Archives for March 2011

As the world economy recovers, company owners and executives are seeing accelerating price increases for many of the goods and services they purchase from suppliers.  At the same time, these managers are contemplating how much of the increases they can pass on to their own customers.

Recently released statistics from the U. S. Department of Labor provide guidance.  The combined inflation rate for goods and services sold in America rose by 1.6% in January 2011, as compared to January of 2010.  Yet the inflation rate for goods (tangibles) was considerably higher than it was for services (intangibles).  Inflation for goods was 2.2% versus 1.2% for services; some service sectors, such as dental and tax preparation, have actually seen prices flat-line or deflate.  By contrast, between 2000 and 2008, the inflation rate for services was 3.4%.

This divergence in the inflation rates for goods and services is explained by supply and demand.  The worldwide demand for commodities is driving up the prices for goods, whereas the stubbornly elevated unemployment rate is moderating the prices of services.  Super-growth emerging economies like China and India are competing vigorously with the United States and Europe for increasingly scarce commodities to put into their products, run their factories and farms, and feed their people.  On the other hand, service businesses are labor intensive and wages are being held in check by the surplus of people to fill most jobs and not just in the lower paying occupations.  For instance, a number of blue-ribbon law firms have de-hired law school seniors that they had previously offered positions as associates. 

Equine-related businesses can expect persistent price pressure for such items as feed, energy, boarding, construction, gasoline, fertilizer, and paint.  These are either commodities are have a high commodity content.  By contrast, there should be much less price pressure on services that do not depend on the vagaries of commodity markets, such as business and professional expertise, employees, and rent.  Health insurance is likely to be an exception.

Equine businesses primarily providing a service will find it more difficult to justify price increases to their customers in the near future than will enterprises that can transparently document commodity cost increases.  For example, a CPA would have a harder time than a horse transportation company persuading clients of the need for a price boost.  A customer knows from filling up his or her own automobile that a trucking/air firm is beset with soaring gasoline prices.  Some equine businesses, of course, deliver both goods and services.  A veterinarian provides a service but also uses a commodity-based product in the form of medicine.

Equine-business executives in 2011 and beyond will face an ever-challenging environment for maintaining profit margins.  However, companies that sell a tangible product will generally be able to present their customers with a stronger case for price increases than enterprises that proffer a service. 

Copyright © 2011 Horse Racing Business

Originally published in the Blood-Horse.  Used with permission.

The Kentucky Racing Commission recently approved a $5 per-mount fee increase for jockeys whose horses finish fifth or lower in races with purses of less than $10,000.  This change brings the minimum compensation to $50 for an also-ran result.

There are several ways to look at this 11 percent increase in compensation.

First, racehorse owners are already struggling to break even, given the costs of keeping a horse in training and the stagnation of purses.  Second, no one forces an individual to become a jockey; he or she could choose to pursue another line of work that pays more and is less hazardous.  Third, some of the highest-risk occupations do not pay well.  Combat soldiers, firemen, and policemen risk life and limb for wages that are not commensurate with the perils.  Fourth, the income of independent contractors, like jockeys, normally depends on how well they perform rather than on simply making an effort.  Some might argue that a jockey whose horse finishes out of the money deserves nothing, just as the horse’s owner receives nothing.  Finally, a jockey who is consistently not able to finish in the top four places in race riding is not good enough and probably needs to find another occupation.

All of these are valid points.  However, consider the following.  Suppose a jockey rides five races a day six days a week.  Say that he or she rides 1,320 races per calendar year over 44 weeks.  In this scenario, his or her basic jockey fees at $50 per race would be $66,000, excluding commissions from purses.  The median household income in the United States is approximately $51,425 and the median income for a person with a high school degree is about $27,272.  One could look at these figures and conclude that this hypothetical jockey with base earnings of $66,000 is doing very well relative to the U. S. population and to people with his approximate educational level, especially when the basic compensation is enhanced with commissions from purse winnings.

Of course, most jockeys do not come close to riding 1,320 races a year or earning $66,000.  Jockeys are idled periodically from injuries, so consistently riding five races a day, six days a week, for 44 weeks a year is unlikely.   In addition, the job is dangerous in terms of non-injury side effects owing to the rigors of dieting.  When these factors are weighed, a per-mount fee of $50 seems like a bargain.

Horse racing is a team sport involving owners, trainers, jockeys, and caretakers.  Owners have considerable financial risk, trainers are under intense pressure to win or else they lose clients and income, and caretakers work long hours around often high-strung animals.  Yet jockeys must perform well to get mounts and earn commissions from purses, pay an agent and travel costs, be responsible for his or her own health insurance, and assume the physical gamble of race riding.  The owner and trainer might go broke but the jockey might literally be broke for life or worse. 

Copyright © 2011 Horse Racing Business.

Originally published in the Blood-Horse.  Used with permission.

Mr. Pope is the founder of Pope Advertising Agency in Lexington, Kentucky.

One Thursday in April of 1979, Keeneland president Ted Bassett let me use his box to entertain an NBC executive. He knew I was trying to sell the television rights to what is now the Rolex 3-Day Event.

I was not involved with Thoroughbreds at that time, so it wasn’t until reading Ted’s award-winning autobiography, My Life, that I realized the significance of his gesture. That was the day Spectacular Bid won the Bluegrass Stakes.

The NBC guy said if Ted would move the Bluegrass from Thursday to a Saturday, they would like to televise it. Ted thanked him, but said he felt nine days before the Kentucky Derby was the right number. Nine days later, Bid proved him right.

Ted Bassett has been right about a lot of things. Perhaps none more than his leadership in establishing Equibase, which assures the performance data in our sport is protected from the whims of a private company.

The Problem

We have a similar problem with our totes, which process wagers. The totalizator network consists of three private companies that do not seem to work well with each other. One example is called “past-posting”, where bets continue to be made after the races start.

If the integrity of the wager is in question, bettors quit. The tracks say past posting may be fixed in a couple years, although compliance will be optional. But even if that problem is solved, the downward trend in racing gives private tote companies little incentive to invest in new technology. That’s a problem when technology is moving so fast.

Customers today use the latest technology in phones and computers to wager on racing, but the totes processing those wagers are not as advanced. It is like buying the fastest computer, for a dial-up Internet connection.

Years ago, The Jockey Club tried to get IBM involved to create a new tote system. Maybe the technology then didn’t provide enough incentive, because nothing happened.

In addition to the tote issue, an ADW problem is growing like the housing bubble. Account Deposit Wagering (ADW) companies are phone and computer-based operations that take off-track bets on races. ADW’s are very profitable and attracting private investment because they make more on a wager than the host track putting on the show.

ADW’s allow customers to bypass betting at tracks and when they do, half or more of the wagering revenue leaves the sport.

Allowing distribution costs of more than 50% is bad business.

The fixed costs of the racing product are met “on-track”. The off-track distribution of racing is digital. So, with $11 billion wagered, there is no justification for distribution costing more than 2%.

Technology waits for no one. The speed technology moves can be cruel to those who have invested in yesterday’s business.

Technology made the role of telephone operators obsolete. Jobs disappeared. Equipment was rendered useless. But the lesson for us is this — customers received more accurate, more secure and faster service.

Off-track bet taking, at bricks and mortar OTB’s and recently private ADW’s, have served a role in racing’s distribution history, but now there is a game-changing opportunity. Technology makes it possible for racing customers to move to a central distribution channel, where all the money wagered stays in racing and goes directly to the host track/purse account.

Technology is made for the massive data and transactions involved in racing. Instead of allowing private interests to exploit weaknesses in our distribution structure, racing can use its enormous cash flow to not only solve this problem, but to create something that equals more than the sum of its parts.

The Solution

Racing can create a new, integrated, tote/wagering system that combines the performance information in Equibase, with state-of-the-art Tote and bet-taking functions like account deposit wagering, into one seamless enterprise for the sport.

This new utility can restore integrity of the wagers, use technology to enhance the customer experience and bring new fans into the sport with games and social media. And, all of these integrated costs can be funded by a small percentage of each wager.

So yes, we can create a new wagering enterprise that delivers more than the sum of its individual parts, because it allows direct wagering on every track’s races. The magic in this new system returns the host tracks to an “on-track” model, where all the wagering revenue stays in the sport.

With direct wagering into a national tote/wagering utility, for the first time since Spectacular Bid won the Bluegrass Stakes, the host track will have an incentive to package and market its own races. If the host event packages great racing, such as Monmouth Park did last year, the sky is the limit on how much revenue those races will generate. This new utility could have provided Monmouth Park, and its purse account, the revenue to make last year’s high purses sustainable.

That was the original intent of the Interstate Horseracing Act (IHA), to expand the wagering distribution of the host event’s races. Now thirty plus years later, the advancements in technology will allow us to fulfill that original intent.

Here are a few of the benefits of a new, national tote/wagering trust for racing:

1. Racing would enjoy a new, tote/wagering system providing integrity of the wager, security for our customers and more capability to withstand cyber threats. As the new system also delivers enhanced services and engages our current and new fans, it would be designed to handle increasing demand. This benefit alone justifies change.

2. Host tracks/purse accounts would be relieved of massive settlement risks, where they struggle with off-track bet takers for weeks and months over billions of dollars. They would no longer have the risk an off-track bet taker, like bankrupted New York OTB, failing to pay hundreds of millions to host tracks and purses.

3. By assuring the integrity of wagers at the national level, the new tote/wagering utility allows State Racing Commissions to reduce their costs and focus their resources on integrity among the participants. Each state would continue to set their takeout and tax rates.

4. At the close of each business day, the new tote/wagering utility would deliver the wagering revenue to each host track operator; to each purse account; and pay all taxes due as directed by the state racing commissions.

5. The sometimes-disruptive negotiations between track operators and horsemen over IHA approval of off-track distribution deals would end. There would be no need for such approval, because all off-track wagering would be through the new tote/wagering utility.

6. The current tote companies and valuable, existing operations could be purchased by the new tote/wagering trust and their employees retained during the transition to the new utility.

7. Track operators would no longer directly pay the costs of tote service. With over $11 billon wagered annually, the national utility can be funded with a small percentage of each wager. The tracks would continue to be responsible for costs of on-track wagering through tellers and machines. Loyalty programs and incentives for the track’s customers can be coded into the new utility.

8. The new tote/wagering system can also relieve the track operator of costs for producing video coverage of the races. Then the video can be standardized and integrated into the new system, to provide past-performance video, media access and enhanced customer service after the races. Host production equipment could be purchased and employees retained by the utility.

9. The video rights to the talent in the races used for wagering, past performance, communications and promotion functions, can be a condition of racing and flow to the new tote/wagering trust. But, the non-wagering commercial rights to the race should be determined by the host event participants, i.e. the track operator and the racehorse owners and jockeys involved, particularly if separate video production is involved.

These recommendations are very friendly to track operators. By relieving them of costs currently incurred, every track will benefit from the new economies of scale. The nature of changing technology makes it prudent for those in racing to move to a new, national tote/wagering utility that can be funded by a small percentage of each wager.

The downside? There is no downside to a national tote/wagering trust for racing. It would be like a utility, which nobody owns, but everyone uses for the benefit of the sport.

Now the Hard Part

Equibase was created to protect the performance data in our sport. Although it was an easy decision, there was no action on it until an old warhorse named Ted Bassett was engaged to overcome the inertia and get it done.

Are there any old warhorses like him still around, who have the selfless will to bring the parties together to do what is right for the sport?

Perhaps there are, but unlike Equibase, where The Jockey Club needed to provide a large investment and offer the inducement of partial ownership to pull track operators away from the Daily Racing Form, we have sufficient cash flow in wagering to build and maintain a new tote/wagering system.

The logical structure is for a new tote/wagering trust that is managed by The Jockey Club, where Equibase resides.

Nobody wants a national Jockey Club deciding who can and cannot race horses in America. That’s why our Jockey Club had to stop. However, we need a structure with economies of scale, like establishing a tote/wagering utility. With good safeguards on operating expenses, The Jockey Club is much preferable to a government body or other alternatives. Their members understand the need for integrity in wagering.

But, the top job of heading up this new enterprise would be one of the most attractive jobs in technology and marketing. While it would be on par with the top lottery jobs, however, it calls for innovative, Silicon Valley-type expertise and it should attract individuals in companies like Google, Amazon, and Facebook with great opportunity and incentive.

Lotteries cannot provide information to determine the outcome of their winning numbers. We can. And, lotteries cannot interact with customers before and after the wagering event. We can. This new, integrated wagering system will deliver something that sports and gambling have never seen before.

While Equibase is a good analogy, it is not a perfect analogy. Equibase is a privately owned partnership between The Jockey Club and racetrack operators, and it should not be considered to own this new utility for the sport.

The Jockey Club should agree to manage the new, integrated utility for the sport at reasonable fees. If they decline, the new trust can purchase performance data from Equibase. Racetrack operators, who will have significant costs eliminated, will receive half of the wagering revenue, so that should be enough. The track operators should not be in a separate profit position, when their partner racehorse owners, are sharing the costs of this new utility.

While this new tote/wagering system will be unique in its abilities, we do not need to completely reinvent the wheel. Two racing countries have parimutuel systems similar in structure. In Japan and France, outside bet takers and bookmakers are banned, so it doesn’t matter where a bet is made or how a bet is made, all revenue flows to the sport. Our Jockey Club can best open the doors with their counterparts in those countries.

What I am proposing for America though, is much more of a free enterprise system than exist in any other racing country. Here the wagering revenue would flow into the tote/wagering utility, but instead of staying with a national body, the revenue would flow out immediately to the host event and its purse account. That is significant.

Strategy

Our sport is not in trouble because of the horses and riders going around the track. Our sport is in trouble because in America, we haven’t figured out a strategy to handle the problems of lack of national structure and the regulations imposed on wagering and operating the sport.

There is a ying and yang to this. When government gives the exclusive advantages on legal sports’ wagering, interstate and Internet wagering, those gifts come with regulations to protect the wagering public.

We need to be a bit smarter about how and what we ask of government.

I recommend a strategy that separates the business issue of integrity of the wager, from the more divisive issues involved in integrity of the sport.

A new tote/wagering utility can better protect the betting public with integrity of the wager at the national level. In fact with interstate wagering, nationally is the only way to protect the wagering public.

On the other hand, the integrity of the sport is more of a local concern with the host track participants and should probably continue at the state level, with national coordination.

Our past attempts at unity have failed because we lack unity of purpose. We should not be divided on the business issue of integrity of the wager. Let’s put that problem to bed and you might be surprised how returning the tracks to profitability and increased purses can change the conversation on other issues.

To those who say government should not get in the way of free enterprise, I agree. But, we cannot ignore the reality of the regulations to protect the public.

When racing asked government to legalize interstate wagering in 1978, the law should have allowed free enterprise to continue determining which tracks survived and failed.

But, it didn’t. Well-intentioned language was put in the law to protect the small tracks and it backfired. Instead of the tracks, in small markets going bankrupt, our largest market facilities failed. Now, the whole system is failing because 90% of wagering is off-track and live racing is not profitable.

The good news is a new tote/wagering utility will correct the IHA problems and re-establish free enterprise, where each host event will control their own destiny.

I believe one common distribution channel, a new, tote/wagering utility, answers a lot of questions in our regulated sport. It assures integrity of the wager at the national level. It has tremendous economies of scale, shared costs of operation and security with enhanced services for racing customers and fans.

This is a small price to pay for the advantages our sport has been given, but not allowed to enjoy. The host event will still determine how to package and present its product, how to price its product and how to promote its product.

With direct wagering into the tote/wagering utility, small tracks can be innovative and compete nationally. If Tampa Bay Downs packages and markets the most popular racing, they could enjoy the highest profits and purses in the country. The new, wagering utility, providing national distribution, levels the playing field and takes the advantage away from the larger markets.

Balance

It is my experience from years of meetings that many racehorse owners and breeders at the highest level, who have money and influence, are not interested in the money issues in racing. They are more interested in other racing issues, like medication.

On the other hand, racehorse owners who make a living from racing at lower levels are very interested in the money in racing and they are less interested in other issues, like medication.

Somehow, those who are not interested in the money in racing, must come to understand the fastest way to have their concerns addressed is to use their influence on this money issue in racing.

Racetrack operators have not been able to count on their partners, the racehorse owners, to do much more than stay out of the way. There hasn’t been much of a partnership and the results for the sport are evident.

Why do racehorse owners have to participate? Because there will be attempts to hijack this idea, to make the utility a private company, and/or make the utility idea go away.

Racehorse owners, as the equal partners in racing, need to provide the balance that has been missing in our sport.

When going to Congress, the partners in racing — racetrack operators and racehorse owners, need to present a business plan for wagering on the sport that creates a national tote/wagering trust utility. The plan should tell how the wagering public is going to be better protected and how the new utility will allow the sport to be improved and grow to the benefit of hundreds of thousands of jobs. It should tell how it would be tax neutral and not require government funds. It should stay with a clear strategy and say nothing more, and nothing less.

After the racing’s partners present their case, Congress may allow off-track bet takers the opportunity to say why they deserve the money from racing instead of the partners in the sport who employ hundreds of thousands of voters. That should not take long.

Summary

For the first time since Spectacular Bid won the Bluegrass Stakes in 1979, and off-track wagering began, technology makes it possible for the host event putting on the racing show to regain control its own destiny and restore integrity in the wagering system at the national level.

By creating a new tote/wagering trust, each host event would receive all the revenue from wagering on its races. They would have full access to distribution of their product in every racing state, and maybe someday, global distribution. That’s what racing needs.

What will a national tote/wagering system cost you? Nothing, the central system will be self-funding from wagers. It will not require government funds of any kind, just approval to let us control distribution in our own sport.

We can have a smooth transition, similar to the Equibase experience, once the resolve in the industry is established. The current tote companies and other valuable, existing operations could be purchased by the new tote/wagering trust and their employees retained.

Who is going to be against this? The individuals and companies invested in off-track bet taking will be against it. It may surprise you how many individuals and media are involved, but that is their choice.

Like all bubbles, the profits in ADW’s have been too good to be true, because they take too much of the revenue from the sport. Perhaps the new tote/wagering utility will offer the ADW’s less revenue and they will continue. Or they may have the opportunity to sell their business to the new utility.

Horseplayers will enjoy a level field in off-track wagering, one with improved integrity and enhanced services, from experienced management that understands their value.

This proposal is very favorable to racetrack operators, who will see their expenses for tote, video production, and their off-track wagering risks disappear. Each track will receive maximum return for wagers on their races and get their money fast.

For racehorse owners, the utility assures purse accounts will receive half of all wagering revenue, which will be a dramatic increase. By having enhanced services to customers and bringing in new fans, the new system should make owner/breeders much more confident about the future.

Thus, the two partners in racing — racetrack operators and racehorse owners, will see their investments in the sport improved.

What does it take to get this done? Well, since no private parties would own it, it will take the same self-less will of people like Ted Bassett, who care about saving and returning this sport to prominence.

You do not need to understand the ins and outs of wagering and the details in this proposal to understand the sport needs to take control of the integrity of its wagers with a new, tote/wagering utility.

If you are the kind of person who wants to change the direction of racing, then please pick up the phone and call your peers and don’t stop calling until The Jockey Club members know the industry wants this job done.

If you get the call, please take it.

© Fred A. Pope, 2011. Reprinted with permission.