a distribution channel and has been rejected by too many listeners, who are no longer willing to pay $16 for an album of songs they mostly don’t want. Trial and error in the marketplace will determine whether Universal’s new online publishing model works; if it doesn’t Universal will try something else. In the long run it will be forced to, intellectual property law or no, because consumer behavior, the way music listeners get and consume music, has changed and changed for good.

Movies, travel and lodging, airlines, and bookmaking are other industries that are experiencing the kinds of Internet-related impacts the music industry is trying to cope with. It’s worth noting that the movie studios are following the labels: last month the Motion Picture Association of America (MPAA) said its members would begin filing copyright infringement suits against individuals who trade digital copies of movies online; like the labels, the studios are experimenting with download services.

As dramatic as the changes being wrought by the Internet are, these are still early days.

After a slow start growth in Internet advertising dollars took off in 1999. Spending on online ads reached $7.3 billion in 1993, and no one thinks that’s where it will stop. Those trends validate an advertising business model for Web sites that isn’t all that different from the broadcast network television business model. That’s a development racing should bear in mind.

This is what underlies that growth in online advertising. The number of American households online has grown steadily since 1995 and reached 62.2 million in 2003: that compares to 73.4 million U.S. households with basic cable television (November 2003). This, too, is probably in its early stages. Wi-Fi- yet another technological innovation-lets consumers bypass cable modems and DSL and get high speed connections just about anywhere–in many cases for free.

Does that sound like file sharing? It should. A couple of weeks ago Verizon lobbied Pennsylvania’s legislature into passing a law that would prevent Philadelphia from creating free or nominal cost Wi-Fi access points everywhere in the city–which would pretty much invalidate Verizon’s DSL service business model in Philadelphia. Verizon persuaded Pennsylvania’s governor, Ed Rendell, to sign this measure into law; Verizon says it will permit Philadelphia to go ahead with its free broadband access program, but other Pennsylvania cities and towns presumably will not be able to do likewise. Philadelphia is not alone. This approach to connectivity is increasing common in Pacific Asia, and many American and European cities are walking down this road. A world online at high speed, anywhere, for free, may be dawning. Racing should think hard about what that means. Verizon is.

That brings us to Betfair. From nothing in 1999 when two outsiders, Andrew Black and Ed Wray, saw, as Shawn Fanning had seen, a business model for doing something online that had no counterpart in the physical world, Betfair has exploded into a global business that is impacting licensed pari-mutuel racing and fixed odds bookmakers everywhere. More than 70% of Betfair’s business is horseracing: who said horseracing isn’t a growth industry?

The drivers of Betfair’s astonishing growth resemble the drivers of music downloading services: lower consumer price and vastly wider selection. Just as no Tower Records outlet (Tower, incidentally, is in bankruptcy) could offer even a tiny percentage of the music inventory consumers can find online, no racetrack and no bookmaker can offer the variety of wagering propositions consumers can find at Betfair. If you haven’t done so, log on to Betfair’s website and spend a little time looking around. You will find more things to bet than anyone in pre-Internet days could ever have imagined.

You will also find lower prices. Much lower prices. Betfair’s business model derives revenue from a commission on the peer-to-peer bets it matches: this commission seems to range from 7% to 9%. That is, of course, very much lower than the north-of-20% takeout that is commonly deducted from pari-mutuel wagers in the United States. Serious horseplayers are among the most price-sensitive consumers of any kind in any industry, and Betfair’s pricing is irresistible. Offshore betting services and rebate shops also offer lower prices, of course. Downward pressure on the price of betting horses is a structural change in racing’s market environment; betting exchanges contribute to this pressure but it would exist even if the exchanges shut down tomorrow.

As most in racing know, one reason Betfair and its offshore betting service competitors are able to offer lower prices is that they contribute less to purses than do U.S. pari-mutuel license holders–or nothing at all. Without in any way neglecting the importance of this, or the integrity issues raised by the ability of Betfair’s customers to lay horses to lose, it’s important for racing to understand that these aren’t the only reason bettors like Betfair. Betfair is as close as your PC or, real soon, your mobile phone handset. Pari-mutuel machines simply aren’t needed for many horseplayers today: that industry expense is something the consumer no longer needs to support. And, as file sharing proved, consumers like variety. No pari-mutuel licensee could hope to offer the variety Betfair does–if for no other reason than the Wire Act, that unenforceable law that licensed businesses must observe but consumers are able to ignore. (Note, in this connection, YouBet.com’s recent announcement of its intention to acquire American Wagering, a licensed Nevada sports and horserace betting service.)

So what should racing do about all this? How should racing respond to Betfair?

Jack Ketterer, the executive director of the Iowa Racing and Gaming Commission, answered this question in Paul Dworin’s November 2004 Global Gaming Business, and I think the Ketterer recommendations are a start.

First, Jack thinks racing must reduce the high cost of wagering. Twenty percent to 25% of handle is simply too high. It costs 4.5% to bet NFL football, never mind, because the consumer doesn’t mind, that this is illegal outside Nevada; at Betfair or a long list of convenient offshore betting services horse race betting prices typically do not exceed 10%. These price differentials pre-date the Internet, of course, at least for a few horseplayers. The Internet has made lower prices from more convenient suppliers available to everyone. Trying to charge 25% for a bet when the competition charges 10% is swimming against the tide.

Second, Jack thinks racetracks should use access to their pari-mutuel pools as a bargaining tool to negotiate contributions to industry costs from online betting service providers. This is a good idea. There are two things wrong with it.

Number one, the U.S. racing industry’s organization, or lack of organization, makes it hard to implement in practice. You would have to gather all the relevant rights into the hands of someone empowered to negotiate with Betfair and its many offshore betting service suppliers: the NTRA (National Thoroughbred Racing Association) is the natural candidate, but getting this done would, undoubtedly, be easier said than done. There’s also the Federal government’s position that offshore betting service suppliers are criminals, which certainly complicates a negotiating process involving holders of state pari-mutuel licenses.

Number two, increased contributions to industry operating costs run directly counter to the price advantage Betfair currently enjoys. Before you say “competition is illegal” and repeat the mantra that this is wrong and Betfair shouldn’t have a price advantage because it doesn’t contribute to purses stop and think. Consumer desires for lower prices aren’t illegal. Remember the Internet’s promise: lower consumer prices and more efficient businesses, for just about anything. The music industry’s experience is powerful support for the argument that you can’t maintain a $16 price for a CD or a 25% takeout from a horse race wager anymore, because consumers have lower priced alternatives online. Jack’s second recommendation is a good idea, but it may prove hard to implement in practice.

Jack’s third recommendation is to reduce the number of racing days “to a realistic number” as a way of reducing the industry’s high costs, which I guess Jack thinks are no longer supportable in today’s business environment. If Jack is right about this there is an industry contraction ahead. Like some of Jack’s other recommendations, this is, in my view, something NTRA and/or The Jockey Club might look into.

Jack’s fourth recommendation concerns breeding and is, as I read it, one that calls the economic logic of subsidizing the breeding of horses with betting revenue into question. I don’t think this relates directly to the issues posed by Betfair and the Internet and I’ll defer discussion of it to another time. So what should racing do about betting exchanges? Downward pressure on the consumer price of betting horses will be a fact of life for U.S. racing from here on out. Nothing can alter that. No law, no law enforcement efforts, no judge, no committee can make downward pressure on the price of betting go away. The Internet and technologies yet to come rob racetracks of their gatekeeper function and open channels to betting services for consumers everywhere. This isn’t personal. It’s business. And racing isn’t alone. Airlines, lodging companies, telcos, music labels-these and other industries are being forced to adjust their price structures because of technological change. U.S. racing can nail its colors to the price structure fixed in pari-mutuel law and see its clientele steadily erode; or it can find a way to compete on price with the new-technology suppliers. Implicit in this is another conclusion: pari-mutuel law, by fixing the consumer price of betting, deprives U.S. racetracks of a basic business tool: the ability to set the price of their products. If racing can’t get pari-mutuel law changed it probably needs to find a way around it.

Racing shouldn’t confuse the legal issues raised by Betfair with the business problem it poses. Betfair and other offshore suppliers may be illegal under U.S. law, as the Justice Department contends, but the music industry’s experience with Napster suggests strongly that a strategy resting on the enforcement of the Wire Act could win in the courts and lose in the marketplace. The labels are solving the problem posed by file sharing by adapting their business model to changed market conditions: by setting up music download services of their own, perhaps ultimately by jettisoning the CD entirely and moving to direct digital publishing. These are radical changes in a business model that served recorded music well for three quarters of a century. But I think it’s clear that if the labels had limited their response to file sharing to “competition is illegal”, if they had been content with shutting Napster down and hadn’t been prodded by Steve Jobs into addressing the problem of file sharing in the marketplace, they would be dying today. Law is important. But racetracks are businesses. They are not law enforcement agencies. Businesses live or die by their ability to compete in the marketplace. When marketplaces change businesses change, like the labels are changing; or they die.

At the end of the day I think there are six possible responses to the challenges posed by betting exchanges.

1.  Racing might do nothing.

2.  Racing could form a committee.

3.  Racing could rely on the “competition is illegal” response and pin its hopes on the Wire Act.

4.  Racing could take Jack Ketterer’s advice and try to find ways of lowering the consumer price of its product.

5.  Racing could change its business model by adding new lines of business that are unrelated to horse-racing–VLTs, for example.

6.  Or racing could enter the market with a competing betting exchange–or with some as-yet unthought-of method of supplying competitively priced wagering on U.S. races to the emerging global horse-race betting market. This was suggested a few weeks ago by Chris Scherf (Executive Vice President of Thoroughbred Racing Associations), but Chris’s suggestion hasn’t, as far as I can see, excited much discussion. I think it should. Just as Napster proved the market for file sharing, Betfair has proved the market for betting exchanges. It took Steve Jobs to prod the labels to the obvious conclusion: launch download music stores that supply licensed files and return revenue to artists and the music industry. The parallel with racing isn’t exact; racing and recorded music operate in different legal environments; but the two situations have enough in common to make Chris’s suggestion worth thinking seriously about.

Eugene Martin Christiansen is Chairman of Christiansen Capital Advisors, LLC, 250 West 57th Street, Suite 432, New York, New York 10107.

212-779-9797

www.cca-i.com/

Copyright © Insight (Vol. 2 Issue 11) November 30, 2004.

Filed Under: Horse Racing Business Tagged With: , , ,

HELP WANTED IN OHIO…SORT OF

January 24, 2009 by

OHIO NO HELP WANTED.

Ohio has three Thoroughbred racetracks that are located in the Cincinnati, Cleveland, and Columbus metropolitan areas.  Four Standardbred racetracks are in or near Cleveland, Columbus, Toledo, and Lebanon. 

Thistledown, home of the Grade II Ohio Derby, in Cleveland is owned by Magna Entertainment, but is for sale as the parent corporation is desperate for cash.  The Standardbred racetrack in Toledo, Raceway Park, is also owned by a publicly-traded company, Penn National Gaming, as is the harness track in Columbus, Scioto Downs, which is part of Mountaineer Gaming Group.

These seven racetracks are all having hard times, so much so that the Ohio State Racing Commission hired a consulting firm to make recommendations in the final quarter of 2008 because the Commissioners candidly admitted that they were bereft of ideas about what to do.  Ohio’s agribusiness breeding industry is fading along with the racetracks.  The cause is not due solely to competition from gaming in states contiguous to Ohio, but that is the lion’s share of the problem.

Full-scale casinos operate in Indiana, Michigan, and West Virginia, and Pennsylvania has slot machines.  Only Kentucky, across the Ohio River to the south, does not have some type of alternative gaming.  River Downs in Cincinnati is impacted by a nearby Indiana casino; Raceway Park in Toledo is close to Detroit; and the Cleveland-area racetracks have been badly damaged by the slot machines and racing at Presque Isle Downs in Erie, Pennsylvania (Thoroughbreds) and The Meadows Racetrack and Casino south of Pittsburgh (Standardbreds).   They also must contend with the full-fledged casino at Mountaineer Casino and Racetrack in Chester, West Virginia (Thoroughbreds). 

Ohio held statewide plebescites on casinos in 1990, 1996, 2006, and 2008.  The votes in favor of casinos were 38%, 38%, 43%, and 37%, respectively.   These initiatives all made the fatal mistake of restricting the locations where the casinos would be built, so, as a consequence, the areas of the state left out voted no.  In three of the four failed ballot initiatives, the county or counties for which a casino was proposed voted affirmatively.  This indicates that were all regions of the state to be cut in on the action, especially the population centers, a casino referendum might well pass.

In the 1990 referendum, only Lorain (near Cleveland on Lake Erie) was to get a casino with the vague possibility of later expansion to other parts of Ohio.  In 1996, riverboat casinos were proposed for four counties, three in Northeastern Ohio and the other in Hamilton County (Cincinnati).  In 2006, the ballot language permitted two casinos in Cuyahoga County (Cleveland) and at the State’s seven racetracks.  Most recently, in 2008, the proposal was for a single casino resort in one of Ohio’s poorest counties.   Penn National Gaming spent $36 million to defeat this measure in order to protect its properties–the Argosy Casino in Lawrenceburg, Indiana, and Raceway Park in Toledo.  Moreover, the Ohio State Racing Commission urged a no vote.

A ballot initiative would have a far stronger chance of approval if it were to specify casino permits for Cincinnati, Cleveland, Columbus, and Toledo, and, perhaps, for the Lake Erie Islands, near Sandusky, and Youngstown.  The likelihood is that cash-starved big city mayors and county commissioners would rally support.   

In the past, the major political movers and shakers of both political parties have weighed in against expanded gambling–most notably, onetime Republican governor and now U. S. Senator George Voinovich–who is retiring in 2010-and the most recent past governor, Republican Bob Taft, and the current governor, Democrat Ted Strickland.   Strickland is a former Congressman and Methodist pastor with an earned doctorate in psychology from the University of Kentucky.  He has the reputation of being fair-minded and honest. 

To Voinovich’s credit, while he has campaigned against alternative gaming and casinos, he has supported pari-mutuel wagering on horse racing because of the agribusiness supply chain behind it.  The significant economic impact of the horse industry and horse racing in Ohio is substantiated in the American Horse Council Foundation report by Deloitte and posted at Ohio Thoroughbred Breeders and Owners.

In the midst of the current Ohio budget crisis of mammoth proportions (around $7 billion), Strickland is wavering on his opposition to expanded gambling.  In 2008, he lent his support to letting the Ohio Lottery install Keno in bars, restaurants, and racetracks.  In early January 2009, Strickland said:  “I think it is impossible to know how deep this recession is going to be or how long it is going to last.  I am therefore willing to keep an open mind and listen to whatever argument that may be brought to me regarding gambling.”   

The Governor has already met with Penn National Gaming officials.   Penn National’s proposal, which has not yet been formalized, would be on the November 2009 ballot and would put casinos at all seven racetracks and maybe at other venues.  My Ohio Entertainment, the organization behind the failed 2008 casino ballot initiative, is proposing another referendum for November 2009 that would allow casinos in Cincinnati, Cleveland, and Columbus, plus the possibility of two additional locations.

The President of the Republican-controlled Senate says that he personally opposes gambling but would at least consider supporting a ballot proposal for the sake of assisting Ohio’s economy.  The new Speaker of the House, a Democrat, is an outright advocate of expanded gambling for the Buckeye state as a means to create jobs and bring in revenue.  Ohio’s largest newspaper, The Plain Dealer, on January 11, 2009, ran an editorial titled “It’s time to get casinos and their taxes and jobs.”  The co-authors were the president and the CEO of the Greater Cleveland Partnership.

Two days prior to the Obama inauguration, Ohio’s Democrats celebrated at a plush dinner and ball at the Renaissance Mayflower Hotel in Washington, DC, complete with music by the 235-member marching band from Ohio State University.  The cost was partially underwritten by sponsors, who paid anywhere between $10,000 to $75,000 each.  One of the sponsors was none other than Penn National Gaming.

As with previous casino proposals, there will be plenty of opposition from assorted organizations and individuals.  For instance, a Plain Dealer columnist wrote on January 18, 2009:  “Circulating in Columbus is a scheme to install video lottery terminals (‘VLTs,’ a sanitized term for slot machines) at Ohio’s horse-racing tracks and in a couple of downtowns…Except for the Bushes and the Clintons, no one has made a greater sense of entitlement than Ohio’s horse-track owners…The real object of VLTs will be, by Statehouse fiat, to further enrich people who are plenty rich already…”   (An objective observer who reads this columnist regularly quickly discerns that he often advances ad hominem arguments like this one and is resentful towards anyone who might make a profit that, in his view as a self-appointed moral arbiter, is excessive.)

Whether the racing agribusiness in Ohio receives help or not depends on four key eventualities.  First, the Governor will evaluate his re-election chances for 2010 by weighing the pros and cons of his offering tacit support for expanded gambling.  The deepening budget crisis will have a lot to do with his decision; if Ohio gets sufficient federal bailout funds from the Obama administration, then the gaming revenues will not look as attractive, given the Governor’s re-election risks of alienating important constituencies.  Second, if two or more competing casino proposals make the November 2009 ballot, the likelihood is that they will fail.  A focused effort is required.  Third, even if a casino initiative passes in a statewide vote, Ohio’s seven racetracks may or may not be included as sites.  Lastly, the odds of passage are increased if all of the major population centers are allowed to have their own casinos.

A perfect storm will have to occur for Ohio racing to be extended a lifeline in the sea of competition it finds itself drowning in from surrounding states.  Otherwise, the prognosis is grim.

In a battered state economy that is so dependent on the shaky “Big Three” automobile manufacturers, Ohio needs every job source it can get.  The unemployment rate is 7.8% and rising. 

Ohio’s racetracks employ many people and account for considerable local and state tax revenues, as do the independent contractors like trainers, veterinarians, and feed suppliers, whose businesses depend on the racetracks and the farms.  Horse racing is a sizeable agribusiness in Ohio and should be cultivated by elected officials.   One sure way to do that is to allow the racetracks to be more competitive so that their customers are not so easily lured to the racinos and casinos in nearby states.

 Copyright © 2009 Horse Racing Business

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