Archives for January 2010

Racetracks and movie theaters have at least two commonalities: They are both multi-billion-dollar entertainment businesses and customer attendance at their physical facilities is increasingly threatened by information and communications technologies. Racetracks have seen customers migrate to off-track locations and to remote wagering over the telephone or Internet. Customers of movie theaters have a variety of alternatives, such as renting and buying from a physical store or kiosk, purchasing from a cable television company, and placing and receiving orders over the Internet or by mail. Home entertainment centers have become so sophisticated that they approach or sometimes exceed movie theaters in audio and video quality.

Following is how horse-racing handle in the United States compares to movie-theater box-office revenues over the past decade, an era when the Internet has become ever-more sophisticated and popular as a means to deliver intangibles like wagers and movies.

                  Racing Handle        Theater Gross                    

                                         (billions of $)
  
2009           12.3                                 10.6  
2008          13.6                                    9.6
2007          14.7                                   9.6
2006           14.8                                  9.2
2005           14.6                                  8.8
2004           15.1                                  9.3
2003           15.2                                  9.2
2002           15.1                                  8.4
2001           14.6                                  7.6
2000          14.3                                  7.4

             Percentage Change from Previous Year       

                  Racing Handle           Theater Gross                                                    

2009           -9.9                                    +10.0
2008          -7.3                                     –   0.3
2007          -0.4                                    +  4.9
2006          +1.5                                    +  4.2
2005           -3.6                                      – 5.8
2004           -0.5                                     + 1.5
2003           +0.8                                   + 0.9
2002           +3.2                                   + 8.8
2001           +1.9                                    + 9.8
2000          +4.4                                   +  2.9

Whereas racing handle continues to be considerably larger than movie theater gross, the theater business has been more resilient. In the past three years, handle has decreased and box-office gross has gone up in two of these same three years. In 2009, handle declined by nearly 10 percent while theater gross increased by 10 percent, so the gap between the two is closing.

In the face of tremendous competiton from the likes of Netflix, movie-rental stores, cable television video-on-demand, HBO, home entertainment centers, and pirated movies on the Internet, the retail movie-theater business has been able not only to hang on, but also to manage to grow. Although racetracks are not located nearby to virtually every American, as with movie theaters, those that evidently provide an entertainment experience customers enjoy, such as Del Mar, Keeneland, and Saratoga, can and do attract people from considerable distances. 

The racing industry will have to reverse the stagnation in handle, or undergo a huge downsizing. The crutch of supporting purses from alternative gaming revenues will not last because the businesspeople who run racinos and casinos and the elected officials in racing states will sooner or later stop the practice. The movie-theater example shows that an old-line entertainment business is not necessarily condemned to permanent decline in an age of proliferating communications technologies. Moreover, racetracks have an overwhelming advantage over movie theaters with regard to such technologies. While movie delivery via the Internet and cable television are direct substitutes for going to a retail theater, these are user-friendly technologies for horse racing. A wagering  transaction can be conveniently consummated with people near and far to an actual racetrack.

Copyright © 2010 Horse Racing Business

The Eclipse Awards for the champions in the various divisions of Thoroughbred horse racing and the award for Horse of the Year are determined by the voters from the National Thoroughbred Racing Association (comprised of Equibase and racing secretaries), the Daily Racing Form, and the National Turf Writers Association. These three organizations do not vote as blocks and therefore do not each constitute one-third of the weighting. Voting by block was eliminated in 2002.

According to Jim Gluckson of NTRA: “The best way to describe this [voting procedure] is to forget the blocks… The voting in all categories is one person, one vote. The highest number of first place votes wins. All voters are treated the same.”

For the 2009 Horse of the Year, there were 269 eligible voters (229 voted), broken down as follows: The National Turf Writers Association had 142 eligible voters (52.8% of the voters); the Daily Racing Form had 58 eligible voters (21.6%); Equibase had 31 eligible voters (11.5%); and racing secretaries had 38 eligible voters (14.1%). Thus over half of the eligible voters came from the National Turf Writers Association.

The Rachel Alexandra/Zenyatta debate over Horse of the Year was inevitable because of the vagueness of the criteria for making the selection and the total reliance on human opinion. Was the overall 2009 record of the filly Rachel Alexandra–especially in the stakes races where she defeated males–sufficient to offset the undefeated mare Zenyatta’s Breeders’ Cup Classic victory, the only race in which she ran against males? No standardized metrics were employed to assist in answering this question. Human judgment was the sole determinant.

The closest sport to horse racing in the way that its champions are determined is the top level of collegiate football (called the Football Bowl Subdivision or FBS). In every other college sport, the champion is decided through an extensive elimination playoff system. Like horse racing, in FBS college football there is no playoff system wherein teams are eliminated in a tournament until a champion remains. Only the top-two ranked FBS teams play.

College football has attempted to take much of the subjectivity out of crowning a champion by instituting an elaborate procedure, based on the results of two human polls and six computer rankings. CBS Sports explains the methodology:

“To derive a team’s poll percentages in the Harris Interactive and the USA Today polls, each team’s point total is divided by a maximum 2825 possible points in the Harris Interactive Poll and 1525 possible points in the USA Today poll. [The Harris Interactive College Football Poll consists of votes cast by 114 former players, coaches and administrators, and current and former members of the media. These panelists are randomly selected from 300 nominations submitted by FBS Conference offices and their member schools. The USA Today poll is comprised of the weekly votes of 59 coaches at FBS universities.]”

Six computer rankings calculated in inverse points order (25 for #1, 24 for #2, etc.) are used to determine the overall computer component. The best and worst ranking for each team is dropped, and the remaining four are added and divided by 100 (the maximum possible points) to produce a Computer Rankings Percentage. The six computer ranking providers are Anderson & Hester, Richard Billingsley, Colley Matrix, Kenneth Massey, Jeff Sagarin, and Peter Wolfe. Each computer ranking accounts for schedule strength in its formula.

The Bowl Championship Series (BCS) grand mean is calculated by averaging the percent totals of the Harris Interactive and USA Today polls, and computer rankings.

The FBS university presidents are continually under pressure to abandon the system in favor of a playoff among eight or more teams. However, absent a tournament, the present system has worked reasonably well in winnowing the FBS teams down to the two that will play for the championship.

Horse of the Year methodology could and should be addressed in the same manner that college football selects which teams will play in the championship game. This would be fairly easy to do by weighting races and combining a horse’s year-end point totals in these races with the subjective voting of NTRA/Equibase, the Daily Racing Form, and the National Turf Writers Association. For instance, a Grade I race open to horses of both sexes and all ages would merit so many points, a Grade I race restricted by sex and age would be of lesser value, unless it was a classic, and so on. Say, for purposes of illustration, that the subjective voting constituted half of the outcome and the metric ratings comprised the other half. This would reward a horse for its body of work over the entire year, yet would allow for human insights to count, as is the case in major-college football.

Any system for awarding Horse of the Year is inevitably going to have some people complaining about its inequities. Yet a technique that identifies in advance what the criteria are and how they are weighted enables horse owners to plan their campaigns around the races that matter most.

Even then, there would remain a fundamental contradiction in the way Horse of the Year is determined. The Breeders’ Cup World Championships purport to crown “world champions” in actual racetrack competition, rather than by a vote. Yet it is possible for the Horse of the Year not to run in these races, as occurred for 2009 with Rachel Alexandra. It is hard to fathom how Horse of the Year can not come from among the world champions if one accepts the premise that the Breeders’ Cup is really deciding world championships. That is like proclaiming that a team not participating in the Super Bowl or World Series is the “Franchise of the Year.”

This same kind of inconsistency exists in professional boxing, with multiple organizations sanctioning different champions in the same weight class.

There are three courses of action: (1) Breeders’ Cup can exise the word “world”  from the title of its year-end championships, or (2) Breeders’ Cup and the Eclipse Awards’ groups can stipulate that the Horse of the Year must come from among the world champions, or (3) both groups can just continue with the contradiction. Given the penchant of the various organizations in racing not to coordinate, number 3 seems to be the most likely outcome.

Try explaining to a person who is not a racing fan how Horse of the Year is a higher accolade than World Champion. Or vice versa. If this is confusing to people who follow racing closely, imagine how confusing  it is to the casual fan. Maybe it is meaningless to all but racing insiders and the most dedicated fans and therefore does not count for much in the scheme of things.

To complicate matters further, one can make a compelling case that Sea the Stars was World Champion and Horse of the Universe for 2009 and the outstanding racehorse in the first decade of the 21st century.

Copyright © 2010 Horse Racing Business

The phrase alternative gaming is commonly used in the horse-racing industry to refer to forms of gambling besides pari-mutuel wagering, and in particular to the addition of video lottery terminals at racetracks, or racinos. The term is a misnomer.

What base or core service do racetracks provide to customers? Not horse racing. What fundamental or core service do casinos provide? Not blackjack, or poker, etc. The answer is gambling.

Whereas some customers prefer pari-mutuel wagering, others stick with slot machines, while still others are partial to sports betting, or casino table games, or whatever. But the typical person’s main motivation for engaging in any of these is to become involved in a game of skill and/or luck for possible gain and entertainment.

If horse races were held without the opportunity for customers to gamble and if casinos offered no payouts, but instead customers played for fun and recreation, the number of patrons would be relatively small. Consider the sparse gatherings for the preponderance of horse shows.

Without a doubt, some people go to the races for the sheer enjoyment they derive and they do not wager at all or bet very little. But the vast majority of patrons are drawn by the challenge and excitement of gambling.

A product line is a grouping of related offerings. For example, Procter & Gamble has five: Personal & Beauty; House & Home; Health & Wellness; Baby & Family; and Pet Nutrition & Care. Each encompasses numerous individual products and the five product lines together constitute P&G’s product mix. Similarly, a big Las Vegas casino has multiple product lines: Gambling; Entertainment; Food and Liquor; and Retail Shops. Each line entails related offerings. Gambling, for instance, encompasses table games, slot machines, sports betting, and pari-mutuel wagering.

The strategic concepts of product line and product mix account for why so many racetracks are presently in trouble. For many years, racetracks prospered with a very limited product line for the simple reason that they provided the only legal form of gambling. Racing insiders wrongly concluded that the big crowds were at the racetracks because the folks were crazy about horse racing. In fact, most were there to gamble.

As long as racetracks maintained their quasi-monopoly, they were able to do well with a narrow product line, which was win, place, show, and daily double wagering on horse racing. Once competition became increasingly prevalent at casinos and later online, racetracks’ plain vanilla product line was an impediment, although racetracks did add some variety with exotic wagering. It was like Procter & Gamble selling a single brand of soap or Anheuser-Busch tendering only one brand of beer.

Observers rightly concluded that horse racing was stagnant or in decline, but they were wrong about the predominant reason. Customers had not lost interest in the sporting aspect of horse racing; many were never that enamored with it in the first place. They were at the racetrack to gamble…it was the only game in town.

Erstwhile racetrack customers gravitated to other items in the gambling product line, which were only available at casinos. Casinos had a tremendous advantage in that they offered a full line of gambling products (including pari-mutuel wagering), all of which had a much smaller takeout than pari-mutuel wagering. Racetracks were left with pari-mutuel products to take on the casinos, which is like going to a gunfight with a knife.

Had horse racing been a normal industry, unfettered by strict government regulation as to what products its members could offer and when (dates and times of day) they could do so, racetracks would have immediately expanded their offerings to include slots and table games. Racetrack managers are often criticized for their lack of creativity, but it is difficult or impossible to be innovative when you have government telling you what products you can offer. Not even marketing-juggernaut consumer-product companies could compete effectively if they could not update and expand their product lines and product mixes.

It is to be expected that racinos and casinos would do better financially than stand-alone pari-mutuel racetracks. Give consumers a choice between a narrow product line and a multiple-item product line, and the latter will usually prevail. A married couple can choose between going to Churchill Downs to bet on horses or travel across the Ohio River to Caesars in Southern Indiana, where an assortment of gaming options are available. Advantage casino because it has more to offer to both spouses.

Government prohibition of competition for racetracks stimulated racing’s halcyon days and government restriction of expanded gambling at racetracks caused hard times today. The racetrack managers of yesteryear were no smarter about operating than the managers of this era. They were just lucky that their micro product line had little competition.

The staunchest supporters of horse racing do not want to hear it, but the product at racetracks  is not horses racing around an oval. The underlying offering is not so much sport, but rather, is the sporting proposition of having the chance to win some money. (To a large degree, the same can be said for professional sports like the NFL, NBA, and soccer in Europe.)  Not even Del Mar, Keeneland, and Saratoga at their finest would draw anywhere near the crowds they do now without their customers having the opportunity to collect cash.

In reality, there is no such thing as alternative gaming.

Copyright © 2009 Horse Racing Business