Archives for December 2009


Horse racing has tremendous opposition for the betting dollar from both legal and illegal wagering. Just how much opposition derives from illegal betting is staggering, as shown in CNBC estimates of how many dollars are spent betting illegally on various sports. Pari-mutuel wagering on horse racing is dwarfed by each and all of the following:  National Football League games, the Super Bowl, college football, National Basketball Association games, college basketball, and Major League Baseball. The CNBC list is broken down sport by sport. Click the following link to go to the CNBC information.

The number one sport in the world for legal betting is soccer.


Untold words have been written and uttered about the rise and fall of countless companies and industries, including such once seemingly rock-solid organizations as General Motors and AIG and the enterprises of banking and home building. Pari-mutuel wagering on horse racing is on the list.

Jim Collins is a former instructor at the Stanford Business School and the bestselling author of books on corporate leadership. He is no armchair theorist, as his work is firmly grounded in extensive empirical research. The books he is best known for are the influential mega-sellers Good to Great and Built to Last. His current book (2009) is titled How the Mighty Fail (subtitle: And Why Some Companies Never Give In).

Collins and his research associates found that great companies in decline typically, although not always, follow a predictable path through five stages:

Stage 1: Hubris Born of Success. Leaders of highly successful organizations are susceptible to becoming complacent and therefore lapsing into not working as hard as they once did to keep their edge. Upper management may believe that their success is well deserved and understandable given their savvy and superior abilities. In their view, luck or good fortune has nothing to do with it. Undaunted by potential or nascent competition, leaders come to think that their organization is largely  impervious to change and that its prominence will go on in perpetuity.

Certainly, racetrack executives in the heyday of pari-mutuel wagering, when it was insulated by law from competition, acted this way. Racing’s quasi-monopoly position in the United States masked a multitude of problems with how tracks were operated. This was the era when racetracks earned their deserved reputations for notoriously poor customer focus.

Stage 2: Undisciplined Pursuit of More. Emboldened by its successes, top management goes on a growth binge and, in the process, puts a strain on the cash, fixed assets, and human resources needed to execute. The organizational system becomes increasingly bureaucratic. Upper management is fixated on short-term growth and increased scale of operations, often by going on an acquisition binge, and sometimes in businesses in which they have little or no expertise. Frustrated employees depart and the deficit in human resources begins to show up in results.

Magna Entertainment Corporation exhibited most of these characteristics after its founding in the 1990s, although it was never a great company or even a good one. The company acquired one racetrack after another, so there was not enough time and resources to assimilate the racetracks it purchased, and Magna churned management talent at an alarming rate, so there was no continuity in leadership. The company looked into expansion into shopping developments and a theme park.

Rather than fixing the racing problem, racetracks have tended to pursue greener pastures in alternate gaming and forays into non-racing retailing. For instance, The Meadows near Pittsburgh has a bowling alley. These new areas of commerce may be beneficial to a racetrack, but the risk is that management will neglect its traditional core product, which is pari-mutuel wagering. 

Stage 3: Denial of Risk and Peril. Herein the executives in charge seem oblivious to the dangers facing the organization. They isolate themselves from what is happening and tend to entertain good news while discounting the threats from the bad news, which, by now, is coming fast and furious. External factors are blamed for the organization’s hard times, and sometimes rightly so. Management attempts to recapture the organization’s vibrancy by making “big bets” into ventures and product lines that will supposedly right the organizational ship.

Racing in some states are indeed imperiled by external factors largely beyond their control but lamenting it will not solve the problem. In Kentucky, Churchill Downs is competing against slots and table games at a casino just across the Ohio River in Indiana. Management is acutely aware of the threat and is working diligently, if so far unsuccessfully, to overcome it. By contrast, Magna Entertainment Corporation was making optimistic statements about its future long after it became clear to most knowledgeable individuals that the company was about to go bankrupt.

Stage 4: Grasping for Salvation. By this time, management is in a panic mode. The organization is apt to look for a charismatic leader to return things to the good old days. The savior will have a grand vision that will bring the organization back.

The new leader comes in and makes a lot of noise about installing a new culture of innovation. He or she restructures the organization and then, when that does not improve things, does it again. Finances are rationalized. Objectives and goals are changed out frequently. One master strategy is abandoned and replaced with another, so on ad infinitum. Inconsistency becomes the only consistency and the corporate culture is one of confusion and distrust.

It is often asserted that racing needs a czar to rule the sport. Presumably, he or she will mandate that diverse interests cooperate and thereby partly at least restore the halcyon days when racing was the preeminent legal means to wager? This kind of talk is a sure sign of desperation and is  impractical besides because of the diffusion of authority over racetracks  across state lines.

In practice, the truth about successful turnaround executives is that they tend to be introspective people rather than the sterotype of charismatic personalities. They pay close attention to reality and go about their job in a thoughtful and workmanlike manner. The image of the blustery Lee Iaccoca at bankrupt Chrysler in the early 1980s is the exception and not the rule.

When Louis Gerstner Jr. was named chairman of IBM, he was the first outsider ever to head the company. IBM had fallen on desperate times because personal computers were taking away much of the business of IBM’s golden goose, the mainframe computer, or “big iron.”

Early on in his tenure, the cerebral and reflective Gerstner took a lot of criticism when he answered a reporter’s question about his vision for IBM by saying that the last thing that IBM needed was a vision. I recall visiting IBM’s Armonk, New York headquarters in 1995 and hearing , from one of Gerstner’s immediate assistants, an explanation of this seemingly inexplicable comment. Gerstner recognized that his first job was to staunch the bleeding at IBM and to surround himself with top-rate talent. Together they would labor to turn IBM around, which they did, as opposed to Gerstner articulating some lofty vision and then having everyone else implement it. The turnaround would not come about because of a bold stroke of vision, but rather, through assessing a massive amount of quantitative information about IBM’s markets and competitors, and subsequently evolving IBM toward the empirically-documented most promising paths. Anne Mulcachy, a Xerox lifer, followed a similar process when she and her colleagues resurrected Xerox from stage 4.

Stage 5: Capitulation to Irrelevance or Death. The organization plummets into extinction or hangs on as a former shadow of itself.

Collins points out that none of these stages are necessarily fatal. Declines can be reversed, even in stage 5, and organizations can be resurrected.

Collins writes: “The main message of our work remains: we are not imprisoned by our circumstances, our setbacks, our history, our mistakes, or even staggering defeats along the way. We are freed by our choices.”  His research shows that great nations, great companies, and great individuals can decline and recover. In fact, this trait—the ability to comeback from defeats—is the mark of the “truly great.”

Collins advises: “Never give in. Be willing to change tactics, but never give up your core purpose. Be willing to kill failed business ideas, even to shutter operations you’ve been in for a long time… Be willing to evolve into an entirely different portfolio of activities, even to the point of zero overlap with what you do today…create your own future,” as have a host of well-known companies.

So far, the predominant strategy employed by top executives of racetracks has been to morph their organizations from being exclusively racetracks into racinos and simulcasting facilities. In my view, this has been the correct course of action because all racetracks can no longer survive with one product, on-track pari-mutuel wagering on horse racing. Additionally, the judgment here is that remote wagering still has significant  growth potential through the implementation of Betfair-like offerings.

The takeaway from Collins’ research is for racetracks to attract the very best executive teams they can, people with a “never give up” attitude, who can quietly work together to create their organization’s future. One place to begin is the inclusion on boards of directors of insightful people who will take their appointment as a challenge instead of a resume enhancer with a few perks thrown in. Beware of people who claim to have a bold new vision for racing. The fact is, in most cases of success, the restoration of a once-strong enterprise comes incrementally rather than through some momentous flash of creative insight by a leader, and without a wholesale abandonment of what made the organization successful in the first place.

Copyright © 2009 Horse Racing Business


The credit crunch in Dubai raises alarming questions about the potential effects on the global Thoroughbred bloodstock business, as demonstrated by articles in major newspapers in the past week. Sheikh Mohammed bin Rashid al-Maktoum, Prime Minister and Vice President of the United Arab Emirates (UAE) and the Emir of Dubai, is the leading Thoroughbred owner in the world and the driving force behind the gamble on growth in Dubai that led to the current state of affairs.

Following are two analyses and a closing commentary.

Dubai Crisis. The likelihood is that the situation in Dubai is not the beginning of a new worldwide debt crisis, but rather, is a lagging effect, or a repercussion from the global financial debacle in the Fall of 2008 and early 2009. The size of the aggregate Dubai debt has been estimated to be about $80 billion, but some experts believe it to be closer to $120 billion.

Abu Dhabi, the location of the UAE’s federal government, has the immense wealth from oil to support the UAE banking system so that it does not default. Even though the powers that be in Abu Dhabi are reportedly “furious” with Sheikh Mohammed and others in Dubai, they have pledged to back up all domestic banks and subsidiaries of foreign banks operating in the UAE.

Dubai World, Dubai’s “flag bearer in global investments” (quote from the entity’s website) is another matter. Dubai World’s debt, approximately $60 billion, is not guaranteed by the emirate’s government and Abu Dhabi is showing no inclination to come to the rescue. The debt must be paid from the cash flow from Dubai World investments. These assets are described on the Dubai World website:

“As a holding company [Dubai World] operates a highly diversified spectrum of industrial segments and plays a major role in the emirate’s rapid economic growth. Its primary aim is to play the role of a growth engine that powers development both locally and internationally. Dubai World’s investment spans four strategic growth areas of 21st Century commerce namely, Transport & Logistics, Drydocks & Maritime, Urban Development and Investment & Financial Services.”

 Ironically, in light of the present dire straits of Dubai World, the website says: “The company’s business strategy is driven by a combination of pragmatic acquisitions and prudent investments, designed to deliver real, measurable results to all its stakeholders. “

Dubai World’s debt burden will be ongoing, as it restructures the terms of the debt and extends the repayment schedule. Whether the Dubai problems will extend to other emerging nations is a monumental risk looming over the worldwide economy.

Effects on the Bloodstock Industry. I was at a corporate board meeting last week and the topic came up of how much the worth of a company is diminished as its reliance on a single customer increases. Everyone agreed that, while the single customer’s business is essential, the overall value of the company is less than it would be if the customer base were widely diversified. The 80-20 rule of thumb says that, for most companies, 80% of the revenues and profits derives from 20% of the customers. In some cases, 95% or more come from a very small percentage of customers and this dependence dramatically ramps up the risk for a company in such a vulnerable position.

Sheikh Mohammed bin Rashid al-Maktoum and his far-flung breeding and racing empire (Darley and Godolphin) constitute a single-customer threat to bloodstock businesses and racetracks worldwide. He has been the leading buyer at Thoroughbred auctions for years and, in fact, is the most important purchaser in modern history. Were he to sneeze, so to speak, the bloodstock industry would get pneumonia.

John Ferguson, Sheikh Mohammed’s chief bloodstock advisor, commented on the debt dilemma in Dubai by saying that the Sheikh’s racing and breeding operations are separate from the imperiled business operations. This is no doubt technically true, but still does not mean that the racing interests will be unaffected. In the first place, one would assume that the Sheikh has a significant portion of his personal fortune invested in Dubai World. Even if this is not true, there could be public and investor pressure for him to show some “sharing of the pain” by cutting back on lavish spending, including bloodstock expenditures at public auctions and extraordinary purses at the Dubai World Cup competition. What’s more, the debt crisis is likely to result in a lowered standard of living for his subjects, which should be a governor on ostentatious consumption by the ruler. Finally, the federal government of the UAE may stipulate restrictions in return for the bailout.

It is easy to counsel the bloodstock and racing industry to diversify and expand its owner base so as to reduce its reliance on Sheikh Mohammed. That, of course, is difficult to achieve. I once served on the board of a Nasdaq-listed company whose biggest customer was Home Depot. It takes a lot of average companies to hedge the risks of losing such a behemoth as Home Depot. Similarly, the Thoroughbred Owners and Breeders Association would have to recruit a multitude of wealthy new owners to compensate for a giant cutback in spending by Darley.

Immense Entrepreneurial Risk-Taking. Sheikh Mohammed is to be commended for endeavoring to diversify the economy of Dubai in anticipation of the day when oil revenues ebb. In the long run, his subjects would be better off by not being oil dependent. However, Dubai appears to have attempted to grow too much too fast. As a result, since 2008, residential real estate prices have fallen by 50% and 41% of commercial space is vacant. Unfortunately, the Sheikh’s ambitious vision was implemented, with a mountain of debt, at almost precisely the same that the world economy plunged. Consider the expanse of the projects undertaken by Dubai World:

“Its portfolio comprises some of the world’s best known companies and a number of outstanding projects. This includes DP World, one of the largest marine terminal operators in the world; Drydocks World & Dubai Maritime City designed to turn Dubai into a major ship-building and maritime hub; Economic Zones World which operates several free zones around the world including Jafza and TechnoPark in Dubai; Nakheel the property developer behind iconic projects such as The Palm Islands and The World among others; Limitless the international real estate master planner with current development projects in various parts of the world; Leisurecorp a global sports and leisure investment group, reshaping the industry by unlocking value across investment, development and brand opportunities; Dubai World Africa which oversees the regional development and portfolio of investments in the African continent.; and Istithmar World, the group’s investment arm that has a global footprint in finance, capital, leisure, aviation and various other business ventures.” (Source: Dubai World website.)

The Sheikh’s intent for his people was correct and his vision was bold. His timing was bad, but then, no one sees the future. Perhaps Dubai’s debt problems will turn out to be a detour to the future rather than a dead end. The bloodstock industry has a lot riding on the outcome.  Dubai World’s motto is “The Sun Never Sets on Dubai World.”  Let’s hope not for the sake of bloodstock and racing enterprises worldwide.

Copyright © 2009 Horse Racing Business