IN SEARCH OF A FUTURE

(Continued from “Why Horse Racing Declined,” Horse Racing Business, March 21, 2009.)

Andrew Grove, chairman emeritus of Intel, explains the term strategic inflection point:

… a strategic inflection point is a time in the life of a business when its fundamentals are about to change. That change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end. Strategic inflection points can be caused by technological change but they are more than technological change. They can be caused by competitors but they are more than just competition. They are full-scale changes in the way business is conducted, so that simply adopting new technology or fighting the competition as you used to may be insufficient. They build up force so insidiously that you may have a hard time even putting a finger on what has changed, yet you know that something has. Let’s not mince words: A strategic inflection point can be deadly when unattended to. Companies that begin a decline as a result of its changes rarely recover their previous greatness. But strategic inflection points do not always lead to disaster. When the way business is being conducted changes, it creates opportunities for players who are adept at operating in the new way. This can apply to newcomers or to incumbents, for whom a strategic inflection point may mean an opportunity for a new period of growth. You can be the subject of a strategic inflection point but you can also be the cause of one.

Horse racing in the United States is either at an inflection point or on the downside of one, all but certainly the latter. The sport could plug along for a while with sustenance from a loyal but aging core of fans–and in some places from alternative forms of gaming–but wither away. On the other hand, with the right business models, horse racing could solidify itself as the 21st century progresses, even though a return to its previous greatness is unachievable.  Which scenario eventuates will ultimately determine the fate of the entire bloodstock business because wagering handle is ultimately the economic raison d’être for all else.

The most likely scenario is that racetracks offering an attractive value proposition will do well and vanilla tracks without one will perish. Another way to say this is that only racetracks with a distinctive business model will survive.

In the racing press and at racing conferences, there are often comments that racing needs a new business model. When you examine what is being said, most of the time the term business model is intended to mean a profit model. A business model is broader and encompasses a customer value proposition, a profit formula, strategies, and the human resources and processes that deliver value to customers.

A recent Harvard Business Review article titled “Reinventing Your Business Model” did an exceptional job of explaining the term, which consists of several interacting parts or elements.

First, a business model starts with a customer value proposition…or what benefits customers in the target market are getting out of consuming the product or service. Put differently, what need and/or want is being satisfied. Why does one prefer to go to a racetrack rather than bet online-and vice versa? Clearly, these are different value propositions.

Second, a business model contains a profit formula, which, in turn, consists of a revenue model, a cost structure, and a margin model. Racing has multiple profit formulas, depending, for instance, on whether wagers are made on track or off track and on whether a wager is a straight win, place, show bet as opposed to an exotic bet. Further differences depend on whether an at-the-track wager is made on a live race or a simulcast race and whether the person who bets through an advance deposit wagering service lives within a certain distance of a racetrack.

Third, a business model encompasses key resources “needed to deliver the customer value proposition” and the key processes that “make the profitable delivery of the customer value proposition repeatable and scalable.” In the case of racing, key processes and resources are, for example, information and communications technologies and the skilled professionals in charge of them.

Following are some business models that have proved to be successful in horse racing:

Del Mar, Keeneland, Saratoga, and to some degree Oaklawn and Monmouth are racetracks with a high probability of ongoing profitability because they have well-defined and proven business models, and in particular attractive customer value propositions. These are boutique lifestyle racetracks that have short meets and a pleasant on-track ambience. The high quality of racing contributes to the profit model by enticing off-track wagering.

Churchill Downs Inc. has at least two business models that sustain it. The first one is built around the customer value proposition and the profit formulas associated with its signature event, the Kentucky Derby, which is a single weekend per year. The other Churchill Downs Inc. business model is based on year-round racing from its four racetracks and from alternative gaming.

Mountaineer Casino Racetrack and Resort, Philadelphia Park, Indiana Downs, and others, offer a racino business model. So far, this is a successful approach utilizing a different customer value proposition with a different profit formula. This inherent risk, of course, is that state governments may decide to forgo subsidizing horse racing with gaming income.

Another useful business model is employed by racetracks that have essentially opted to be television studios for the purpose of sending out signals to off-track sites. These racetracks have live racing at odd hours and often on Tuesdays to fill out simulcast schedules during these slow times. They usually try to avoid head-to-head competition with more popular racetracks. Their strategy is to “be where they aren’t” and to provide a low-cost commodity signal to gamblers.

The European and Asian racetracks also differ in terms of customer value propositions, but, unlike most racetracks in the United States, they prefer short meets. Whether the European and/or Asian customer value propositions could be successfully transplanted to the United States is unanswered, but might be experimented with to see. Keeneland has two short meets per year and does spendidly.

Each racetrack must carve out its own business model, built around its particular external environment and internal strengths, in order to continue on in business. In other words, racing does not have a business model per se, but rather, it has business models, just as Wal-Mart, Nordstrom, Target, etc. have their own templates that made them outstanding. The profit formula is similar across racetracks, whereas customer value propositions are very different. Importantly, it is a fallacy to think that a business model that works well in one venue can be cloned in another location and the results will be the same.

Examples are easy to find of racetracks that do not have a clearly-articulated business model formulated around an attractive customer value proposition. Such tracks with a generic approach will likely vanish. In addition, a few racetracks have a winning business model, but they are too valuable as real estate plays to survive as racetracks.

Forecasting and predicting are always risky propositions because the future is unknowable. With this disclaimer, if present trends can be extrapolated, the most likely outcome for horse racing in the United States is a downsizing–just how severe is indeterminate.

Based on the assumption that more racetracks will be closing than opening in the United States, there will be fewer racetracks: marginal racetracks without a compelling customer value proposition won’t be able to survive. Ohio, for instance, with seven racetracks will surely have attrition and, likewise, California and Kentucky have tracks on the bubble.

This rationalization should translate into a reduced bloodstock component. The market for well-bred racing prospects with good conformation should remain strong, but, as the shakeout in racetracks occurs, demand for pedestrian racing stock will probably see a precipitous decline, as the law of supply and demand works. A beneficial offshoot would be fewer unwanted horses.

While the number of racetracks and the bloodstock industry in the United States should shrink, total betting handle and purse averages may actually increase because of remote wagering on the surviving North American racetracks, as well as  on international signals. In my view, the racing industry in the United States will be considerably smaller as the 21st century progresses but will have a more solid economic foundation than it does today. 

Next week’s (April 4, 2009) article “Crafting and Tailoring Racetrack Customer Value Propositions” explores this all-important subject in more depth and looks at such issues as positioning racing as a sport or gambling, customer service, horse slaughter, breakdowns, medication, and handle takeout. It is the third and final article in the Horse Racing Business series of March 21, March 28, and April 4, 2009.

Copyright © 2009 Horse Racing Business.

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